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What is Coin Day Destroyed?
First, let us look at the indicator Coin Days Destroyed, which means “the days of the destroyed coin” literally. When a certain number of cryptocurrencies are transferred on any given day, the process will involve the sender’s wallet (from) and the recipient’s wallet (to) for the transaction to work. Of course, the sender was at some point had been a recipient as well.
Let’s take a loot using Bitcoin (which is a representative cryptocurrency) as an example. Bitcoin is distributed in different quantities to different wallets around the world. There will be an accumulated period from the date of the transaction to the corresponding wallet in the past to the date of transaction (withdrawal) to a new wallet. Multiplying that period by the number of corresponding Bitcoin will give us the valuer for calculating the Bitcoin CDD. By using this method, we will find and add each value for Bitcoins distributed over different periods. The coin days destroyed of a Bitcoin can be measured based on a specific date. This same method is applied to any other cryptocurrencies.
“1 Coin Day (=1 Coin x 1 Day)” occurs after 1 cryptocurrency is transferred to a specific wallet. When the cryptocurrency is transferred to another wallet the next day, 1 is added to the CDD of the day, and the Coin Day of the transferred cryptocurrency expires and will start over from 0.
This can be expressed through the below formula:
Coin Day Destroyed = Sum (No. of cryptocurrency transferred off the base starting date * Period of stay in the wallet to which the cryptocurrencies were sent) = Sum (Coin Day)
In a nutshell, Coin Days Destroyed for a transaction is the number of cryptocurrencies for that transaction multiplied by the sum of the period until the last time the cryptocurrency was used. It’s worth noting that the coin days destroyed on a particular day are not calculated by measuring the accumulated coin days at each measurement point until destroyed. Instead, it is the sum of the destroyed coin days at the measurement point (day).
Reason to Learn About Coin Day Destroyed?
Coin Days Destroyed can be used as an indicator to measure the degree to which cryptocurrencies (typically Bitcoin) are traded. Unlike volume, CDD itself may be a more helpful indicator because both volume and duration are considered. It is beneficial for assessing the movements of institutions and long-term investors. This prevents the coin days from accumulating. Here, we can interpret it as the psychology of the market (confidence in cryptocurrency) to hold the coin long-term.
A large CDD in one day could mean that a large amount of cryptocurrency in one wallet has been removed to another wallet after a long time. This can also mean the long-term holders are cashing out their profits and could signal decreasing confidence in the coin. Conversely, a small CDD implies that the same cryptocurrency is traded frequently daily.
However, considering that most cryptocurrencies are being mined and that the number of cryptocurrencies will likely keep increasing in the long run. It should be assumed that the standard size of CDD is gradually growing, like inflation. For this reason, standardized indicators such as dividing CDD by the total number of cryptocurrencies are also used.
Furthermore, it does not reflect off-chain transactions such as over-the-counter (OTC) transactions made outside the blockchain, and it does not reflect multiple transactions of the same cryptocurrency in less than a day. In addition, we must also consider the limitations of CDD, such as that the transaction destination is accumulated regardless of the wallet owner is the same person.
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