LEARN DORMANCY INDEX IN 3 MINUTES ——BLOCKCHAIN 101

Blockchain in 3 Minutes: What Is Dormancy Index and Why Is It So Important for the Crypto Market?

In the world of Bitcoin and crypto, there are many technical indicators used to predict the “temperature” and “direction” of the market. Besides the commonly used ones like trading volume, volatility, and active addresses, there’s one indicator that leans more toward on-chain analysis—yet is widely used by experienced investors. That’s the Dormancy Index.

Today, we’ll explain this powerful tool in plain language. In just 3 minutes, you’ll understand: how it’s calculated, what it tells us, and why it’s considered an on-chain thermometer for identifying bull and bear market transitions.

What Is the Dormancy Index?

First, let’s define it: Dormancy literally means “a state of sleep.” The Dormancy Index measures the average age (Coin Days) of coins being traded.

In the Bitcoin network, the time a coin has been “asleep” since its last movement is its coin age. Dormancy Index combines transaction volume and coin age into one indicator.

In simple terms:

A high Dormancy means long-dormant coins are being moved.
A low Dormancy means mostly short-term holders are active.

How Is Dormancy Index Calculated?

Let’s start with two related concepts:

Coin Days Destroyed (CDD): This is a core on-chain metric. For example, if a wallet holds 10 BTC and doesn’t move them for 5 days, then sends them out, that’s 10 × 5 = 50 Coin Days Destroyed.
Transaction Volume: The total amount of BTC transacted on the network in a given time period.

🧮 The formula:
Dormancy Index = Coin Days Destroyed / Transaction Volume

So essentially, it tells us how long, on average, each coin being traded had been dormant before being spent.

What Can the Dormancy Index Tell Us?

This is part of on-chain behavioral analysis, and the core question it helps answer is:

Are the active players in the market newbies and short-term traders?
Or are veteran holders and long-term investors starting to move their coins?

Let’s look at a few typical scenarios:

1. Dormancy Index Rising: Long-Term Holders Are Moving

If Dormancy Index rises significantly over a period, it means many wallets that hadn’t moved for a long time suddenly became active and started spending old coins. This usually means:

The market may be at a top, or investors believe current prices are worth cashing out.
Could signal that a bull market is nearing its end, and “smart money” is exiting.
The age structure of on-chain coins is getting younger, with new users taking over.

📉 Example:
In May 2021, just before BTC plunged from $60,000 to $30,000, Dormancy Index spiked for several weeks. Many early holders began to sell, sending out clear risk signals on-chain.

2. Dormancy Index Falling: Short-Term Players Are Active

When Dormancy Index is low, it means most of the trading involves recently moved coins—long-held coins remain untouched. This often appears in:

Bear market bottoms, when long-term holders are still holding.
Sideways markets, where new users make frequent, small trades.

In other words, low dormancy isn’t necessarily bad. It may actually mean veteran holders are still confident and not selling.

How to Use Dormancy Index in Practice

1. Assist in Identifying Bull/Bear Transitions

Many investors use Dormancy Index alongside price charts. When Dormancy rises sharply and prices are high, be cautious of a potential top signal; conversely, when Dormancy is at a low and price is depressed, it may be a bottoming signal.

2. Combine with MVRV, Active Address Count, and More

Dormancy is just one dimension. It’s most effective when used together with other on-chain indicators, such as:

MVRV (Market Value to Realized Value): Detects overvaluation or undervaluation
Active Addresses: Measures user activity on-chain
Exchange Inflows: Indicates potential short-term sell pressure

When multiple indicators point in the same direction (e.g. high price + high Dormancy + heavy BTC inflow into exchanges), it could mean: smart money is exiting.

Classic Case Studies

Case 1: Dormancy Soared Before the 2017 Bull Market Peak

In late 2017, right before BTC hit $20,000, Dormancy Index kept rising, signaling that early dormant funds were exiting en masse. After the price topped, Dormancy dropped sharply—new users were left holding the bag, while the old players had cashed out.

Case 2: Dormancy Remained Low During the 2022 Bear Market

Throughout the 2022 bear market, Dormancy Index hovered at historical lows, reflecting that long-term holders were refusing to sell, while active traders were mostly short-term speculators or quants.

This is how on-chain data reflects belief and conviction: the old players were waiting for spring.

Conclusion

Dormancy Index doesn’t predict price—it predicts behavior patterns.

It tells you:

Who is moving coins?
Is the money old or new?
Is the market in a distribution or accumulation phase?

If candlestick charts show you how the market moves, Dormancy shows you how the people behind the market are thinking.

For anyone serious about understanding crypto markets, Dormancy Index is one of the secret weapons to gauge market sentiment and identify tops and bottoms.

Remember:Dormancy high = old players exiting，Dormancy low = HODLers keep holding