What impact does the circulation velocity of Bitcoin have on future development?

By Stefania Barbaglio, Coindesk

Compiled by Shaw Golden Finance

summary

Bitcoin’s on-chain velocity is at its lowest level in a decade, suggesting a shift in its use from currency to long-term asset holdings.

Institutional adoption has increased, with Bitcoin holdings in exchange-traded funds (ETFs) and corporate treasuries increasing significantly, leading to a reduction in on-chain transactions.

Off-chain activity, including the Lightning Network and Wrapped Bitcoin usage, suggests that Bitcoin’s economic activity is more active than on-chain metrics suggest.

Bitcoin's on-chain transaction velocity (the speed at which Bitcoin is circulating) is at its lowest level in a decade. For some, this is a red flag: Has Bitcoin lost momentum? Is it still being used?

In fact, declining velocity is perhaps the clearest sign yet that Bitcoin is maturing, not stagnating, as it moves less like cash and increasingly is held like gold.

Functional transformation

In traditional economics, velocity refers to how often money changes hands; it's an indicator of economic activity. For Bitcoin, it tracks the frequency of on-chain transactions. In the early stages of Bitcoin's development, velocity was high as traders, early adopters, and enthusiasts tested its use cases. During major bull runs like those in 2013, 2017, and 2021, transaction activity surged, with Bitcoin moving rapidly between wallets and exchanges.

Today, the situation has changed. Over 70% of all Bitcoin has remained untouched in over a year. Trading activity has declined. At first glance, this might seem to indicate diminishing usage. But in reality, it reflects something else: unwavering confidence. Bitcoin is being viewed as a long-term asset, not just a short-term currency. This shift is largely driven by institutions.

Institutional adoption leads to supply lock-in

Since the launch of US spot Bitcoin ETFs in 2024, institutional holdings have surged. As of mid-2025, spot ETFs held over 1.298 million Bitcoins, representing approximately 6.2% of the total circulating supply. Including holdings by corporate treasuries, private companies, and investment funds, total institutional holdings approach 2.55 million Bitcoins, or approximately 12.8% of all circulating Bitcoin. These assets remain largely untouched, stored in cold wallets as part of long-term strategies. Companies like Strategy and Tesla have not used their Bitcoin, holding it as a strategic reserve.

This is good for scarcity and price, but it also reduces velocity: there are fewer coins in circulation and fewer transactions happening on-chain.

Off-chain usage is increasing and becoming harder to detect

It is important to note that on-chain velocity does not capture all economic activity in Bitcoin.

On-chain velocity only tells part of the story. Today, Bitcoin’s real economic activity increasingly occurs outside the base layer and beyond the reach of traditional measurements.

Take the Lightning Network, for example. It's Bitcoin's second-layer scaling solution, enabling fast, low-cost payments that bypass the main chain entirely. From streaming micropayments to cross-border remittances, the Lightning Network enables Bitcoin's use in everyday scenarios, yet its transactions aren't reflected in velocity metrics. By mid-2025, the Lightning Network's public capacity exceeded 5,000 Bitcoins, a nearly 400% increase since 2020. The growth of private channels and institutional experimentation suggest the actual number is much higher.

Similarly, Wrapped Bitcoin (WBTC) enables Bitcoin to circulate on Ethereum and other chains, powering decentralized finance (DeFi) protocols and tokenized finance. In the first half of 2025 alone, the supply of WBTC grew by 34%, a clear sign that Bitcoin is being used, not sitting idle.

Then there’s the custody issue: Institutional wallets, exchange-traded fund (ETF) cold storage, and multisig financial instruments allow businesses to securely hold Bitcoin, but they generally don’t move these coins, which may be economically important but contribute nothing to on-chain transaction speeds.

In short, Bitcoin may be more active than it appears, but this activity is occurring outside of traditional velocity metrics. Its utility is shifting to new layers and platforms—payment channels, smart contract systems, yield farming strategies—that are not captured in traditional velocity models. As Bitcoin evolves into a multi-layered monetary system, we may need new ways to measure its momentum. Declining on-chain velocity doesn't necessarily mean declining usage. In fact, it may simply mean we're barking in the wrong direction.

The trade-offs behind slow transaction speeds

While slow transaction speeds indicate strong investor confidence and a long-term holding strategy, they also present challenges. Fewer on-chain transactions means fewer fees for miners: a growing problem following the 2024 block reward halving. Bitcoin's long-term security model relies on a healthy fee market, which in turn requires sustained economic activity.

There's also the issue of perception. In a network with few coins circulating, it could start to look more like a static treasury than an active market. This might strengthen Bitcoin's argument for being "digital gold," but it undermines its promise as a viable currency.

Therein lies the core design contradiction: Bitcoin is designed to be both a store of value (digital gold) and a medium of exchange (peer-to-peer cash). But these two roles don't always mesh. Velocity is a measure of this push and pull. This constant struggle between store of value and utility, and how Bitcoin navigates it, will shape not only its usage patterns but also its role in the broader financial system.

Sign of maturity

Ultimately, a decline in Bitcoin's velocity doesn't mean it's being used less frequently. It indicates a shift in how people use Bitcoin. As Bitcoin's value increases, people tend to save it rather than spend it. With widespread adoption, infrastructure gradually shifts off-chain. And as institutions join, their strategies prioritize preservation over circulation. The Bitcoin network is evolving. Velocity hasn't disappeared; it's simply become less active, reshaped by a changing user base and new layers of economic activity.

If transaction velocity rises again, it could signal a resurgence of transactional usage: increased consumption, faster money flows, and greater retail participation. If transaction velocity remains subdued, it could indicate that Bitcoin's role as macro collateral is becoming entrenched. In either case, transaction velocity offers a window into Bitcoin's future: not as a currency for consumption, but as an asset to be constructed.