One of the defining stories of the last decade in finance has undoubtedly been the rise of cryptocurrencies led by the near enough parabolic ascent of Bitcoin.
This is not intended to be a hit-piece against the broader phenomenon of cryptocurrencies (full disclosure – I have positions in this market which I will explain within this piece). Rather, I intend to give a sober look at the market and identify the legacy technology (which the market will ultimately reject) and identify the successors (which the establishment will ultimately embrace).
Lets not dance around the issue – anyone latching-on to the issue of cryptocurrencies purely to fuel some anarchist-inspired wet-dream of upending the monetary system or leading to some sort of zero-tax libertarian utopia should not be entertained and I believe that ultimately these ideologues will be left lying in the ditch when the establishment ultimately does pick it’s horses.
The issue of cryptocurrencies is simple: to gain any sort of mainstream adoption, the technology must align with the requirements of society and be compatible with the requirements of the current financial order.
Bottom-line, innovative technology is great and the intellectual achievements of the cryptocurrency space are amazing… BUT… at the end of the day, sooner or later, everything boils down to actually creating something which people can use.
This is not to make excuses for the establishment (which really is genuinely awful at making useful changes which better-serve society and naturally there are protectionist agendas everywhere). However, the technology which ultimately captures the majority share of the cryptocurrency market must have features which improve society and the international financial system. Otherwise, quite simply, they will never be adopted on large scales.
Why Bitcoin Won't Go The Distance
Proponents of Bitcoin in particular point to it’s appreciating prices as evidence of Bitcoin’s health.
Indeed, on face-value this observation seems like a pretty good argument.Â
However, as we will see, much of the price appreciation of Bitcoin is based on factors which really aren’t ultimately conducive to it’s health over the long-term and are no indicative of increasing adoption by society.
1. Usage May Have Already Peaked
Usage is fundamental to valuation as a currency.
The dollars valuation for example primarily comes as a result of it’s worldwide popular acceptance.
The ability to actually buy things with a currency is ultimately the major purpose for it existing.
When we look at statistics relating to the usage of Bitcoin however, we do not see any concrete evidence of increasing adoption and usage.
The Bitcoin Network
Statistics from blockchain.com show that rather than exploding, as Bitcoin advocates would have us believe, Bitcoin network activity has effectively been flat for the last 4 years.
We can see below a chart which shows the number of confirmed transactions per day on the Bitcoin network [1].
This shows that realistically, Bitcoin network transaction volume peaked a couple of years ago and has indeed been essentially flat in real terms.
Exchange Volume
Naturally, because many transactions take place away from the blockchain, we can also look at the volume on prominent Bitcoin exchanges.
If we look at the total exchange volume data from Bitcoinity.org [2] we can see that exchange volume (which measures the aggregated buy/sell volume of prominent cryptocurrency exchanges and are separate from the primary network transaction volume) basically topped-out around the same point in time and has been declining ever since.
Much of the volume we see here was due to Chinese buyers who were of course banned from exchanges a few years ago and this is the reason why the volume collapsed in the first quarter of 2017.
However, from 2018 to the present day, we can still see a persistent decline in transaction volume on major exchanges.
If we adjust this chart to exclude Chinese exchanges we get the following picture.
As such, we can see that ultimately exchange volume has been following a serious persistent downward trend ever since 2018.
Similarly, this chart of exchange-traded volume expressed in dollar-value from Blockchain.org shows a similar picture. We can see that the recent spike in the dollar-value of exchange-traded Bitcoin volume topped-out about a year ago and never truly recovered the 2018 high in activity [3].
In fact a shorter-term 6 month view of this same dataset paints an even worse picture for the raw dollar-value of exchange volume as it shows that volume is still ultimately declining in dollar-terms even while the exchange-rate of Bitcoin in dollar terms is still strengthening [3].
Institutional Exposure
Similarly, if we look at more professional instruments such as the Greyscale Bitcoin Trust (which is the most popular way for finance professionals to gain bitcoin exposure) appears to have reached peak volume at around 40million shares traded within a single day in the first part of 2021. However, this was due to a spike on the daily charts and, on-average, there is scarcely more volume trading the Greyscale ETF than we observed 3 years ago [4].
Business Adoption
Additionally, we can look at the trend for business adoption which is a much-quoted point of reference by Bitcoin enthusiasts due to the likes of Tesla and Overstock who recently began accepting payment for goods and services in Bitcoin.
However, according to statistics gathered by Fundera, there are only 15,174 business worldwide which accept Bitcoin [5] as a payment method (this figure includes large businesses such as Overstock and Tesla).
Similarly, from a global perspective, according to Coinflip [6], there are around 22,141 businesses in the world which accept Bitcoin as a form of payment (the majority of which are focused in Europe and North America according to Coinmap [7]).
Averaging out this global figure, this means around 1379 businesses worldwide have adopted Bitcoin every year since it’s inception.
However, what we need to remember is that, according to the Trading Economics Foundation, there are actually 185,558,942 businesses in the world.
As such, this means that the 22,141 businesses who accept Bitcoin as a payment represent only around 0.01% of the worlds’ 185million businesses (again, the majority of which are focused within West Europe and the USA).
Thus, averaging this percentage out over the 12 years since Bitcoin was launched, this means the business adoption rate of Bitcoin since it’s inception translates to a mere 0.00083% per year,
An important reason for this is the fact that while businesses do not necessarily deny the usefulness of cryptocurrencies, most large corporate enterprises are actually more interested in creating their own in-house cryptocurrencies rather than adopt bitcoin (or in fact any other cryptocurrency asset created thus far).
Evidence of this includes:
- Paypal
https://www.ft.com/content/cfe4ca11-139a-4d4e-8a65-b3be3a0166be
- Mitsubishi
- JP Morgan:
As such, we can see that although there is heavy institutional interest in adopting the concept of cryptocurrencies this interest is usually not focused upon anything that currently exists in the cryptocurrency markets and especially not Bitcoin.
This is because large corporations are aware of the problems with current blockchain cryptocurrency models (especially Bitcoin) and, fundamentally, are showing a preference to in-house their cryptocurrency programs.
Indeed, perhaps 0.1% of the exchange-traded cryptocurrencies marketplace has any real institutional interest at all.
I would also point out all the institutional adoption seems to be focused upon 2nd generation cryptocurrencies such as Hedera, Ripple and to an extent Ethereum.
None of which offer any support for the concept of institutional Bitcoin adoption.
Public Interest
We can also look at the search data from Google Trends to see if worldwide search interest for Bitcoin is making any progress.
As we can see, from this perspective, it seems that Google search interest in Bitcoin may have already peaked back in 2018.
These statistics do not point towards increasing public mass-adoption and realistically, the Bitcoin market is, for the most part, exactly where it was in 2018 and has made effectively zero progress to reaching any sort of critical mass as a currency or other asset.
2. Bitcoin Liquidity Is Rapidly Deteriorating
One of the most important factors in a currency is liquidity.
That is, to be a useful currency, there has to be a large enough supply of it to satisfy demand for it, to facilitate it’s use as a medium of exchange and to conduct transactions effectively.
The first things we have to remember are a few fundamentals regarding the issuance of new Bitcoins into the markets.Â
- Bitcoin has a hard market cap of 21 million coins [9].
There will never be any more than 21,000,000 coins without a substantial revision to the coding of Bitcoin itself.
This a fundamental fact of Bitcoin’s underlying framework and, rather than being a strength, is actually an underlying problem the reasons for which we will explore later.
- The current supply is in the region of 18,683,000 BTC [9]
Around 18.6million (18,683,000) coins have already been mined and are out there in the markets. This equates to around 88% of the maximum possible supply.
- https://www.bitcoinblockhalf.com/ [10] is currently quoting Bitcoin’s inflation rate as 1.77% per annum averaging-out due to the impact of miners upon the ecosystem.Â
However, the problem with this figure is that it is a gross figure and does not take into consideration the problem of lost coins and coins which are actively being taken out of circulation due to investing and people simply doing stupid things with them and so forth.
- Thus, the gross inflation figure does not factor in the counter-effect of deflation through contraction of the circulating supply.
Therefore we need to examine the the underlying deflationary factors which are working against bitcoin.
Lost Coins
The first thing I did was to look for estimates of how many bitcoins have been lost and taken out of circulation as a total percentage of the supply.
An interesting article from Fortune.com in 2017 quotes between 2.78 and 3.79 million bitcoins being lost forever as of 2017 [11].
“According to new research from Chainalysis, a digital forensics firm that studies the bitcoin blockchain, 3.79 million bitcoins are already gone for good based on a high estimate—and 2.78 million based on a low one. Those numbers imply 17% to 23% of existing bitcoins, which are today worth around $8,500 each, are lost.”
(Source:Â http://fortune.com/2017/11/25/lost-bitcoins/) Â
This would leave roughly 15,000,000 “left to supply or circulate” as of 2017.
The Math - Part 1
So lets do some math and work backwards.
- If we take the figures which Chainanalysis estimate for coins which are “out of circulation” which also includes long-term “Hodlers” and Strategic Investors and work off Chainanalysis’ prediction that 50% of these will never be brought-to-market again and take this number as a percentage of Bitcoin’s overall supply, these figures combine into an aggregate figure of 4.3 million Bitcoins representing 20.4% of the max possible supply being “missing-in-action” as of 2017.
- We can add into this Chainanalysis’ figures for coins which are considered to be “permanently lost” (which represents between 2.78 – 3.79 million bitcoins) and take the median figure here which amounts to 3.28 million bitcoins representing an additional 15.6% of the max possible supply.
- The combination of these two statistics equates to what I consider to be a rather conservative estimate for 7.58 million bitcoins representing over 35% of the total current circulating supply being out-of-circulation & permanently missing.
- Now, bear in mind, Bitcoin had only been around for roughly 8 years in 2017 when Chainanalysis released their research on lost coins  (as it was launched 3rd January 2009) and thus, what we’ll do is take that 35% and average it out over 8 years.
- This figure averaged out over 8 years translates to a gross annual deflationary factor of 4.37% per annum.
- What we shall now do is extrapolate this forwards.
- This means that, over the 12 year period from 2009 to 2021, over 52% of the supply has gone missing (-4.37% x 12) with only roughly 10million coins remaining.
- What we can do next is examine the current inflation rate of Bitcoin which is reported by https://www.bitcoinblockhalf.com/ as being 1.77% per annum as of 2021.
- Therefore we can now subtract the deflationary factor we quantified earlier from this figure and give us a net inflation score for Bitcoin.
- Assuming that the median rate of deflation per year is going to remain relatively stable then the math works out as follows:
1.77 - 4.37 = -2.60
- Giving Bitcoin a negative net inflation score of -2.60 percent which easily outpaces the efforts of miners.
What this means, is that bitcoins supply is now contracting by a net value of nearly 3% per annum in spite of the presence of miners.
Now, I don’t begrudge anyone who made money from holding onto Bitcoin and allowing this deflationary dynamic to push up the price of their investment through simple supply-and-demand.
However, the problem with this is twofold:
- Firstly, we have to separate the fact of Bitcoin’s price performance from it’s use potential as a currency. The simple fact is that no part of the the monetary system will ever adopt a deliberately deflationary currency because, as I have demonstrated in other and future articles, the problem with the world financial and monetary system right now is a deflationary or disinflationary problem, not an inflationary problem. Ultimately, our integrated capitalist economies requires that the total credit supply expands in-line with economic activity and it is imbalances between the two which cause crises. A deflationary currency, while it may make an attractive short-term investment, will not be part of the future monetary system for our economy because it will import the same problem which the global economy is currently struggling to solve.
- Secondly, although this might have made bitcoin a good short term investment, it’s realistically impossible to say how long this can continue for before the deflationary dynamic causes a liquidity shock to the Bitcoin ecosystem and initiates a subsequent meltdown. The reason for this, is that bitcoin is still largely a vehicle for speculation and hasn’t really made much traction within the international community as a payment method (as evidenced by the grindingly slow business adoption worldwide) and this means that ultimately Bitcoin has very low liquidity alongside an inherent ponzi dynamic wherein demand is largely speculative and not based on it’s utility value as a medium of exchange. Given the deflationary dynamic at play, if Bitcoin experiences any large-scale liquidity problem, then this will ultimately challenge market participants ability to speculative on it and this presents a threat to the bitcoin ecosystem as a whole.
Bitcoin Is Not Infinitely Divisible
Often, when I point this out, the usual rebuttal to this is:
“Bitcoin is infinitely divisible”
However, this is not true.
Bitcoin can fundamentally be reduced to fundamental components known as “Satoshis”.
There are 100,000,000 Satoshis per Bitcoin and, most importantly, unlike Bitcoins, Satoshis are non-divisible [12].
So, lets repeat our math on the basis of Satoshis and try to project forward to the date at which the liquidity problem will become more acute.
The Math - Part 2
On the basis of “Satoshis” then the total remaining supply, factoring in our previous math is as follows:
There are 100,000,000 Satoshis per Bitcoin
We can carry-over the 52% figure from our Bitcoin math here and work on the basis that 52% of all Satoshis are missing.
We can also import the figure for the gross deflationary burden which is equivalent to 4.37% of the supply going missing per year.
This means that 4.37% of all Satoshis (representing 44trillion Satoshis) go missing every year and there is no way to change this without making bitcoin a permanently inflationary currency (which will be rejected by purists).
As such, bitcoin is not infinitely divisible and there is ultimately a “brick-wall” of liquidity on the horizon in the not-too-distance future.
Projecting forward, presuming the rate of deflation remains relatively static (we should ultimately remember that the end of mining will amplify this process) this ultimately means that Bitcoin will have completely self-destructed within the space of two decades.
In fact, on a Satoshi basis, we can project that Bitcoin’s liquidity brick-wall will occur when the available supply of Satoshis starts to place limits upon the daily trading volume.
If the 4% per annum rate of loss stands then this will occur within the decade.Â
Why This Matters – The Liquidity Trap
Certain people might look at this as a validation of their Bitcoin maximalist position from an investment perspective.
The problem is that without any liquidity to offer as a means of exchange, adoption of Bitcoin on a global scale would mean that growth grinds to a halt.Â
There are two principle reasons for this:
1. Firstly, the deflation dynamic which causes explosive price booms encourages monetary hoarding and disincentives spending & investment.
This is because, with a currency which seems to continually appreciates in value in a serious manner, the incentive is always to hoard it and save it rather than spend it or invest it.
As such, the monetary incentive here is tilted away from encouraging consumer spending and business investment and towards saving.
This drives further appreciation which drives further saving and hoarding and we can see from this how what I refer to as a negative-liquidity feedback loop develops.
This doesn’t sound like a bad thing at first, but we have to think about what happens when consumer spending and business investment grinds to a halt in our modern integrated capitalist economies.
Ultimately, this is where recessions come from.
This means that Bitcoin’s dynamics, because the incentives are tilted towards saving and hoarding, are actually tilted away from incentivising and encouraging growth.
2. Secondly, the very limited supply means that the monetary system cannot expand in-line with the size of an economy.
As the economy expands in GDP terms, demand for the currency usually expand roughly in line with it (or at least should do).
To meet this demand, the supply of the currency must expand in-line with the demand for it.
Aka a liquidity trap.
Therefore, any capitalist system adopting Bitcoin as it’s core monetary base would end up with a contracting currency supply which would also drive contraction in economic growth.
Bitcoin Has Poor Performance Dynamics
Bitcoin is often touted as the future of money and its proponents argue it can solve all manner of problem which the world monetary system experiences.
However, when we look at Bitcoin then we can see that it’s performance metrics are actually pretty poor when compared to both fiat money systems and also, crucially, the next generation of cryptocurrencies.
Costs
One of the obvious first-points we can look at here is how much a transaction actually costs.
According to https://privacypros.io/, bitcoin transaction fees are actually pretty high and there are periods when they have been even more expensive in dollar terms [13].
Relative to the network throughput, then the average transaction fee for resolving within 1 hour is over $15 USD.
Of course one may point out that Bitcoin’s transaction fee has been as low as a few cents however this is only during periods when network volume (and thus demand) is low and of course price is relatively low).
As such this points to a relatively expensive currency for transactions especially if Bitcoin did gain wider adoption.
Of course this disincentive towards transaction use is one of the factors which has moved arguments away from utility as a medium of exchange and has led to it being largely a vehicle for speculation.
Speeds
Likewise, according to this graph from blockchain.com [14], bitcoin confirmation time is really nothing impressive and is easily on par with current cash-based payment systems such as Paypal (who usually offer near instant resolution).
As such, with most payment systems offering virtually instantaneous payment resolutions, it’s a little difficult to see the case for Bitcoin in this respect because it offers nothing particularly special over current cash transaction times (or indeed transaction times within other cryptocurrencies).
Similarly, if we look at additional sources such as YCharts, Bitcoin is experiencing serious volatility in transaction speed times and is showing spikes of up to half an hour wait for block resolution times which feeds through into very slow transactions.
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The current confirmation time stands at 33 minutes according to Ycharts [15].
This is far slower than even current fiat transaction systems including regular retail and business banking systems that conduct trillions of dollars worth of payments every year.
Factoring this in, it’s difficult to see the case for Bitcoin as a payment system especially factoring in the rise of very serious competitors.
Energy Consumption
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This is because the cryptographic algorithm of Bitcoin is very energy intensive and especially as the difficulty of the cryptography has risen, energy costs have risen in turn.
What this ultimately means is that Bitcoin is not only a very expensive and inefficient way to run a currency, but already, with such a tiny percentage of the world actually using Bitcoin, it is already using more energy than some sovereign nations.
This graphic from visualcapitalist.net [17] illustrates this problem in graphic detail.
What isn’t immediately obvious from these statistics is that Bitcoin is already setting these energy consumption requirements when only 0.01% of the worlds businesses and a fraction of the worlds’ total population is using bitcoin.
We can only imagine what sort of energy usage would be required if it indeed did scale-up as Bitcoin maximalists propose.
Ultimately, this would completely undermine the current push for efficiency and the greening of the global economy worldwide and as such this makes it doubtful that bitcoin could be part of the world financial system in this respect because obviously, if we accept the bitcoin maximalist case, then ultimately, the costs of it’s use amplify in turn which would make it wildly uneconomical.
The possible electricity overheads which would accompany mass adoption would also make it very expensive to operate at scales suggests by bitcoin maximalists and this could outweigh any additional benefits from de facto adoption.
Bitcoin Has Some Unique Drawbacks & Vulnerabilities Which Should Be Taken Into Account
Network Centralisation
As we can see from this Cambridge University Research data [18], Bitcoin is fundamentally centralised within China because it currently hosts over 65% of the Bitcoin network’s global hash power (in the form of miners)
.The reason for this is down to the sheer overheads of running Bitcoin mining nodes which are required to carry-out transactions and naturally these are often cheaper (due to factors such as electricity costs) in nations like China..Â
This is fundamentally a huge security risk in the eyes of the west and really I think we should question if we would want to adopt a currency which is so absolutely concentrated in the Peoples’ Republic of China which is currency taking such an openly hostile line to so much of the world.
Irrespective of what we as citizens think of this, there is no way that other sovereign nations will adopt Bitcoin on large scales with the market being so heavily centralised in the Peoples’ Republic of China.
Indeed, if Chinese miners ever abandoned Bitcoin on any large scale for a particular reason (perhaps higher electricity costs in China) then the network would lose 65% of it’s hashing power.
Additionally, when we look at how many entities actually control this huge chunk of the market-share, the Chinese share of the market is operated by just 5 companies according to a Bloomberg report [19]
As such, it’s pretty clear that the Bitcoin network is already far more centralised than even some fiat currency systems.
Bearish Technicals Are Taking Place
I would hazard to say, that the technical analysis on Bitcoin does not look good at the moment.
Naturally anything can realistically happen in the markets, however, there is a possible diamond-top reversal taking place on BTC/USD.
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For those not familiar with this form, we can compare the diamond-reversal which took place on the NASDAQ100 ETF in the year 2000.
Although this takes place across a couple of different timeframes, we can see the the fundamentals of the form are all in place.
This is no guarantee that we will see a dot-com style crypto bust in the coming weeks or month, but still, it is something which should be considered and taken into account considering how similar the form on BTC is to the year 2000-era form on the NASDAQ-100
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Bitcoin In It’s Various Forms Is Vulnerable To Dollar Strength
If we look at Bitcoin in both it’s ETF form (Through the GBTC Greyscale ETC) and it’s regular form (in the BTC/USD pair) we can see that Bitcoin appears to be enormously vulnerable to dollar strength and has relied upon dollar-pullbacks in order to help fuel it’s bull runs.
Here is a chart which shows DXY (The dollar index) versus the Greyscale Bitcoin ETF.
As we can see, a lot of Greyscale’s supposed strength appears to be nothing more than dollar weakness.
Similarly, a lot of the recent strength from BTC/USD currency pair appears to be due to the dollar-pullback which occurred during the COVID-19 crisis.
I am fundamentally aware that lots of people and huge sections of the market are pricing in a weaker dollar going forward however… as I outline in Why I’m Bullish On The US Dollar (And Why You Should Be Also) I think this is an enormous mistake.
Ultimately, my expectation is that if the dollar weakness which we saw during the COVID-19 crisis reverses, ultimately, the Bitcoin strength we observed during the same period will do as well.
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Fundamentally, Bitcoin Is Legacy Technology
One of the most important points regarding Bitcoin is that it is ultimately not even one of the best examples of a cryptocurrency in practice.
In fact it uses Blockchain which itself may already be an out-of-date technology and has very unsound monetary dynamics.
We also must remember that Bitcoin does not exist in a vacuum. It exists in a broad market surrounded by potential competitors.
In the spirit of being constructive, I am going to outline what I believe are some of the most serious competitors in this space and give them a comparison to Bitcoin.
I am not necessarily personally invested in all of these nor do I believe all of these will take the lions share of the market going forward however they do show promise and as such, versus Bitcoin, they warrant more attention.
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Bitcoin (BTC)
Hedera Hashgraph (HBAR)
Binance Coin (BNB)
Ripple (XRP)
References
[1] https://www.blockchain.com/charts/n-transactions
[2] https://data.bitcoinity.org/markets/volume/
[3] https://www.blockchain.com/charts/trade-volume
[4] https://uk.tradingview.com/symbols/OTC-GBTC/
[5] https://www.fundera.com/resources/how-many-businesses-accept-bitcoin
[6] https://www.coinflip.tech/news/cryptocurrency-explained-how-to-spend-bitcoin
[7] https://coinmap.org/view/#/world/33.28461997/9.14062500/2
[8] https://trends.google.com/trends/explore?date=all&q=bitcoin
[9] https://www.investopedia.com/tech/what-happens-bitcoin-after-21-million-mined/
[10] https://www.bitcoinblockhalf.com/
[11] http://fortune.com/2017/11/25/lost-bitcoins/
[12] https://www.investopedia.com/terms/s/satoshi.asp#:~:text=The%20general%20unit%20structure%20of,bitcoins%2C%20equivalent%20to%20100%2C000%2C000%2C000%2C000%20satoshis.
[13] https://privacypros.io/tools/bitcoin-fee-estimator/
[14] https://www.blockchain.com/charts/avg-confirmation-time
[15] https://ycharts.com/indicators/bitcoin_average_confirmation_time
[16] https://www.bbc.co.uk/news/technology-56012952[
17]Â https://www.visualcapitalist.com/visualizing-the-power-consumption-of-bitcoin-mining/
[18] https://cbeci.org/mining_map
[19] https://www.bloomberg.com/news/articles/2020-01-31/bitcoin-s-network-operations-are-controlled-by-five-companies
Brilliant
Hi Sharon. Thanks for your comment. I hope you enjoy the blog. Your thoughts and feedback are very welcome.