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Another bitcoin ecosystem health check as we slide into 2017

Gute rutsch is the Swiss greeting for New Year. Translation = good slide. I hope y’all had a good slide into 2017.

 Now for all those resolutions – like going for regular health checks.

As we try to determine the health of the bitcoin ecosystem, some regular health checks are called for.

We have done two bitcoin ecosystem health checks in the past –  in June 2015 and April 2016. We publish those today for reference. All the data we use is in the public domain and we publish our methodology, so anybody can run these tests at home – no expensive medical equipment or training needed. All we ask is that you tell us if you see a way to improve the testing methodology.

Yes, the image is of only one health check, which is price, but the reality is that the price is what gets people’s attention and the price is rising. The biggest barrier to traction is being ignored and we can see the Google Trends and price of bitcoin correlate well. A rising price gets attention and that may impact the other metrics.

Methodology

We look at 4 indicators

For data we mostly use Blockchain.info

Note: in order for this doctor to have a holiday, the health check took place in December 2016.

To discuss and improve the methodology, please go to this thread on the Fintech Genome. We are open sourcing our methodology in order to get contributions from the community to improve it.

Why 4 indicators are needed

If your doctor only ran one test, they would be negligent. The bitcoin ecosystem is complex and therefore also requires a number of tests. I am using this analogy to debunk three memes that took hold in 2016:

“The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.”

Indicator 1 = Price

Look at this long term price chart:

The 2014 spike is pure speculation. The 2016 price chart looks more suitable for investors – as long as the other health indicators come out OK.

One of our 2017 Predictions is:

“bitcoin price will go past its all time peak of $1,242 (from 2014) and then settle back just below $1,000 for most of 2017.”

If that prediction is true, then bitcoin will be seen as best performing currency of 2017. That will bring in mainstream investors.

The problem is that you can assess bitcoin as a store of value in three ways:

  1. currency
  2. commodity
  3. startup stock

The latter is where we get the wild forecasts of a single bitcoin being worth $100,000 or $1,000,000 (from about $966 as I put key to pixel). Before dismissing that as crazy, consider the fact that one share of Berkshire Hathaway is worth about $250,000

Like a stock, the supply of bitcoin is fixed. In the case of bitcoin, it is fixed at 21 million. If you own 210,000 bitcoins you own 1%. That is why bitcoin people talk about market capitalization (which is not how you talk about currency).

Bitcoin as an asset class is gaining some momentum. For example, Polychain capital, a hedge fund investing in digital assets has managed to raise $15m from top tier VC such as Andreesen Horowitz and Union Square Ventures.

The near zero correlation to other asset classes is attractive. Volatility and liquidity look fine.

This is where the other tests matter. Investors will happily take a punt on a big upside if the downside risk is protected. If you bought bitcoin in 2009 it was like buying founder stock – you have no downside. If you buy bitcoin in 2017, you spend real money. For downside risk to be protected, bitcoin must be more than tulips. It must be a real currency. Which brings us to Merchant Transaction Volume.

Indicator 2 = Merchant Transaction Volume

We want to track this because we need to see how much are people paying for goods and services using bitcoin. In short, is bitcoin being used as a currency?

To track this we need to subtract the transactions done for speculation or money laundering.

This data is surprisingly hard to find. One data point on Blockchain.info that is helpful is Number of Transactions Excluding Popular Addresses.

This does show some reasonable growth and excludes speculative bursts around events such as Brexit.

Hard data is hard to come by, but we see anecodatal evidence such as (from Techcrunch) that Airbnb CEO Brian Chesky asked for product suggestions for 2017, and accepting Bitcoin payments was the number one most requested feature for the company.

Is there a better data point to track? I imagine that big payment processors such as Coinbase, Bitpay and Circle have this data, but do they put this in the public domain?

Indicator 3 =Transaction time

The Average Transaction Confirmation Time shows this. There is nothing dramatic about this chart, it looks stable as one would expect unless there had been a significant change to the protocol. The problem is simply the numerator, which is in minutes.

This is where we expect to see a lot of change in 2017 as Segregated Witness and Lightning Network roll out. For background on these scalability issues please read this post.

Indicator 4 = Cost Per Transaction

Blockchain.info shows this. The data problem is that this chart is in USD, so the exchange price gets in the way. What we need is cost per transaction in bitcoin (just like we use transaction volume in bitcoin). If anybody knows where to find this, please tell me. Maybe one could compute this from a mix of things like Hash Rate and Difficulty. However, that is a nuance. The big picture is that small transactions are not economic today. Which means some combination of offchain centralized processing and/or use of Sidechains. This is another area where Segregated Witness and Lightning Network rolling out in 2017 will have a big impact.

Past checkups

As you can see, the methodology is evolving.

April 2016

June 2015

Image Source

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