Q3 2018 Bitcoin Velocity Analysis
Token velocity is the frequency at which the same unit of a token is used to process on-chain transactional value. We can calculate token velocity by summing up all the transactions processed on-chain throughout the year and dividing by the network’s average asset base.
For example, in 2016 Bitcoin processed approximately $58 billion worth of transactions and the average size of bitcoin’s asset base (market capitalization) through 2016 was $8.9 billion, so Bitcoin’s hybrid velocity in 2016 was 6.5 ($58/$8.9). This tells us that each bitcoin that is in circulation has changed hands 6.5 times in order to process $58 billion worth of transactions. This however is not absolutely accurate since not all bitcoins are available for transactions because over 50% of users surveyed by Coinbase never use it as a transactional medium, hence those bitcoins have 0 velocity. So 6.5 would be the hybrid velocity as described by Chris Burniske in this post.
In 2017, Bitcoin’s velocity slightly decreased as it processed 6X more transactions ($375 billion) than in 2016, yet it’s average asset base went up almost 8X ($66 billion). So $375 / $66 = 5.68 was the hybrid velocity of Bitcoin in 2017.
So far in 2018, Bitcoin processed $298 billion with $1.2 billion in average daily volume while having an average market capitalization of around $145 billion. If the daily average transaction volume and the average market capitalization stay around the same, Bitcoin will process $441 billion by the end of 2018 and have a hybrid velocity of 3 ($441/$145).
As you can see, if this happens Bitcoin’s 2018 velocity will be drastically lower than in 2016 and 2017. This tells us one of 3 things:
- Over 75% of people are now treating bitcoin as an investment rather than a transactional medium in 2018 (as opposed to 54% in 2016) resulting in a sharp increase in the number of bitcoins being hoarded, thus having 0 velocity. So if the hybrid velocity for 2018 is 3, the transactional velocity would equal 12.16 (3/0.25) which would closely match transactional velocities from previous years.
- If Bitcoin’s 2018 hybrid velocity were to remain similar to 2016 and 2017 while maintaining an average market capitalization of $145 billion, the network would need to process around $870 billion worth of transactions by the end of 2018. We are 9 months into 2018 and so far $298 billion processed — processing an additional $572 billion within the next 3 months is most likely unrealistic which leads us to a harsh reality of bitcoin’s market overcapitalization.
- If Bitcoin’s 2018 hybrid velocity were to remain similar to 2016 and 2017 while maintaining it’s current daily average $ transaction volume, the average market capitalization through 2018 should be around $73.5 billion.
None of these 3 options paint a good scenario for Bitcoin. If the number of speculators is increasing at a faster pace than the number of actual users, it shows us that most people don’t want to use bitcoin as a transactional medium. As more people speculate on the future use case of the asset, instead of actually using it, asset’s market capitalization runs far away from the reality. What you end up with is a massively overvalued asset with the majority of participants never moving their tokens to utilize the network, discouraging new participants from joining.
If the number of speculators is not increasing and the 2018 hybrid velocity is similar to previous years, bitcoin will need to process an unrealistic number of transactions within the next 3 months or more realistically — decrease it’s average asset base. It is important to note that from 2016 to 2017 Bitcoin processed 600% more transactions and it’s average market capitalization increased over 700%, while from 2017 to 2018 the network will process only 18% more transactions yet it’s average market cap still increased over 120%. The 2016–2017 price increase was justified by an actual increase in network’s utility usage which continues to happen in 2018 but not at the pace which people have anticipated. For the last 9 months bitcoin’s price has just been adjusting to reflect network’s real utility after a jolt of speculation in 2017.