Crypto-Currency-Usage Index: Tracking Bitcoin, Litecoin, Dash and Ethereum in their usage.

Dear community,

I have developed a simple model to track and compare digital currencies over time in their actual usage. The model does not allow exact pinpointing but should be considered as an additionally tool for you.

The question: For what reason do people use digital currencies and how will this develop in future? Is it for speculation only? About what kind of investors are we talking about? How many whales are out there? How will things change in future?

Assumptions: All technical issues are considered to be a “black box”, here named as network capacity. The resulting fees and the verification speed have strong effects on the kind of usage. The decision whether to use digital currencies or not depends on the relative high of transaction costs and transaction time against market competitors. We are only intereted in “Kind of Usage”. Figure [1] shows a small concept of the background mechanism.

Construction of the CCU-Index

Now I have developed an easy model to track major digital currencies. All in all, I collected data for 4 cryptocurrencies. The CCUI is divided in two parameters. First, the usage intensity and second the median transaction value.

  1. Median transaction value within the network
  2. Network`s usage intensity: (#Transactions/#Active Users)

I used the median transaction value as a proxy to incorporate as much as possible the density function and thus distinguish between high volume short-term investor trades and real low value transactions. Obviously, the use of boxplots would have been the best solution as the upper and lower quartile as well as outlines can be illustrated best. Unfortunately, I have no access to those data.

The usage intensity is kind of an intermediate parameter that expresses the number of transactions per active user. If the usage intensity is high, it is can give information about a strong daily usage of the system. While active users only include those addresses, which are not mainly used for long-term speculation, this now can have two possible explanations: First, it is high because of an intensive day trading for the purpose of arbitrage and short-term speculation. Or second, it can be affected by indeed a real high rate of daily purchases of an active user community. Hints to what degree what explanation is right can be given by the median transaction value.

Figure [2] shows the 30 days simple moving average median transaction value of major digital currencies from October 2016 until today. It immediately shows two things: First, BTC, DASH and LTC are rising since months while the value of ETH is falling since July. And second, ETH differs strongly from other coins, as its median value is generally much lower. Comparing the data for the median (Figure [2]) with the simple average (Figure [3]) also shows ETH with the lowest value.

The 30 days mean transaction values in September 2017 were $37.000 (BTC), $9.800 (ETH), $34.900 (LTC) and $22.100 (DASH). Therefore, figure [2] already give the impression that these major coins can be separated in these two categories. As an anchor point, the transaction values of leading credit card companies in 2012 rage between: $150 (American Express), $92 (MasterCard) and $91 (VISA) (See: Statista, 2012). This big spread is not surprising because simple moving average is strongly biased by extreme values: While digital currencies have no limit and people also use them as investments, very rare big purchases are done with credit cards as in general monthly card limits are imposed. For example, is it not possible to buy real estates or cars with credit cards as it would exceed the users’ limits. This is one reason that speaks for preferring the median value over the simple moving average.

The CCU-Index

While the median transaction value determines the current classification, the usage intensity measures the frequency and the way currencies are used. The development of the major coins since January 2017 until September 2017 is graphically illustrated in figure [4].

CCU-Index (January 2017 until September 2017; Each point indicates one month)

The model distinguishes between four categories:

A(Asset character): Characterized by a high median transaction value per transaction and low frequency trading. This attributes fit best for asset classes like gold and stocks. It stands for an asset class that is strongly traded by big institutional investors.

B(Short-term speculation): Sector B marks an area with a very low usage intensity but small transaction values. This field stands for a semi-currency usage where especially low volume trades are being done but with low velocity. This speaks for a niche market asset that is mainly used by private and small investors. Another possible use case that would show such an outcome are remittances. Here, transactions are done not so frequently but instead often consistently for example every week or every month.

C (Low Volume Asset): Stands for an asset with huge transaction volumes and a short holding duration of the asset. This may fit to high frequency in trading of certificated liabilities, where huge volumes are bought and sold within a short period of time for the reason of speculation but not for long term holding.

D (Currency Character): Is the opposite of sector A and marks the area where you may can speak more about a more real currency usage.

Results:

Interestingly the CCUI shows the move of Bitcoin, Litecoin and Dash from sector A to sector B in summer 2017. A possible explanation for this is the parallel engagement of more and more headfolds and institutional investors in the market. This market entry surly had effects on the market itself as more and more professional investors actively participated. Ethereum is the only digital currency that is in reality used like a currency while all others have a strong asset character. Especially DASH, which advertises with becoming the first really digital currency because of its easiness to use, its low transaction costs and its fast verification process is in practice far away from its goal. Although bitcoin promise to bank the unbanked and make micro payments possible on a global scale is far away from reality. Right now, the use is concentrated on long term speculation by small and large players.

Sure, the Index doesn`t say anything new than many experienced investors already know. However, some of you may like this easy illustration and its simplicity to track future developments. Last but not least it gives us new content to discuss about. Can`t wait for your comments!

The data used for the CCU calculations was taken from www.bitinfocharts.com