Bitcoin is Overvalued and will not be the Blockchain Network of the Future
Bitcoin is Overvalued
As a blockchain platform, whether innovation or transaction, Bitcoin is significantly overvalued. The thesis of the following argument is that, at this point in time, the token value and therefore market cap of Bitcoin is based primarily on trading activity and not on activity as a whole (non-trading activity and trading activity).
If total activity taking place on a chain (as defined by number of transactions/operations and fees generated from transactions/operations), were more directly tied to token value, Bitcoin’s valuation would be significantly lower. Furthermore, the Bitcoin token has relatively low intrinsic utility as a medium of exchange as the Bitcoin ecosystem is lagging ecosystems on other networks. For these reasons, Bitcoin’s value will decrease as specialized tokens are established for specific transactions.
Please note that all figures below are of a snapshot in time, specifically January 7th, 2020.
Utility-Based Value
Given the improved governing structure and enhanced performance (e.g. faster transaction times and greater scalability) enabled by POS and DPOS consensus mechanisms, much of the activity taking place on blockchain networks is occurring not on the Bitcoin network, but on other networks such as EOS, TLOS, Steemit, and others.
In fact, Bitcoin does not even fall within the top 10 networks by 24-hour transaction volume. Bitcoin’s average 24-hour transaction volume of approximately 450K is dwarfed by the most actively used network, EOS, which has an average 24-hour transaction volume of 56M. Despite having over 125X more transactions on its network, EOS has a market cap of roughly $2.7B which is a fraction of Bitcoin’s $150B+ market cap.
Additionally, activity-based fees generated by the network do not directly influence token price (i.e. an increase in fee generation does not increase the network’s value) for the most actively used networks. Greater earnings generation should make the network appreciate in value as it represents either greater user adoption, greater earnings per node, or both as well as representing the earning power of a network which should have a more direct correlation with market cap and therefore token price. Ironically, fees arguably only affect Bitcoin’s token price when fees are too high and therefore discourage trading, lowering the velocity of the token and driving down the price.
Bitcoin’s Large Average Transaction Size (and not its widespread use) is Driving Token Price
So what is it that is driving such for Bitcoin? Although the Bitcoin network has a relatively low number of transactions, the total transaction value is high. Average transaction value on the Bitcoin network is $18K.
By comparison, the average transaction value on the EOS network is $32. Bitcoin’s network is primarily used for trading activity, transferring money, and possibly remittances. Its total market cap is driven by the large (in terms of dollars) transaction volume on its network. However, the actual activity (as defined by number of transactions) taking place on Bitcoin’s network is still relatively small. On the other hand, EOS’s network is processing a significant amount of transactions on a daily basis and the lower average transaction value suggests that there is more non-trading activity (relative to trading activity) taking place, making EOS a more widely-used and therefore more valuable blockchain platform.
Bitcoin’s Price will Decline as Specialized Blockchain Networks and Platforms gain Traction
The most widely-used blockchain networks are incentivizing use of their native tokens through fee discounts and loyalty programs. As category-leading, function-specific blockchain platforms emerge and gain widespread adoption, users will increasingly leverage the native tokens of the given platform to execute transactions. Several tokens will become trusted mediums of exchange for specific transaction types and will make those tokens more intrinsically valuable, increasing token price.
For example, consider Steemit. Steemit is a blockchain company that has been rewarding users for creating and publishing content on its social media platform (think of it as a middle-ground between Reddit and Medium). Users create and publish content and are rewarded with STEEM tokens based on engagement with posts. If Steemit grew to become one of the most widely used publishing platforms, the STEEM token would become one of the go-to tokens of digital media creation and curation.
The transaction volume and cumulative transaction value of the STEEM token, as a result, would primarily be comprised of non-trading activity (specifically content creation and curation) as significantly more users and transactions would represent activity related to creating and sharing content relative to users and transactions representing trading of STEEM tokens. Changes to token price, therefore, would be driven by changes in transaction frequency and average transaction value of the core value-add activity, which in the case of Steemit would be content creation and curation.
As the utility of tokens on blockchain networks expands beyond trading activities through the adoption of specialized applications and platforms, transaction volume will more directly drive token price.
However, Bitcoin will not benefit from this phenomenon in its current state as its network has a limited ecosystem for reasons including a less efficient consensus mechanism, low capacity and scalability, and high transaction fees during peak demand. Bitcoin’s transaction volume will decrease in favor of adoption of tokens on specialized platforms that provide users with greater utility. Consequently, the price of Bitcoin will decrease to a lower price that more accurately reflects its lower utility.
