Only 33% of Bitcoin Payments Used to Purchase Goods, Economic Value in Question

As global investors flock to cryptocurrency as an investment vehicle, the use of cryptocurrencies for their intended purposes has come into question.  New research suggests that only one-third of transactional activity occurring on the Bitcoin network is related to the purchase of goods or services.

The Network Value of Cryptocurrency

One of the main criticisms surrounding cryptocurrencies is that they aren’t actually operating as currencies, and the data surrounding Bitcoin’s transactional information seems to confirm this.  According to data from blockchain data provider CoinMetrics, the majority of Bitcoin’s transactional activity can be attributed to factors like mining pool distributions, spoofing, and manipulation.

CoinMetrics uses a formula that devises a Network Value to Transactions Ratio (NVT) to compare the dollar value of the virtual currency to the network value.  This system of measurement allows investors to better understand how certain cryptocurrencies are actually being used.  According to Coin Metrics, “a low market to transaction value (NVT) denotes an asset which is more cheaply valued per unit of on-chain transaction volume.”

This value varies significantly between different cryptocurrencies and gives a good idea of which virtual currencies are overvalued based on their average on-chain transaction volume.  For instance, Cardano’s (ADA) on-chain transaction volume is actually higher than its network value, giving it a low NVT of 0.78. This is compared to Bitcoin, who has an NVT of 30.78.

Although the Network Value to Transaction Ratio gives a general idea of how cryptocurrencies are being used, it doesn’t give a reliable idea of how many of the on-chain transactions have economic value.

Although Cardano has significantly higher on-chain transaction volume than Bitcoin, further research conducted by Elementus Inc. suggests that only 2% of economic transactions occurring on Cardano’s network carry economic value.  Even though Bitcoin’s NVT is significantly higher than Cardano’s, more of its on-chain transactions carry economic value, at approximately 33%.

Cryptocurrency as a Form of Payment

The use of cryptocurrencies as forms of payment has increased significantly in recent years but is still nowhere near being adopted by the masses.  New systems like Coinbase Merchant and Square’s payment systems have made it significantly easier for companies to accept cryptocurrency as a form of payment, and these are still relatively new services.

Overstock.com was one of the first major online retailers to accept cryptocurrency, and they have seen tremendous success in their cryptocurrency payment program.

According to one of the company’s board members, Jonathan Johnson, Overstock is generating a significant amount of money through cryptocurrency payments.

“We have somewhere between $68,000 and $120,000 a week in cryptocurrency revenues; people buying sheets and toasters using Bitcoin or Ethereum or other coins.” Johnson said while speaking to the Heritage Foundation.

Johnson also explained the benefits that Overstock sees in using cryptocurrencies rather than fiat currency, saying:

“We pay a processing fee for credit cards, and we employ about 40 people in our fraud department. That’s a cost of doing business with credit cards. When we take cryptocurrency, we have a very small transaction fee with Coinbase, much smaller than our credit card processing fee, and we have no fraud prevention department. It’s like a cash transaction. For us, that is a much cheaper way of doing business.”

As companies become increasingly open to accepting cryptocurrencies due to the fiscal benefits, the amount of economic transactions occurring on cryptocurrency’s networks will increase significantly.  This will be reflected in the price of commonly used cryptocurrencies, as their NVT ratio will skyrocket.

Featured image from Shutterstock

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by Cole Petersen on July 27, 2018 at 12:00PM