Bitcoin Transaction Volume is Down – Should You Be Worried?

Decline

Needless to say by now, the price of bitcoin has been struggling this year. Since the record highs from December last year, prices are now down by more than 60%. Meanwhile, the number of transactions per day on the bitcoin network has also shown lacking momentum, causing FUD among investors.

Looking at the number of daily bitcoin transactions reveals that the number hasn’t been this low since February 25 when it slipped to 144,000 transactions per day. With some investors now questioning the future of bitcoin, many are looking to the transaction volume for clues on where the price might be heading next.

Following the low on February 25, the number of transactions briefly shot up again before it fell back down. At the time of writing, the daily number of transactions is again close to the low from February, with 164,400 confirmed daily transactions.

Relationship between value and transactions

I recently came across an article on Forbes that outlined a model developed by a group at Trefis.com for estimating the price of bitcoin with an amazing accuracy of 96% on historical data. Specifically, the they looked at the number of active bitcoin users and the daily transaction volume in USD terms, using a model based on Metcalf’s Law, which is something we have previously covered here on Hacked.com.

Judging from the group’s findings, it appears very likely that the number of bitcoin users, transaction volume, and price are all directly linked. It clearly shows that there is a direct relationship between bitcoin adoption and price.

Number of transactions is not the whole story

Still, not everyone agrees that the lower number of bitcoin transactions is necessarily a bad thing. It can be argued that the lower number of bitcoin transactions per day is in fact a consequence of new solutions such as SegWit and batching of transactions being implemented by exchanges. These are all solutions that are implemented to improve the usability of bitcoin by lowering transaction fees and network congestion.

Some are also questioning whether the price of bitcoin is a function of transaction volume, or if it is the other way around. One can argue that in bull markets, more and more people are jumping on the bandwagon, generating lots of transactions between exchanges. Rising transaction volume would in that case come as a consequence of the rise in price.

Regardless of whether the chicken or the egg came first, one important thing to note here is the difference between the confirmed transactions per day and estimated transaction value. So whereas batching of transactions definitely lowers the number of confirmed transactions, it should in theory not affect the total value of transactions.

As we can see from the graph below, the drop in the number of confirmed transactions per day has been rather sharp since it reached an all-time high back in mid-December last year.

transactions per day

When we look at the estimated transaction value, however, we can see that the drop has not been quite as dramatic.

estimated transaction volume

Bitcoin price action aside, the above graphs confirms that looking at the number of daily transactions alone does not give the full picture of the extent to which bitcoin is being used.

So whether price is a function of transactions or not, it leads us to the conclusion that transaction batching and otherwise better management of transactions is having an impact on the transaction count. The sharp drop we have seen here recently therefore should not be a major cause of concern for bitcoin investors going forward. Instead, it indicates that transaction batching has been a success, improving scalability with lower fees and faster transaction times for everyone.

Featured image from Pixabay.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term trading.

Author:
Fredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.