Earlier this year, when bitcoin’s price fell more than 60 percent from its record close, a less-noticed bitcoin figure also plunged: the number of daily transactions.
There are many explanations for the fall-off in trading, from software- to news-related. What’s less understood is why the level hasn’t recovered as bitcoin’s price made a 50 percent comeback since Feb. 5. That’s left some investors wondering whether the cryptocurrency is waning in popularity.
The average number of trades recorded daily has roughly dropped in half from the December highs and touched its lowest in two years last month, even as bitcoin became a household name and roared back to near $11,000.
The transaction data might be bad news for bitcoin bulls, according to Charles Morris, chief investment officer of Newscape Capital Group in London, who invests in cryptocurrencies. Trading and purchases on the bitcoin network, which can be measured by metrics like transaction volume, is indicative of price direction, he said.
“We had a hype-cycle and now it’s cooling down,” Morris, who’s working on a project that will facilitate price discovery in various cryptocurrencies, said by phone from London. “We just may be entering a bear market” for bitcoin.
Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive bitcoins in exchange. The coins also can be bought and sold on exchanges with U.S. dollars and other currencies.
Transactions plunged from a seven-day average of almost 400,000 in mid-December to about 200,000 this week, according to research firm Blockchain.info. The last time transactions were this low, the currency traded below $500.
Transactions waiting to be officially recognized by the bitcoin network dropped from a seven-day average of 130 million bytes in early January to 35 million now.
Average transaction confirmation times have tumbled—though that might be in part because the technology that underlies bitcoin has already been adapted to address some of these delays. For example, a software enhancement known as the SegWit protocol, changing the way data is stored on the blockchain, was recently activated by Coinbase Inc., the largest U.S. cryptocurrency exchange.
Not everyone agrees that lower volumes signal trouble for bitcoin. It might be a healthy return to normality and signs that the market is maturing.
Should prices start rallying again, traders may well be coaxed back, according to David Drake, whose New York-based family office has more than $10 million in cryptocurrency and blockchain investments. He sees the currency soaring to $35,000 by the end of the year.
“We have a legacy of transactions being too slow and expensive, and it will take some time for people to forget,” Drake said by phone. “But they’ll come back.”
The decline in prices might itself be to blame for lower trading volumes in bitcoin. And websites that once allowed payment only in bitcoin now accept a much wider range of digital currencies, according to Kyle Samani, managing partner at crypto hedge fund Multicoin Capital. That makes alternative currencies more appealing than the first-mover in the space. A year ago, bitcoin’s market value was about 85 percent of the total sector. It’s now around 40 percent, according to website Coinmarketcap.com.
“Merchants, payment processors and online gambling are moving off of bitcoin,” Samani, who has $50 million allocated to the space, said in an email. “Our bitcoin position as a fund is small—I believe bitcoin is in the process of failing.”
Some businesses have jumped on the bitcoin bandwagon amid a flurry of media coverage. Overstock.com accepts payments in bitcoin, for example.
Still, its popularity is low compared with cash and cards, and many individuals and businesses won’t accept bitcoins for payments.•