News Bitcoin Velocity Drop-Off Shows Usage as ‘Reserve Currency’

Bitcoin is “functioning well as a reserve currency” for cryptocurrency investors as its transaction volume looks set to halve in 2018, Placeholder VC partner Chris Burniske said following new analysis released this week.

2018 Market Hits Velocity

A Medium post by developer and interviewer Nodar Janashia September 5 had highlighted that Bitcoin’s token velocity, neatly described as “the frequency at which the same unit of a token is used to process on-chain transactional value,” would likely drop significantly versus 2016 and 2017.

“…In 2016 Bitcoin processed approximately $58 billion worth of transactions and the average size of bitcoin’s asset base (market capitalization) through 2016 was $8.9 billion, so Bitcoin’s hybrid velocity in 2016 was 6.5 ($58/$8.9),” Janashia explains.

This tells us that each bitcoin that is in circulation has changed hands 6.5 times in order to process $58 billion worth of transactions.

He noted that this figure was not strictly accurate given the portion of the Bitcoin supply, which never moves and thus has a velocity of zero.

“If the number of speculators is increasing at a faster pace than the number of actual users, it shows us that most people don’t want to use bitcoin as a transactional medium,” concluded Janashia.

‘Expected’

Nonetheless, with a more inactive supply following price declines which began in late 2017, concerns could arise that usage – and hence investor confidence in Bitcoin – were waning. This is not so, Burniske commented on the findings, arguing that they were on the contrary “expected” from a go-to reserve asset.

“With a reserve currency, as confidence falls market wide more people will hold onto the reserve asset (in this case, [Bitcoin]), dropping its velocity,” he said in a series of tweets Friday.

…Non-reserve currencies tend to be the opposite: as confidence falls, velocity accelerates as people try to get rid of the asset before it loses more value.

1/ Per the analysis below, #bitcoin’s velocity thus far in 2018 has been ~3, about half that of 2016 and 2017. https://t.co/xnPT5F9yg0 — Chris Burniske (@cburniske) September 7, 2018

As Bitcoinist previously reported, research this year has also focused on Bitcoin’s overall trading versus investment trends, identifying a roughly 50/50 split in user habits between the former and latter as of June.

What do you think about the Bitcoin velocity analysis? Let us know in the comments below!

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