Thursday, January 1, 2015

Bitcoin: Volume matters

It's easy to get fixated on prices, particularly if the price you're interested in keeps going up and up and up (or down and down and down).  In early December of 2013, for example, when Bitcoin was trading over $1000 with no limit in sight, the only logical conclusion was that it would soon take over the world.

Since then, the dollar price of BTC has fallen into the 300s.  Considering that the famous 10,000 BTC pizza would be $3 million at today's prices (if just a bit stale), that's still pretty good.  On the other hand, it's around a quarter of the peak price.

The exact exchange rate between BTC and reserve currencies shouldn't really matter greatly, though, so long as it's reasonably stable and there's enough money supply to handle whatever it is BTC is being used for.  But what about volume?  How much BTC is changing hands on a given day?  How much Bitcoin, measured in dollars or some other reserve currency, is there in all?

As an aside, there's a whole body of established techniques for using volume in conjunction with price to make buying and selling decisions.  I won't even pretend to know much about that.  I'm more interested in how Bitcoin stacks up against other currencies (if you consider it a currency) and money transfer networks (if you consider it that).

According to, around half a million Bitcoins are "sent" daily, or about $150 million worth at current prices.  I believe this is taken from the blockchain that records all Bitcoin transactions, and so would include activity on the various exchanges, miners collecting and redeeming their bounties, direct transfers of BTC to and from long-term holdings (the "pure" Bitcoin economy) and whatever else.

If I buy a Bitcoin for $320 or whatever, that would show up as one Bitcoin sent to me from the exchange, and if I use that Bitcoin to pay you for some good or service, that would in turn show up as one Bitcoin sent to you, and if you turn around and sell that Bitcoin for $320, that's another Bitcoin sent, to the exchange from you.  In other words, a typical transaction using Bitcoin as an intermediary between reserve currencies will be counted three times.  If we want to consider Bitcoin as a money transfer network, we should probably allow for some amount of non money-transfer activity, then divide by three, but in what follows let's count all $150 million, if only because it's simpler.

The Bitcoin money supply is deliberately easy to calculate.  While there are several measures of "how many dollars are there?", the total number of Bitcoins at any given time is a known parameter of the protocol.  Currently, the BTC money supply is about 14 million, or $4 billion.

By contrast:

  • About 100 nations have more than $4 billion in currency
  • The US M1 money supply is around $2 trillion, or about 500 times the Bitcoin money supply
  • The US M2 money supply is around $12 trillion, or about 3000 times the Bitcoin money supply
  • The US GDP is close to $50 billion per day, or about 300 times total Bitcoin activity (1000 times or more if you buy the triple-counting argument above)
  • VISA processes about $9 billion in transactions every day, or about 60 times total Bitcoin activity (or about 200+ with triple-counting)
and so forth.

I'm actually struck that the Bitcoin economy, or whatever you want to call it, is as big as it is.  There may be 100 countries with more money, but there are also 50 or so with less.  You could literally run a small country on Bitcoin.  I'm not saying it would be good policy, but in some sense the numbers are there.  A small fraction of US GDP is still a fair bit, as is a small fraction of Visa.  For a while Bitcoin was arguably bigger than Western Union.  Your call whether that's a matter of Bitcoin being big, WU being small, or some of both.

The main point remains: If you want to get an idea of how important Bitcoin might be, don't look at the price alone.  Look at volume as well.