Bitcoin – native Internet money, protective asset or means for speculation?

At the end of last year, the Big Seven (G7) published a report that states that bitcoin and other cryptocurrencies still do not represent a “reliable and attractive” means of payment.

In particular, the G7 researchers are sure that cryptocurrencies are extremely volatile, difficult to use, they have scalability problems and regulatory risks.

A similar opinion was recently expressed by American billionaire Rey Dalio – he believes that the first cryptocurrency refers to speculative assets and is ineffective as a means of exchange or maintenance of value.

The FORKLOG magazine tried to find out if the “slow, volatile and poorly scalable” bitcoin function of the money, and also what it is more – an intermediary in exchange, a means of maintaining value or a speculative asset.

Bitcoin and monetary theory

Until now, regulators of various countries have not come to a common denominator in cryptocurrency matters and therefore in their own way interpret their essence. Some equate bitcoin to assets, others – to payment funds, others – to goods, and the fourth even prohibit the circulation of digital currencies, calling them extremely speculative instruments and guns in the hands of criminals.

Before answering the question of what cryptocurrency is, we turn to the basics of monetary theory.

Money shows themselves through their functions:

The measure of value, helping to exchange each other on the basis of price various products.
Means of circulation – The role of an intermediary in exchange. In this context, an indicator of liquidity is extremely important, characterizing the ease and rate of money exchange for any other product at a price close to a market.
Instrument of payment – when repaying debt and other obligations. According to a number of economists, the line between the means of circulation and payment is very conditional and therefore these functions can be combined.
Accumulation – recognized by economic agents the equivalent of the cost, stored for subsequent exchange for goods and services. Such equivalents of value can be not only currency, but also precious metals, promotions, bonds and other financial instruments. They can also be objects of art, real estate and cryptocurrencies.
World money – maintenance of value movement in international economic turnover.

Bitcoin can quite effectively perform all five main functions of money. So, despite the relatively high volatility of the first cryptocurrency, it is in demand as a measure of value and a means of circulation in Venezuela, which suffer from hyperinflation, where the prices of goods can change significantly even throughout the day.

As world money, BTC is used to pay freelancers from various countries, being an alternative to slow, expensive, and sometimes inaccessible banking transfers. Bitcoin and other digital assets are developing with the cryptocurred market and other digital assets.

More and more often bitcoin is used in the darknet. According to Chainalysis, in the first half of 2019, about $ 515 million in BTC was spent on illegal trading floors. Analysts note that the largest illegal marketplace is Hydra, and the most popular goods are drugs.

It is noteworthy that on such sites, Bitcoin was ahead of the anonymous cryptocurrency Monero, which is often accused of being the main tool for illegal operations.

The first cryptocurrency is able to serve as an excellent tool for diversification of the investment portfolio. In addition, over the years, the price of bitcoin is growing, therefore, cryptocurrency may be a means of accumulation.

Bitcoin price growth for various time periods. For example, over the past five years, the BTC price has increased by almost 4000%. Data: Condance as of 20.01.2020

The value of money as a means of circulation is their purchasing power. The latter is not necessarily determined by the actual cost (for example, with gold from which the money is made or for which they can be exchanged in the conditions of the gold standard) – it can be determined by the trust of cash holders.

It is not surprising that in the same political and economic crisis of Venezuela, the volume of trading on the Localbitcoins P2P platform is growing rapidly-in all likelihood, many see in the first cryptocurrency an acceptable alternative to the depreciating Bolivar or “wealthy oil” El Petro.

Modern monetary policy and the law of sinful

The English financier Thomas sin as back in the 16th century noted that when the content of valuable metals in the coins, while maintaining the previous nominal value, previously released money quickly went out of use.

Portrait of Thomas Sin, 1544

Based on his observations, he sin formulated the rule: “The worst money is supplanted from the best appeal”. By good he meant money, the internal value of which is higher either by the nominal value, or the poor money in circulation with an equal nominal cost.

People prefer to keep “good” coins, paying “bad”. As a result, “expensive” money is replaced from circulation.

In modern conditions, many developed countries resort to the policy of “cheap money”, trying to revive business activity and make more competitive export.
Such a policy floods the market with a money supply and, therefore, leads to the devaluation of the currency and supernarial or even negative interest rates. The significance of the function of maintaining value in fiat currency is reduced, as well as its purchasing power. The level of confidence of the population to the authorities also falls, in fact, engaged in damage to coins, just like in the days of sinful.

It is not surprising that in conditions of monetary expansion, the population is looking for alternative ways of maintaining value, preferring deposits more profitable shares or bonds. This can lead to bubbles in the financial market. The soft monetary policy does not ultimately prevent, but only exacerbates crisis phenomena, lengthening the economic cycle.

Many who understand this diversify the portfolio with protective assets, including bitcoin, which has recently been correlating with gold recently.

The degree of correlation of bitcoin with gold reached the values of August 2016. Data: CoinMetrics, Arcane Research report.

The stereotype is widespread that the Central Bank, which almost uncontrollably produces money, is used by the printing machine. In fact, the main part of the money supply is generated by commercial banks due to partial reservation and the multiplier mechanism associated with it.

The fact is that credit organizations attracted in the form of deposits to demand in demand are deposited in the Central Bank in accordance with the norm of mandatory reserves (in the Russian Federation, for example, it is 4.75%). Commercial banks can issue the remaining funds in the form of loans, as well as invest in securities.

Subsequently, the money spent in this way is placed for storage in another bank, thereby creating new deposits and allowing them to give them out on credit again. Thus, the money supply consistently increases, which in most countries exceeds the monetary base created by the Central Bank.

Remarishing the parallel with bitcoin, we note that lending on the basis of cryptocurrencies is rapidly developing. Such loans are usually super -icing, that is, the amount of pledge exceeds the amount of borrowed fiat money.

For example, a loan of $ 500 at 5.9% per annum on the NEXO service should be provided with 0.10936543 BTC (about $ 945 at a rate of 21.01.2020).

Thus, the risk of liquidity of cryptocredit organizations is much lower than that of the financial institutions of the traditional market. This is positively reflected in the cost of borrowed money, which also depends on the risks of non -return of debts.

However, unlike the traditional one, the deposit insurance system is not developed in the cryptocredite market. In addition, companies operating in this market do not have the opportunity to contact the latest instance creditor (in the traditional market – this is the Central Bank) in case of solvency problems.

Credit market is an important source of resources for any industry. Cryptocurrency lending is rapidly developing and is in significant demand, since it makes it possible to occupy and invest at an acceptable percentage without unnecessary bureaucracy. Such services can be especially relevant for investors in the conditions of a bear market – when you need money, but I do not want to sell digital assets at a catchy price.

The advantages and disadvantages of bitcoin in comparison with fiat money

Of the main ones advantages The first cryptocurrencies can be noted:

Hardly limited emission. Bitcoin’s offer is limited to 21 million coins, of which more than 85% have already been mined. Thus, BTC is almost the rarest asset on Earth. Its price in the long run will increase under the condition of unchanging or growing demand. Therefore, bitcoin can perfectly perform the function of maintaining cost, especially if the investment horizon is measured for years.
Extremely low and predictable inflation. This property is closely related to the previous. The current BTC inflation rate is 3.79%, and after the May halving it will fall below 2% (in the currencies of most countries this figure is slightly higher).
Lack of central regulator. From this property, the stability of bitcoin censorship and voluntarist manipulation of various parameters are followed; Anyone can make transactions and store the cost in BTC without any permission for this.

https://gagarin.news/news/chinese-police-claim-that-cryptocurrencies-are-used-in-drug-trafficking/

Low transaction costs and acceptable payments speed. These properties are especially relevant for those who carry out cross -border translations. Lightning Network technology is designed to increase the speed and reduce the cost of payments, as well as solve the problem of scalability of the BTC network.
Safety and irreversibility of transactions, not involving the parties to disclose sensitive information. The property of irreversibility, in particular, protects sellers from losses due to fraudulent Chardzhbekov.

From disadvantages BTC can be distinguished:

Low degree of accepting cryptocurrencies. Many people still consider bitcoin something frivolous and purely speculative, not appreciating the advantages of decentralization, the power of cryptography and the potential network effect.
High volatility. Bitcoin price fluctuations are still quite high, but the indicator is characterized by a long-term tendency to decrease. So far, conservative investors who prefer low -income and least risky assets can repel significant volatility.
In various countries, operations with bitcoin are prohibited or significantly limited. The actions of regulators often create barriers to the massive accepting of cryptocurrencies on a global scale.
Bitcoin’s deflation nature can be both an advantage and a disadvantage. BTC concentration in the wallets of large investors increases over time. Consequently, growing demand with a limited sentence may cause exponential price increase. However, if at a certain moment many whales record profit, the price of bitcoin will collapse.
The irreversibility of transactions can also be a significant problem, especially if there are risks of non -fulfillment of the agreement. For example, when non-passage of goods from the online store there are no guarantees of a refund of funds. When paying via Visa or MasterCard, the client may use the return payment procedure.
Only the owner of the coins can deliver transactions and spend funds from his wallet. However, the loss of a private key means the loss of access to funds by the user – this is the opposite side of financial sovereignty. In traditional finances, for example, a lost credit or debit card can be blocked immediately, avoiding loss of money.

Thus, bitcoin is significantly different from the subjects of fiat currencies, the value of which depends on the central authorities and trust in them from the population.

Addresses, transaction volume and bitcoin volatility

Digital assets are increasingly concentrating in whales, the number of bitcoin addresses with a remainder of more than 1000 BTC updates historical maximums. For example, 42% of Bitcoin’s total offer is in the hands of investors with 1000 to 1000,000 BTC. For comparison, at the end of 2017 this figure was 37.9%.

The number of addresses with 1 BTC or more, according to Glassnode:

To date, there are more than 784 thousand such addresses, the growth since the beginning of last year amounted to 11%. Since 2015, the number of such addresses has doubled.

“This steady growth is the result of the savings of retail buyers”, – expressed the opinion of the analyst Digital Assets Data Connor Abendshain.

The expert emphasized that such dynamics may indicate the adoption of bitcoin as a means of maintaining the cost.

The graph above shows that growth trend continues, despite significant fluctuations in digital gold prices. Similar behavior of investors is also characteristic of the gold market – the attractiveness of this protective asset is always high, regardless of short -term fluctuations in its price.

The number of addresses with a non -equal balance is increasing – as of January 21 there are 28 351. The previous record was recorded on January 11, 2018 – 28 190 such addresses.

Number of #Bitcoin Addresses with Non-zero Balances Rose to a Record High of 28,351 on Jan. 21

Previous Record High Was 28,190 (Jan. 11, 2018)

Data by @glassnode pic.Twitter.COM/Yrv0htdjo7

– Omkar Godbole (@Godbole17) January 23, 2020

However, we note that the growth of this indicator does not necessarily mean the influx of new investors. One market participant can store 1000 BTC, for example, 1000 addresses.

Settlement of digital gold mainly in whales can indicate the influx of capital and the confidence of large investors in the long -term prospects of the first cryptocurrency. On the other hand, the question is about how good Bitcoin is as a means of circulation. To find out, you need to evaluate the transaction demand for it.

In 2019, users transferred $ 673 billion in the Bitcoin network, which is 11% less than 2018:

Thus, last year, the volume of the transferred value decreased by more than 10%. On the other hand, this indicator is four times higher than the total cost of transactions from 2009 to 2016.

Researchers of The Block note a close correlation of the volume of onchain transaction with the price of bitcoin and trade turnover:

The relationship between the volume transferred to the blockchain transaction of value and trade turnover on exchanges presented in the BitWise 10 rating

Orange line – the number of transactions, gray – the market value of bitcoin in dollars. The correlation between these two indicators is very close. For example, the peak of onchain-activity was achieved when the price of BTC increased to a historical maximum. Data: Glassnode.

This, the researcher of The Block Larry Chermak, indicates that Bitcoin and other popular cryptoactives are primarily instruments for speculation.

Given the rather active beginning of the year, there is a hope that transactional activity will continue to grow. However, this is necessary for a confident recovery of the market after a half -year descending trend.

Arcane Research analysts state the growth of Bitcoin onchain-activity at the beginning of the year. So, during the second week of January, the volume of transactions increased by almost 5%, and the total amount of the transferred cost by more than 25%. Miners’ commissions increased by 43%, and the number of active addresses by more than 7%.

Against the backdrop of a recent revival of market and onchain-active, an indicator of Bitcoin’s volatility increased by 3%, interrupting the descending trend that lasted since August:

The report of the CoinmarketCap service says that among the first five of the most capitalized crypto actes, the volatility of bitcoin is the lowest. However, in comparison with traditional assets and world indices, BTC fluctuations are still noticeably higher:

Over the past year, the price of bitcoin grew faster than many exchange products, world indices and ETF. At the same time, BTC volatility is higher than that of the instruments of the traditional market. Source: Blog Coinmarketcap, Investing.Com, Yahoo Finance.

Thus, the interconnected indicators of price, transactional activity and the volume of trading are almost synchronously grow in the bull market and fall together against the background of recession. At the same time, the growth of the number of addresses and the concentration of capital in whales occur even during the bear market. Therefore, bitcoin is more often in demand as a means of maintaining the cost.

Fair value of bitcoin as a means of circulation

As already mentioned, the means of circulation is one of the main functions of money. The market value of bitcoin and the volume of transactions are very close to each other. Consequently, the price of digital gold is significantly dependent on transactional demand, that is, use for everyday operations, including the purchase of goods and services.

The BYTE TREE service calculates the “fair value” of bitcoin based on the ratio of market capitalization to transactional activity (NVT Ratio). According to this service, Bitcoin is overestimated by 51.6% as of 24.01.2020:

According to Byte Tree, the “fair value” of Bitcoin is at $ 5541, while its spare price is in the region of $ 8400.

With the development of Lightning Network and Liquid, the indicators will probably lose significance. However, so far the activity in the second -level network and the Blockstream Sidein is low.

Low transaction demand at a relatively high price is another confirmation that the main uskeis of bitcoin is still exchange speculations.

conclusions

Compared to fiat money, the first cryptocurrency has advantages, but there are some disadvantages – high volatility and still low degree of adoption at the global level. Probably, not everyone likes decentralization, as well as the irreversibility of transactions and financial sovereignty associated with it, which implies the full adoption of risks and safety issues.

So far, the first cryptocurrency is used mainly for long-term maintenance of the cost and for purely speculative purposes, designed for a short and medium-term perspective. At the same time, Bitcoin is gaining popularity among whales, as evidenced by the growth of activity on the exchanges of CME and Bakkt.

Given the ratio of market capitalization to the volume of transactions, Bitcoin is greatly overestimated as a means of circulation. Therefore, most investors consider BTC as a means of maintaining value or as a purely speculative asset. Evidence of the first is the concentration of large sums on large wallets and an increase in the number of addresses of 1 BTC or more, and the second is the rapid development of the derivatives market and still considerable volumes of trading in the spot market.

In the long run, the price of bitcoin will depend on how well it performs the main functions of money. If digital gold is everywhere accepted as a means of circulation and its volatility will be acceptable to perform the functions of accumulation, the market will appreciate it.