Most Cryptocurrency Transactions Have No Economic Value: Report

  • Nearly two-thirds of Bitcoin (BTC) transactions have no economic value, crypto analysis shows.
  • Researchers say publicly available cryptocurrency transaction logs do not show the “full picture.”

Coinmetrics, a crypto asset analytics and data service provider, recently reported that approximately two-thirds of daily Bitcoin (BTC) transactions do not involve trading the cryptocurrency or paying for products and services.

The open-source data company revealed the transaction volume on Bitcoin’s network mainly consists of crypto traders moving funds from one wallet or exchange to another. Per the firm, most other transactions involve spoofing, market manipulation, and mining pools transferring the cryptocurrency to their members.

The data service also said there have been times when up to 98% of transactions on Cardano’s (ADA) blockchain did not have economic value. Meanwhile Elementus Inc., another crypto data provider, claimed over 45 percent of daily transactions on Ethereum’s network are either spam or do not have economic value.

Charlie Morris, chief investment officer at Newscape Capital Group Ltd, was quoted as saying:

If this space is not a joke but serious, then people need to more. You’d want to know the facts. If institutional money is going to come into Bitcoin, they’ve got to understand what they are buying.

Charlie Morris

Morris, who manages $300 million in investment portfolios, aims to bring more transparency to crypto-related transactions by helping firms develop blockchain analytics software such as Elementus and Cryptocomposite.

Blockchain Data Lacks Clarity

Elementus CEO Max Galka, a former trader at Credit Suisse Group AG, revealed his company will be working with financial organizations to launch a crypto data service this year. He added:

You are sort of looking at a tiny piece of the blockchain through a keyhole, and you are not seeing the big picture. It’s really hard to understand the context around it. What we do is we allow you to get the full picture.

Max Galka

Notably, a number of market experts argue that the “full” picture may be very different from what’s available on blockchain explorers. Analysts also argue that being hard to identify who’s behind cryptocurrency transactions may pose serious issues if said transactions are associated with illicit activities.

Lucas Nuzzi, director of technology at Digital Asset Research, a company that focuses on providing “independent, rigorous, credible cryptocurrency” data, stated that “creating addresses in these networks is free, and transaction fees at this point are sufficiently low to enable a single user to send small balance through hundreds of transactions."

Making Transactions Untraceable

This, researchers say helps people to transfer digital currency between accounts in a manner that makes it hard to trace transactions. In fact, Coinmetrics’ research shows one user was behind nearly 90% of the transactions on the Ethereum network between February 2017 and February 2018.

Researchers think mixers, entities that move cryptocurrency between numerous accounts, may be custodians or exchanges who might be trying to make it hard for hackers to steal funds. These could also be malicious organizations or individuals attempting to make transactions untraceable, in order to orchestrate illegal activities, Coinmetrics states.

Nic Carter, co-founder of Coinmetrics, believes the value of real economic transactions on the Bitcoin blockchain is of around $2 billion per day and of approximately $700 million on the Ethereum network.

How Bakkt Can Bring the Crypto Space an Institutional Investor Influx

Cryptocurrency enthusiasts have for years been waiting for institutional investors to enter the space. While the introduction of bitcoin futures contracts on regulated exchanges in late 2017 didn’t gain a lot of traction, but Bakkt may.

Bakkt is a long-awaited bitcoin futures exchange and on-boarding platform from the Intercontinental Exchange (ICE) - the parent company of the New York Stock Exchange – and it’s set to launch this year. Bakkt itself has remained tight-lipped over the precise launch date after delaying its launch last year, with ICE CEO Jeff Sprecher in February simply saying “later this year.”

It’s possible that this quarter may see the launch or at least more news about when the exchange is finally coming. At the end of March, Bakkt CEO Kelly Loeffler explained:

While we’re not yet able to provide a launch date, we’re making solid progress in bringing the first physical delivery price discovery contracts for bitcoin to the U.S.

Bakkt’s launch could be a major milestone for the cryptoasset industry. A venture backed by Microsoft and Starbucks, its institutional pedigree alone will switch many cautious investors on. Specifically, the firm is set to help consumers pay for goods and services with cryptocurrencies, with Starbucks being the flagship retailer in its arsenal.

Bakkt’s Bitcoin futures contracts will be the first physically-settled derivatives on a regulated trading platform. This means investors will receive the contract’s underlying asset, bitcoin, when it expires.

Currently the Chicago Mercantile Exchange (CME) offers cash-settled bitcoin futures contracts, meaning investors get the equivalent of BTC’s value in fiat when the contracts expire. This is seen by some as a major development in the cryptocurrency space, as it shows traditional finance is willing to interact with the nascent cryptoasset industry.

It’s worth noting that earlier this year the ICE’s CEO called Bakkt a “bit of a moonshot bet,”  as it was organized in a way “very different than the way ICE typically does business.” The firm has its own offices and management team, and could undergo more rounds of financing in the future.

Bakkt And a Potential Bitcoin ETF

What’s significant about Bakkt’s launch beyond this, is that it may bolster the chances of a Bitcoin Exchange-Traded fund (ETF) being approved. Such a product would make it easier for institutional investors to gain exposure to cryptocurrencies.

In August, the US Securities and Exchange Commission (SEC) rejected nine other ETF applications, in particular highlighting how those applying hadn’t provided evidence that “bitcoin futures markets are of significant size’” for an ETF to be launched.

Once Bakkt is launched its trading volumes may very well help quell the SEC’s concerns over the bitcoin futures markets’ small size as institutions and other investors may feel comfortable entering it. Larger futures contracts trading volume, increased liquidity and a well-established company involved may prove enough to convince the SEC that the time is right for a Bitcoin ETF.

Bakkt therefore represents a very significant milestone for a maturing cryptoasset industry and may well herald the “institutional influx” that many have been anticipating since 2017. Despite the markets remaining relatively flat throughout 2019 these looming decisions in the U.S. have the power to move the entire industry forward, for better or worse.