BITCOIN: bitcoin flows, is bitcoin a bubble? (Part I)

In this entrance I'm going to talk about the flows of the most developed criptocurrency: BITCOIN.

At the same time we are going to see if the recent evolution of the bitcoin price can be considered a bubble.

I'm not going to enter into details about what Bitcoin is but I'm going to explain a bit the logic behind of the flows of Bitcoins.

Bitcoins can be exchanged for the different existing currencies (EUR, USD, GBP,...) through the various exchange houses that are around the world. Having each one of them an specific characteristics (fees, depth,...).

There are two main reasons to exchange "classical" currencies for bitcoins: the first one is to be able to make transactions in Bitcoins (buy and sell things). This should be what gives the "value" to the Bitcoins but actually right now is value by its second reason "invest in Bitcoins" that is buy them with the expectation that its future value will grow or just as a refuge value against currencies devaluation.

Now that we have a better idea of the structure lets look at the data.

In the previous chart we see see the evolution of the price of a Bitcoin with respect to the dollar. We observe that in the last months the price has more than doubled and as we saw before there are two possible explanations for that. This increase in demand can be due to a higher volume of transactions or a higher interest of the cryptocurrency as an investment asset.

 

A much better representation of the Bitcoin value is its market capitalization which is the result of multiplying its price by the total number of Bitcoins (now around 16,5 millions)

 

If we see the evolution of the number of transactions we observe that they grow in a steady trend but which cannot explain the recent evolution of the Bitcoin value.

Now lets look at the average value of each transaction

 

Here we see a trend much closer to the one that the Bitcoin value (market cap) has followed. However the right measure to compare should the total transaction value which is the average transaction value multiplied by the number of transactions.

 

This two metrics, mkt cap and total transaction value, can be directly compared and to do so we are going to see how the ratio of the two has evolved.

 

Here we can see that the ratio of the two has remained relatively constant through all this period. This shows us something, the recent rise of the Bitcoin has a correlation with the rise of the value of the transactions made with Bitcoin.

That conclusion doesn't imply that Bitcoin is not a bubble (or is) but that the current situation doesn't differ much from the scenario we had 2 years ago but tells nothing about its valuation in absolute terms.

I hope you liked this post, in the following one we will continue analyzing the value of Bitcoin but this time with a more "investing" perspective trying to see if it would be worth to put your saving in it.

See you soon :)