2018 August 20 - Volume.2 Issue.33/34

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2018 August 20 - Volume.2 Issue.33/34

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Bitcoin: Volatility Downtrends, Commerce Audience Still at Large

There is little doubt that Bitcoin is now on the radar for most in the financial industry. What the cryptocurrency has yet to achieve, and in fact, lost ground on, is on the commerce side. The heavy focus that has fallen upon Bitcoin is now seeming to be a double-edged sword. On the one hand, major financial institutions are witnessing investor demand to trade the cryptocurrency. On the other hand, this very fame has, at this point in time at least, moved Bitcoin away from being used as money, and more as an asset class testing the nerves of traders. But volatility is setting an actual trend downwards for the first time.

Despite not only the ease of purchasing Bitcoin growing exponentially since last year, but also its very existence falling onto the world stage, transaction count has dropped below 2016 levels.

Transaction batching doesn’t help resolve the juxtaposition either. While major exchanges began batching transactions at different stages from June last year, this has only accounted for a 5% increase in batched transactions (see chart).

And transaction fees are certainly not to blame either as median charges are now no more than a dime since March – also a 2-year low.


At peak, cryptocurrency market capitalization stood above $800Bn. It’s by no means a small market to be able to cater to. However, the lack of a clearly defined regulatory framework around Bitcoin, ironically, could continue to pose a disadvantage for the cryptocurrency. Businesses will likely remain unwilling to take on the risk of regulators digging through their affairs after a near-decade of media focus on illicit activities revolving around Bitcoin.

And while cryptocurrency merchant processors do reduce such friction, this hasn’t helped adoption by businesses. In fact, major outfits that did accept the cryptocurrency have stopped citing volatility concerns (Diar, 29 January).

Merchant processing plummeted a near 85% in US Dollar terms from its September 2017 high according to data by blockchain analytics firm Chainalysis (see chart). In Bitcoins, the drop is even worse at 93% from April 2017 BTC trading high (a 65% drop in US Dollar terms).

The drop, whilst incriminating, might not be completely indicative however. Speaking to Bloomberg, Bitpay, one of the largest Bitcoin merchant processors claimed a five-fold increase in acceptance from various businesses this year. Overstock.com has also said to see an uptick in cryptocurrency payments.


CME’s then Chairman Leo Melamed believed that the introduction of Bitcoin futures would ease the cryptocurrency’s volatility. “We will regulate, make bitcoin not wild, nor wilder. We'll tame it into a regular type instrument of trade with rules." And while Bitcoin swings are still quite noticeable, Mr Melamed wasn’t entirely off the mark.

Month-on-month volatility has decreased from December 2017 peak, when futures began trading, from 8% now down to 3% (see chart). Whether or not Bitcoin Futures are at play in this instance would be speculative considering that both CME and CBOE Bitcoin Futures trading volume account for a mere 2% against spot trading (Diar, 6 August). Perhaps coincidentally, perhaps not, volatility in 2018 only increased when Bitcoin Futures saw a decline in traded volume.


The US Securities and Exchange Commission (SEC) is set to make a final decision this week on the application from ProShares for a Bitcoin Exchange Traded Fund (ETF). And the regulator has another three to consider within the next 6 months. But not much has changed since July when the SEC rejected the Winklevoss Bitcoin ETF for the second time (Diar, 30 July). Cboe President Chris Concannon says “the problem with a futures-based ETF is, what is the right level of liquidity? It’s never been tested before.”


Should major investors seek exposure to Bitcoin outside of personal custody, options are available (Diar, 6 August). Grayscale’s Bitcoin Investment Trust has seen weekly inflows to the tune of $6Mn a week despite the bear market witnessed since peak in December last year (Diar, 6 August). And if that’s not an investors cup of tea due to a steep premium, come 22 August, Bitcoin Tracker One, an Exchange Traded Note (ETN) will be available to trade through US brokerage accounts. However, the premium in this case might be the exchange rate fluctuations, as the ETN may be listed in USD, but is based on the Swedish Krona, which has seen a 10% decline against the Green Back this year. Still, there are a dozen more options through regulated outfits. The latest coming out of Atlanta, Intercontinental Exchange (ICE) announced its latest venture into the space with Bakkt, a physical futures market set to go live before the end of the year (Diar, 6 August).


The interest from major financial houses is a significant step forward for the cryptocurrency. However, the institutional drive could metaphorically strip Bitcoin’s utility as a currency for trade, should it become seen a holding asset as it forms into what enthusiasts have been voicing all along – digital gold.

Small Miner Abandonment? Bitcoin’s difficulty level and current hashrate, in line with Diar estimates in June, puts miners running Bitmain’s S9 Antminer near the point of little returns (Diar, 04 June). The price decline has accelerated our forecasted date.This reality will bode well for major mining operator Bitmain who is seeking to float with a whopping $18Bn raise target on the Hong Kong Stock Exchange come September (Diar, 13 August). With small miners being forced to switch offline, or move to mining other coins, large mining operations with economies of scale, technological prowess and wholesale electricity costs could come out ahead, cementing their market share of the coinbase reward and transaction fees further.

Bitcoin Monthly Volatility Downtrends to 14-Month Low (%)

1/3 - As Access to Bitcoin Grew With Exchanges Coming Online...

2/3...And Transaction Batching Still Playing a Small Role

3/3...Bitcoin Transaction Count Fell to a 2½ Year Low 2Q18

Notes: Output group sizes as proposed by Coinmetrics.io
Sources: Blockchair.com, Coinmetrics.io, CoinMarketCap.com

Top Bitcoin Merchant Processing Tumbles

Source: Chainalysis via Bloomberg, Diar Calc.

Bitcoin ETF Applications

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