Bitcoin as a novel market institution

Nic Carter (nic__carter)

I am going to be talking about bitcoin as an economic system, not as a software or cryptographic system. This talk has two parts. In the first, I'm going to take a retrospective of the past 10 years of bitcoin as a functioning economic system. In the second part, I will be looking at bitcoin as it is today and how it will be in the future. I'm going to look at the amount of wealth stored in bitcoin and also at the value of the economic throughput of bitcoin. We have popular measures for measuring these things, but they are inferior in a variety of ways.

Let's start with the throughput of bitcoin. It's common in the press to measure bitcoin in terms of the transactions per second or transactions per day. But this is kind of neglecting the essential point which is that bitcoin transactions are large from an economic perspective. They are more like containerships, not parcels. The average bitcoin transaction is $3k and your median bitcoin transaction is $200. I think this is often overlooked in popular narratives. We should try to reorrient the narrative here- it's containerships, not parcels.

We have some uncertainty about the economic throughput of bitcoin. There's no currently accepted best measure here. Lots of people refer to the number, but it's a black box and we don't know how they drive that algorithm. If you look at the raw output, without adjusting for anything, you get a few billion dollars per day. I run and it's transparent not black boxes. We reduce the raw output from multiple billions to $2b/day and then is the more conservative metric. I'll be using the conservative ones and the coinmetrics number for transaction volume. The lesson here is there's many ways to slice economic data for bitcoin and depending on your inputs you get different velocity figures.

Compared to Visa, Bitcoin has moved up several orders of magnitude in its throughput. Visa has also been increasing in the last decade. This is a log chart. Bitcoin is a single order of magnitude from Visa transaction volumes. Even though they are two distinct systems with dissimilarities, bitcoin's throughput or volume is only 1 order of mganitude off.

In this chart, where's a bunch of economic systems including payment systems, settlement systems, OTC gold, and mobile settlement systems and obviously at the top there's SWIFT, Fedwire and CHIPS which are the ultimate global settlement systems. Here we have two measures of bitcoin throughput that have been gradually increasing and traversing the boundaries, surpassing Western Union and so on. I think the most interesting one is the physical gold settlement markets. Saife likes to compare bitcoin to gold; bitcoin is essentially physical settlement and I think it makes a lot of sense to compare it to the OTC gold settlemnet markets. We recently surpassed the OTC gold settlement market size. I would consider that a significant victory, although there are more targets to hit.

Let's focus on the aggregate wealth stored in bitcoin. Today's bitcoin market cap is about $115 billion. The hidden assumption there is that bitcoin supply of 17m is all active, but we all know that's not the case. Satoshi's coins are assumed to be lost, and then some coins are provably lost, and some of those are counted in the market cap today. This chart says there's a couple millions of coins that haven't moved since 2009-2010. It's possible they are in cold storage, but it's also possible they are permanently lost. I'm not sure it makes any sense to count permanently lost coins in market cap. This is a critique of our measures of wealth. The measure of market cap is extremely inferior, especially in the case of coins that are non-circulating.

This is one potential alternative that I call accumulated security spend. It's esesntially aggregating miner revneue over the entire history of bitcoin with the idea that miners have fiat-denominated costs, and they are forced to sell their BTC when they mine them. So there has to be someone on the other end of that trade. This measure aggregates that over time and it gets us an esitmate of the total wealth inflow into bitcoin. What you get is about $10 billion which is the floor of an estimate for the amount of wealth flowing into bitcoin. The market cap is $115 billion but based on this rough heuristic, the inflow is between $10 billion and the marketcap.

This is the alternative to market cap that I would like to propose today, called realized cap. The idea here is that you're aggregating UTXOs based on the price at which they last moved. If their UTXOs at the last moved in 2009-2010, then the price was extremely minimal. What you get is a realized cap of about $88 billion, instead of a market cap of $115 billion. There's a significant amount of coins which are lost or should not be priced because they are not active. The criticism of realized cap is that we have long-term holders that are holding for 7-8 years and they do intend to sell at some point and they should be counted. This is just a counterpoint to marketcap.

I am going to apply this to other coins to apply my point home. I don't want to dwell on competitors for too long. Bitcoin Cash is an interesting case study. The market cap was $60 billion at one point. But the "realized cap", was a small fraction of that. Many people never sold or moved their bcash that they received in their airdrop. Those coins were never activated at all. I would argue market cap shouldn't be used here. Another case study was Bitcoin Private which was a merger of zclassic and something else. The market cap for Bitcoin Private exceeded $2 billion and the realized cap was a tiny fraction of htat. Using marketcap as a measure is essentially totally illegitimate.

I suggest you abandon market cap as a measure. We should be more critical about the kinds of measures we use to measure economic wealth in these systems. I also want to have a discussion about the bitcoin network. If you look at where transactions are going on bitcoin, and the throughput, it's mostly going between large exchanges. It's settling flow between large exchanges. Bitcoin is the global clearinghouse for that system. I think many of us would like it to be a fnuctioning payment system, but there's only a few million dollars for merchants per day. But the vast majority of volume is between exchanges. I would say bitcoin is an efficient clearinghouse for value, and it doesn't matter what it's used for, just that it's being used.

We can look at batching and see where coins are being sent and how. You can look at batching figures on It's typically exchanges that batch multiple inputs together into a single transaction. 30-40% of all on-chain transaction volume is batched. And about 18% of all the value is in single addresses owned by exchanges if you label them. There are many-input many-output transactions which are hallmarks of exchanges. I would argue that we need to accept this about exchanges. Many people say not your keys not your bitcoin; it's true but it's hard to convince everyone else of that fact.

In the future, htis is my model of how bitcoin might look like in the future. I don't endorse intermediation of bitcoin and I support autonomy of bitcoin users and giving them ownership of their keys using non-custodial methods. The situation is that bitcoin is highly intermediated today. Most people only touch bitcoin trhough Coinbase or Xapo or the numerous exchanges. It's on us to police those intermedaries. We have banks, fiat off-ramps, custodians, lightning custodians, merchant solutions, and obviously there's still direct access and many still transact with the base layer, but as transaction fees increase hten it's even more likely to get increasingly intermediated.

How well are these large intermedaries taking care of this commons which is the bitcoin block space? Here is the average transaction size in bytes. It's creeping up. In the ideal world, we'd get better compressing that. It's going up. Some people say this is because of batching and compressing many payments into single transactions. This doesn't seem to be the case right now. We haven't had too much success with batching.

I would like to propose a measure to really determine how efficient bitcoin transactions are, which is economic density, or the total economic throughput divided by the bytes. So what this tells you is that a single byte on bitcoin today represents about $15 in transfer activity. That figure might not mean a lot to everyone, but that means we have natural constraints on the system because we can only transmit so many bytes per units of time. Ideally we want this value as high as possible, with limited throughput we can transmit a huge amount of economic activity. We need to get better at this if we want the system to work long-term.

When Hal Finney talked about digital banks, today these are basically the exchanges. They are holding huge amounts of bitcoin. In many cases, this is a better UX for users. How do we cope with this reality? You can't fight realiy- they are here to stay. Hal finney was right about the bitcoin banks, we just call them exchanges. We should make sure the intermedaries are behaving appropriately. We can retain the hard money properties of bitcoin, even if there are intermedaries. We can probably still retain trust minimization because not all intermedaries are the same. I would say, let's encourage responsible behavior. Lobby for segwit, batching. Reward institutions that respect bitcoin's design philosophy and p2p network governance process, don't support hostile forks. Demand segregated accounts at custodians, and proof of reserves. Give users the option of running a node so that exit costs are low. These companies are the stewards of the blockchain. Ethereum is asking users to stop running dAPPs and stuff. We should encourage the large industrial users who have large chain impacts to behave appropriately and right now that means segwit and batching, and respecting the p2p network governance which was demonstrated with UASF last year, and not supporting hostile forks. If intermedaries are supporting hostile forks to bitcoin, then they are overtly hostile to bitcoin and we should treat them accordingly. Bitcoin activism with regards to intermedaries is tremendously important. We have been successful so far but there are many operating businesses that rely on bitcoin but are totally deaf to bitcoiners and we should make our voices heard.