Nearly 90% of those who have purchased or mined Bitcoin may have already cashed out their holdings, it emerged this weekend. Before now, it was thought that just 36% of bitcoins had currently been spent or sold, an argument often used by both advocates and their adversaries to support the fact that Bitcoin is both likely and unlikely to succeed as an asset class over the long term.
For Bitcoin evangelists, the fact that so many of the currency’s units were thought to have not been used yet was demonstrable proof of the belief that holders had in the asset class. For those who think the opposite, the low level of use was a sign that Bitcoin had no liquid market or much means of practical distribution or use. Now it appears that the argument may be reversed in what would be one of the most significant findings in Bitcoin’s five-year history.
The reddit poster claims to have found the cause of what appears to be the falsely touted number of spent Bitcoins: a research paper that was written in 2013 published by George Mason University scholars in California. A search by the Reddit user, however, revealed that the number of bitcoins spent is actually closer to 87%:
I just did a blockchain scan and as of today, the total amount of bitcoins that have never been spent is 1,917,980 or 13.91% of the total … It is funny how the 64% number was repeated by International Business Times, The Atlantic, Al Jazeera, Arstechnica, Telegraph etc. (often in snarky articles which ridiculed Bitcoin) and no one even bothered to double-check that paper’s findings.
The post also contained a picture the user claimed represented the total percentage of unspent Bitcoin units in circulation:
The image is compelling since it indicates that around the same time period that the price of Bitcoin suffered a dramatic decline which has not yet reversed, was the same period in which the total percentage of unspent Bitcoin units reached its current level of around 14%.
If true, then the findings may indicate that the Bitcoin price has suffered directly as a result of the major holders of Bitcoin liquidating their holdings while claiming the opposite. Many of the potential sellers appear to be the same individuals and organizations who got buyers to purchase during 2011-2013, since the large quantities of unit exchanges happened during this time.
In the picture above, the selling/spending activity kicks off in earnest around July 2011, and doubles in volume at the start of 2013, the same year in which the price passed the $1000 mark for the first time. This would clearly explain the cause of the price decline during 2014 as many rushed to cash out at the same time even as the price was on the increase for a little while.
Another possible explanation is that Bitcoin has merely been used to make purchases and/or investments for an increasing range of products and/or investment opportunities. This would be a positive indication that the Bitcoin price is upward-bound, since the currency units are being used effectively in this instance. This hypothesis gels with the 10x increase in venture capital investments made into Bitcoin companies in 2014 despite the big declines in the underlying unit price. Over $400m was invested in Bitcoin start-ups last year.
By way of explaining how the George Mason University researchers had originally made the mistake of assuming that such a small percentage of Bitcoin units had been spent or transferred, the post directed readers to another Reddit post which explained how the researchers had made the false calculation, by confusing bitocoins that were sitting in the wallet addresses of the original holders of Bitocoin with units that had never been spent at all:
The numbers in the paper are possibly correct (and a high percentage here is actually good – ideally this number would be close to 100% to prevent pubkey leakage), the conclusions are not. It seems even the paper authors misunderstood that metric. (“Nevertheless, these early hoarders in fact took most of the bitcoins out of circulation; as observed by Ron and Shamir , a significant majority of all bitcoins are in these “sink” addresses that have to date never spent their contents (at the time they parsed the block chain it was 75%, whereas we observed it to be 64%),meaning only 4 million bitcoins are currently in circulation.” is WRONG)
Compared to cash the equivalent would be: “90% of the bills in your wallet have never been in your wallet before” (would be possible to check if you noted down all serial numbers you encounter), NOT “90% of the bills in your wallet are brand new and have never been transacted before”.
Crucially, the findings would appear to support many exchange volumes, which critics of the virtual currency have before now speculated were misleading. On the flip side, they would also appear to indicate that there is potentially a large buyer who has been off-taking the currency units, which could potentially cross the 51%-threshold that Bitcoin’s code has written into it allowing a holder of 50%+1 Bitcoin to override the system and re-write the Blockchain’s core protocols.