It’s a common mistake to assume that a steady price indicates lackluster demand for the gold standard for digital assets; Bitcoin.
The truth is that a stable Bitcoin price during a time of nearly double-digit monetary inflation (~9% as of the time of writing) indicates powerful demand.
To put such demand in perhaps more familiar terms; imagine that a country, Japan say, increased its monetary supply by nearly 10% over a year - and yet the Yen remained stable against all other currencies. That stability would be indicative of strong, offsetting demand for Yen; evidence of either a major speculative play or enormous confidence in the Japanese economy.
In a global environment in which national currencies, almost without exception, are depreciating against assets with more stable value, such as art, gold and land, Bitcoin is a truly exceptional value proposition.
When you consider that 3600 new bitcoins are created daily (with that number dropping to 1800 by mid-2016) then Bitcoin’s price just holding steady means that buyers are absorbing thousands of coins daily at or near the market price. In fact, Bitcoin’s market cap, a measure of price multiplied by existent coins, is steadily rising even during spells when price remains as idle as a painted quote upon a painted ticker.
But if price alone, whether static or in flux, doesn’t tell the full story, how can we best measure demand for Bitcoin?
Capturing Bitcoin Demand in Numbers
If price doesn’t tell the full story, we require further indicators to determine the true situation. Fortunately, there are several measures of organic demand which we can consider alongside price to arrive at a more accurate understanding. We’ve identified several indicators of organic Bitcoin demand. These indicators will be combined to form an algorithm which will hopefully present a clear picture of demand. Taken together with price, they present a strong case for a surging global demand for bitcoins. The major indicators are as follows:
1. LocalBitcoins volume data,
2. Google Search hits from around the world for the term “buy bitcoins,” (or its local language equivalent) and
3. the Bitcoin network’s variable transaction fees.
All three measures clearly show the global demand for Bitcoin is reaching unprecedented heights, despite a price which has of late vacillated between four to four hundred and fifty dollars.
1. LocalBitcoins Volume
Relying on volume data from most exchanges allows too great a margin of error. It’s long been known among cryptocurrency traders that volume data from Chinese Bitcoin exchanges can’t be taken at face value. Rather like headline economic data from China (and indeed, most other nations), sometimes you’re getting the truth and sometimes you’re getting the party line. That many Chinese exchanges have zero or insignificant fees allows fake volume to be generated for insignificant expense or effort. Bots can be easily programmed to engage in “churning,” that is artificially increasing volume by trading back and forth between managed accounts.
For this reason, we consider LocalBitcoins’ volume exclusively. LocalBitcoins acts as a matching, escrow and reputation service between Bitcoin buyers and sellers. Trade partners usually transact within the same national banking systems or through cash in face-to-face trades. This more private and decentralised method comes at the cost of reduced speed and higher expense however. As a result, it’s highly unlikely that anyone would seek to inflate LocalBitcoins’ volume figures.
LocalBitcoins’ records reveal that volume is increasing, pretty much across the board. Here’s a snapshot of total trade volume over the past two years, as visualized by Coin Dance:
One notable issue with this chart is that the y-axis shows volume purely in terms of numerical bitcoins, without any adjustment made for fluctuating exchange rates. This is somewhat misleading, as price has risen dramatically over the period shown.
In September 2015, LocalBitcoins’ weekly volume reached a peak of nearly 40,000 bitcoins traded worldwide. At this time, bitcoins were worth between $200 and $240.
Volume as of March 2016 shows around 28,000 bitcoins traded, at a price around $420; roughly double the price during the volume peak from September 2015.
Accounting for the price increase, the difference between the Dollar values of peak and present volume can be calculated as follows:
($420 * 28,000 = $11, 7 million) - ($220 * 40,000 = $8, 8 million) = $2.9 million
Demand for Bitcoin has thus risen by nearly $3 million dollars over ~6 months. A higher price means fewer bitcoins need to be purchased for purchasing goods and services, although the data nevertheless displays a general upwards trend.
Digging deeper into Coin Dance’s volume displays for LocalBitcoins, we can browse currency specific volumes. Even when measured in fiat currency the general trend for all countries is up. The most interesting weekly charts for national volumes, again visualized by Coin Dance, are featured below:
U.S. volume is increasing at a steady pace, with about $6 million exchanged per week. The high-water mark reached is $7,544,105:
China’s LocalBitcoins volume is not especially impressive considering the country’s great size and wealth. It reached a peak of ¥2,991,961 in February 2016, which currently converts to about $460k USD.
Although LocalBitcoins doesn’t handle much Chinese trade and the volume data of more centralized Chinese exchanges is dubious, it’s still possible to make some educated about concerning Chinese demand. Further Yuan devaluation or tightening capital controls by the People’s Bank of China are both likely to boost Chinese demand for Bitcoin. The Zero Hedge economics blog predicted this effect when the PBoC first began such monetary actions and major hedge fund managers are now investing in Bitcoin for this reason.
Despite Bitcoin’s uncertain legal status within Russia, growth in Russian demand has been near-exponential. In March 2016, weekly demand peaked at P119,356,527 Rubles (RUB), which currently converts to roughly $1.6 million USD:
Commodity-based economies are struggling in the current economic climate and South Africa is no exception. The South African Rand (ZAR) weakened significantly in December 2015.
Currency hedging, combined with the presence of the Bitcoin-accepting “MMM” Ponzi scheme, has created strong demand in South Africa. R15,538,100 ZAR is the South African record so far, which currently converts to about $1 million USD.
Venezuela’s oil-based economy has been under tremendous strain as the state’s failed socialist policies have led to runaway inflation. Some Venezuelans have found sanctuary in Bitcoin. They spent a record of Bs18,871,454 Venezuelan Boliver Fuerte (VEF) on Bitcoin, an amount which currently converts to about $3 million USD.
Sweden is also seeing high volumes, reaching a peak of 2,205,672kr in Swedish Krona (SEK). This amount currently converts to about $260k USD.
1,600,000kr = ~$186,000
Another Scandinavian nation seeing high volume, Norway saw a peak of 519,888kr Norwegian Kroner (NOK), which currently converts to $60,000 USD.
Lastly, Mexico is experiencing a recent surge in volume. Their record for weekly LocalBitcoins volume thus far $1,357,541 Mexican Pesos (MXN), which currently converts to around $76k USD.
As with Norway, Mexican volume is relatively minor but both show demand clearly rising in these countries.
2. Google Search Trends
Buy Bitcoin Worldwide specializes in bringing new users from around the world into Bitcoin. It’s our belief that Google Search hits for terms like “buy bitcoins” are the best representation of new demand for bitcoins. Users who already know how and where to buy bitcoins are much less likely to search for these terms.
Probably the most important factor driving demand for Bitcoin responsible is the anticipation of price increases. No understanding of blockchain technology is necessary to the desire for major profits! As major price rises tend to attract a lot of media attention which in turn brings in speculative profit-seekers, this can easily become a positive feedback cycle, aka a bubble.
Below you can find Google search data for the last three years. The spike around the time of the 2013 bubble stands out. We can’t show the exact data here, but the price rise correlated strongly with increased searched volume. In other words, an increasing price caused more people to try to buy bitcoin.
Similar trends are showing lately. The slight rises into the $400s and $500s in early-November and mid-December 2015 have seemingly created new demand, displayed below with search data for the term “buy bitcoin” (100 represents peak search volume, other values are displayed as a % of peak volume):
While search interest for “buy bitcoin” is on a steady uptrend, the increase is even more pronounced for searches “comprar bitcoins” (“buy bitcoins” in Spanish):
And “купить биткоин“ (“buy bitcoin” in Russian) is also trending up:
3. Transaction Fees
Finally, the chart below displays the USD value of Bitcoin transaction fees. We believe this shows the demand to use Bitcoin better than any other metric. Fees must be paid to miners in order to ensure a transaction is processed in a timely fashion. Fees rise and fall in accordance with network demand, although so-called spam attacks may temporarily raise fees beyond the level of natural demand.
Transaction volumes can be faked, as when people transfer bitcoins between addresses they own. Transaction fees, however, are generally a more certain sign of demand. Such fees indicate the value the market currently places on transferring bitcoins in a rapid and reliable manner: