On any given day, as much as two-thirds of the transaction activity registered on the Bitcoin network has nothing to do with buying goods and services or trading the virtual currency.
Volume figures are being influenced by a range of other factors such as so-called mixers reshuffling balances between their own accounts, mining pools disbursing coins to members, outright scams such as spoofing and market manipulation, according to analytics provider Coinmetrics.
Bitcoin isn’t alone. On a recent day, more than 45 percent of transactions on Ethereum are non-economic, such as spam, according to another analytics provider, Elementus Inc. At one point, 98 percent of transactions on the digital token Cardano had no economic value, Coinmetrics said.
While the anonymity of the blockchain is one of the key founding principles of Bitcoin, the lack of transparency on the distributed ledger technology is seen by some industry participants as a hindrance to greater acceptance by both institutional and individual investors, as well as regulators.
“If this space is not a joke but serious, then people need to know more,” said Charlie Morris, who manages $300 million for London-based Newscape Capital Group, which has a small investment in Bitcoin and in Overstock.com Inc., which has been active in crypto. “You’d want to know the facts. If institutional money is going to come into Bitcoin, they’ve got to understand what they are buying.”
Morris’s Cryptocomposite.com and Elementus are among new efforts to develop analytical tools to add clarity to blockchain data. Cryptocomposite.com’s first version will be launched soon, Morris said. Elementus is starting trials with financial institutions this summer, and launching in the fall, Max Galka, chief executive officer of Elementus, said in a phone interview.
"You are sort of looking at a tiny piece of the blockchain through a keyhole, and you are not seeing the big picture," said Galka, who worked as a trader at Credit Suisse Group AG and Deutsche Bank AG and teaches data science at the University of Pennsylvania. “It’s really hard to understand the context around it. What we do is we allow you to get the full picture."
And the full picture can be quite different than the view that can be gleaned from volume charts on online blockchain explorer sites, or examining data put out by exchanges. While every transaction on the public networks that many coins run on are posted online, participants are usually anonymous, and it’s hard to know who is behind the transactions — and if they have malicious intent.
“Creating addresses in these networks is free, and transaction fees at this point are sufficiently low to enable a single user to send small balance through hundreds of transactions," Lucas Nuzzi, director of technology research at Digital Asset Research, said in an email.
When mixers reshuffle balances between accounts, each transaction is recorded separately on the blockchain. Coinmetrics found one mixer that was responsible for up to 90 percent of all transactional value on Ethereum between February 2017 and February 2018, said Nic Carter, co-founder of the site. Mixers can be custodians or exchanges, moving funds around as a precaution against hacks. Or they can be criminals trying to make funds hard to trace.
Mining pools create a lot of transactions with, arguably, no economic value. When a pool earns one Ether, it’s recorded on the blockchain. When the collective distributes fractions of that coin to its members, the disbursements create multiple transactions. Distributions from mining pools to their members accounted for 19 percent of Ethereum transactions, Galka said.
Spam is a huge problem as well. On Ethereum, a slew of obscure tokens are showing high trading volumes and clogging up the network. In one instance, FCoin said that each new user who registers and deposits a token can vote for that token to be listed on its exchange. As a result, many people are creating multiple accounts to increase votes for tokens to be listed, Galka said. He figures that spam activities add up to 19 percent of transactions.
With other coins, various actors have been known to spoof transaction volume, or flood the market with fake orders to trick other traders into buying or selling. That makes a network appear more active, so it would be listed higher on ranking sites such as CoinMarketCap.com.
"Many of the ’indicators’ of successful chains are constantly growth-hacked," Lex Sokolin, global director of fintech strategy at Autonomous, said in an email.
While there’s disagreement over what constitutes an economic transaction — Ethereum co-founder Anthony Di Iorio, said he believes that disbursements from mining pools should be considered — most people agree that many blockchains are clogged with spam. Partly, that’s because fees to send a transaction over the network are low, Di Iorio said in a phone interview.
"If incentive structures are too low, and people are going to see more value to game the system, they are going to do it," Di Iorio said.
Elementus pulls data from blockchains and layers on information about the identities, which it deduces by using artificial intelligence and additional data, such as crawling the Internet. Pass-through transactions — essentially, those involved in housekeeping tasks at exchanges — account for another 7 percent of transactions on Ethereum, Galka said.
After stripping out non-economic transactions, both Bitcoin and Ethereum appear a lot smaller than currently thought, based on reports from blockchain explorers and coin exchanges. Carter figures that the true economic transaction volume for Bitcoin is about $2 billion a day, and it’s $700 million for Ethereum — about half the listed daily volume. Assuming Bitcoin daily volume of $2.3 billion, Morris said he believes that Bitcoin is currently trading within 10 percent of its fair price.
"It’s about right," he said.