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Bitcoin: The Trillion Dollar Underdog

Within 10 years bitcoin has built a market with millions of active participants spanning across the globe. It has generated interest and attracted talent away from the largest banks, hedge funds, consulting firms, and technology companies. Despite the numbers, however, it has retained underdog sentiment among major market players relative to its traditional asset peers. But bitcoin’s network is competitive with many developing economies.

Since January 2017 over $2.9 trillion in bitcoin has been traded across dozens of currency pairs on self-clearing exchanges located around the world. Despite the broader market liquidity fragmentation inherent to self-clearing markets as well as a year to date bear market in the bitcoin price, trading volume continues its trend of well over 100% year-on-year growth.

Exhibit 1: Historical Bitcoin Trading Volume

Sources: Satoshi Capital Research, Coinmarketcap

While over $2.2 trillion worth of bitcoin was traded in 2018, its growth rate returned to its 2016 level of approximately 150%. This doesn’t quite match its 2017 level of 2,636%, yet still indicates rapid, sustained market growth. Trading volume growth was driven by derivatives exchanges offering relatively high leverage to traders, coupled with increased clarity provided by regulators across the world that bitcoin is not a security and by legislators that it is a legal asset to hold and trade. Improvements to derivatives liquidity and counterparty optionality has also significantly increased investors’ and traders’ ability to hedge the asset by reducing hedging transaction costs and counterparty risk.

2018 was the first year in which over $1 trillion in notional value of BTC was traded, signalling the maturation of bitcoin to the global currency level. It tallied over half the trading volume of the Thai Baht and 6 times more trading volume than the national currency of Bulgaria. With listed fees varying from 3 to 20 basis points, bitcoin exchanges are generating somewhere between $650 million and $5.5 billion in profits on volume traded.

Exhibit 2: Developing Market Trading Volumes

Sources: Satoshi Capital Research, Bank For International Settlements, Coinmarketcap

Transaction activity on the blockchain saw a modest 8% decline in total Layer 1 transaction volume over the past year, yet over $3.2 trillion was sent using bitcoin in 2018. Price volatility contributed to the decline as well as the advancing adoption of Layer 2 technologies such as lightning network and private sidechains. Despite this, it now ranks among the top global payment systems, with more than 10x the yearly volume of Discover and 6x the volume of Paypal. With this, bitcoin solidifies itself as not just a serious global currency, but a serious global payment system as well. Countries with underdeveloped national payment systems stand to particularly benefit from bitcoin’s built-in payment rail.

Exhibit 3: Global Payment System Volumes

Sources: Satoshi Capital Research, Wall Street Journal, Company Self-Reporting

The value of circulating money supply of bitcoin took a sharp drop in the past year due to a sustained downturn in price. Regardless, BTC finished the year with relatively solid positioning among other currencies, maintaining a M0 money supply of $62 billion. Canada just beats the digital currency with a $68 billion money supply but BTC again dwarfs its European peer Bulgaria by a factor of 7. Considering the Canadian dollar’s 160 year head start to bitcoin, this proximity in value is an impressive accomplishment for the asset.

Exhibit 4: Currency Money Supplies

Source: Satoshi Capital Research, Trading Economics

While there is still meaningful room for improvement, these stats prove bitcoin is not only a serious contender as a speculative asset, but as a currency competitive at the highest levels. It’s time for the global financial community to give this trillion dollar underdog the focus it deserves.



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