Chainalysis Report Shows Inherent Contradiction on Bitcoin

bitcoin transactions

What is bitcoin? Is it a medium of exchange to replace cash and credit – or is it an asset that speculators use to chase capital gains?

The easy answer is that it’s both – but a new study by Chainalysis sheds some light on why this may be a pretty problematic assertion.

Marie Huillet at Cointelegraph reports that the Chainalysis report, covered by Bloomberg yesterday, showed only 1.3% of Bitcoin transactions from January to April of this year were transactional and merchant-oriented – the rest were assumedly related to either short-term trading or long-term investing.

“Chainalysis’ data shows that merchant activity for bitcoin peaks during a crypto market bull run — as in late 2017, when merchant services hit a high of 1.5% of total bitcoin activity, before dropping to 0.9% in 2018 during the bear market and then rising again during this year’s recovery,” writes Marie Huillet. “BitPay CCO Sonny Singh told Bloomberg the firm had observed the same trend.”

Conceding that services like BitPay are enlarging the merchant’s share of bitcoin transactions, experts looking at the small amount of merchant use will posit that there still a long way to go to even make Bitcoin a substantial medium of exchange rather than something to be held for profit.

This report and others like it frame a very important question about Bitcoin and a really interesting insight into how it’s used by holders.

When you think about it, it doesn’t really make sense to use Bitcoin both as a medium for purchase and as an asset. It makes sense with fiat currencies, because their value is not constantly changing – a dollar’s worth a dollar today, and will be roughly worth a dollar tomorrow. By contrast, Bitcoin just shot up some 20% and more over the last couple of weeks.

To put this simply, if you’re likely to gain – or lose – massive amounts of value from something you’re holding over the short term, why would you spend it on purchases? Why wouldn’t you spend your less dynamic value currency on purchases, and keep your Bitcoin in order to buy low and sell high?

Most experienced traders know that using that philosophy – “buy low, sell high” – results in massive wealth accumulation if it’s done right.

In that light, it makes sense that many Bitcoin holders are now referred to as “hodlers”  which stems from some Reddit user’s typo error – but the idea that there’s a specific word to talk about Bitcoin buy an holders just shows how people are going to psychologically see Bitcoin more as an asset than as change in their pocket. It’s worth keeping this in mind as you navigate crypto stocks or even secondary plays.