The original white paper mentions “peer-to-peer electronic cash system” as part of its title and further details this idea in the first section, yet relative to its media exposure there is little on-chain activity and subsequent data that validates this purpose (yet).  Perhaps this will change, more on that later.

In my paper (pdf) which covers this topic, I mention Square as an example of a company that has grown enormously without the benefit of the same “free” publicity that Bitcoin has received over the past 4 years.  I should point out that I am aware that Square itself is in a tight position and may not have a successful exit.1 The example still stands however as shown below:

This chart comes from Google trends based on dates between January 2009 and January 2014.  Bitcoin (“the currency”) is in blue and Square, Inc. is in Red.  What this illustrates is the low conversion rate (CVR) that the Bitcoin platform has had thus far.  This is not to say it will fail as a platform, rather that it has enormous adoption and on-ramping challenges (such as edge based security).

Some of the other challenges were issues that Square has faced all along and were concisely described in a post a few years ago (the stats are slightly different but the hurdles remain the same): Square will “do better” than PayPal? Yeah.. and Pigs Fly

The following chart illustrates this issue as it relates to Bitcoin:

This chart is based on the past year of on-chain data culled by Blockchain.info: the number of transactions excluding the 100 most popular addresses (such as gambling sites like Satoshi Dice).

What this means is that over the past 6 months, there has been essentially no new on-chain transactional volume.  Despite the tens of thousands of merchants that BitPay and others have on-ramped, most users (or rather holders) of bitcoin are unwilling to actually spend it.  Almost all of the additional activity occurs on the edges, in “trust-me” silos which defeats the purpose of having a blockchain.  I have discussed this issue several times this past month (such as the last section of my paper).

Jason Kuznicki has attempted to describe the lack of growth in on-chain transactions in graphical form.  His chart, above, reflects the daily total transaction value of the bitcoin economy, denominated in U.S. dollars, divided by the total market capitalization of the bitcoin economy on that day, denominated in U.S. dollars. Between December 2012 and December 2013, he points out, the velocity of bitcoins remained within a very narrow band.2 The notable two largest peaks are in April 2013 during enormous global media attention of the platform creating a temporary bubble and at the end of November 2013 when Bitcoin Black Friday (BBF) was held. BBF was the busiest ecommerce day of the year for the network, which achieved 1.5 transactions per second (compared with the average of 0.7 transactions per second and its theoretical maximum of 7 transactions per second).3

Kuznicki notes that:

The key here is that nothing seems to be happening all that dramatically in bitcoin’s velocity of money over time. It’s not circulating more rapidly over time, which is what one should expect if it were taking off as a currency, and if more and more transactions were of the form of people passing bitcoins around for stuff. Instead, most transactions (that is, most that don’t go dollar-to-bitcoin-and-then-stop) are likely to be money-to-bitcoin-to-stuff, after which the merchant reverts to the dollar as soon as possible. If the bitcoin economy were becoming independent, we might expect a takeoff in the velocity of money, but we’re definitely not seeing it yet.

Again, this is not to suggest that Bitcoin will fail as an experiment or that it will not succeed in certain niches (i.e., store of value for Argentinians).  Perhaps it is a chicken-egg problem in which as more merchants enter the space, there will be more incentives to actually spend it.  However, barring the success of sidechains, I am doubtful that Bitcoin itself will be used as a payments platform on par with PayPal or Visa any time soon.

1. See With IPO Hopes Fading, Square And Box Face Reality Of Commodity Products from TechCrunch and Mobile-Payments Startup Square Discusses Possible Sale from The Wall Street Journal [↩]
2. One reviewer noted that “Velocity analysis is really important. For something that purports to be a currency, it is the key metric of success with respect to its role as a medium-of-exchange. There is likely a correlation between the fx rate and tx volume due to speculative demand. However it is uncertain that the price chart of fx and USD tx volume proves that. In the future, a researcher could equally tell the story that the fx rate is being driven by increasing tx demand. Without a way to distinguish block tx due to fx settlements and block tx due to trade in real goods (and of course estimating tx due to change, same-person wallet transfers, etc), these series are likely ambiguous.” [↩]
3. BitPay alone processed 6,926 bitcoin-based transactions on November 29^th last year up from 99 transactions on the same day the year before, see BitPay Drives Explosive Growth in Bitcoin Commerce from BusinessWire [↩]