May 18, 2019

Bitcoin in 2017 Versus Bitcoin in 2019

In light of the recent price increases, we compare the fundamentals underlying the Bitcoin in 2017 to the state of the network now.

Volatility in the market for bitcoin has been reignited over the past two months with highs forming above $8,000. Such price increases commonly comes with increases in the following:

  • Hopes
  • Dreams
  • Fears
  • Wild speculation
  • Start-ups
  • Fundraising
  • Crypto-related text messages from old friends
  • John McAfee’s prospects of saving his manhood

Early markets tend to be far more subject to trends their mature counterparts. Research by Elms Funds has demonstrated the importance of momentum in the USD price performance of bitcoin.

Mature markets such as equities are far more dependent on fundamentals. Prices will fluctuate significantly based on the variance in publicly available information and fundamentals underlying companies. This is why the price of a stock will quickly adjust if an earnings announcement deviates from what analysts have estimated.

Tucked away beneath these trend-driven movements in the crypto market are actual fundamentals. Metrics that serve to quantify what different crypto networks are actually providing and how strong their value proposition is.

Analyst Chris Burniske foresees a future where crypto networks are valued using frameworks based on these fundamentals. While it took hundreds of years to arrive at such a point in the equity markets, Burniske believes we will arrive at this point orders of magnitude faster in the cryptocurrency markets.

Between the price highs of 2017 and the price lows of 2018, the fundamental metrics underlying the Bitcoin network continued to change. In light of recent price increases, an overview of the state of Bitcoin in 2017 compared to now can shine some light on how the network has evolved over the past two years.

2017 Bitcoin versus 2019 Bitcoin

2017 was a year which brought us Binance, Bitcoin Cash, and over $6.2 billion raised through ICO’s. As good ol’ Charles Dickens would say, it was the best of times and the worst of times.

Hash Rate and Distribution of Hash Rate

The hash rate in 2017 ranged from 2.4 EH/s at the start of the year to 15.3 EH/s in December. Hash rate is closely tied to the key value propositions of bitcoin such as censorship resistance, immutability, and having no single point of failure.

The hash rate has more than doubled since the start of 2018. This can represent both a greater number of miners on the network and/or more powerful hardware deployed by miners. With releases of several hardware models since 2017, such hardware has certainly served to drive up the total hash rate deployed on the Bitcoin network.

Properties such as censorship resistance, immutability, and lack of a single point of failure all benefit from a higher hash rate assuming the hash rate isn’t overly concentrated in a small number of entities. The above is a snapshot of the hash rate distribution on December 27th, 2017.

Hash rate concentrated within a small number of entities greatly increases the vulnerability of the network to the collusion of miners. The threat is more pronounced than it appears at face value in the Bitcoin network as Bitmain owns the and AntPool mining pools and are also an investor in the ViaBTC pool.

The Herfindahl-Hirschman Index (HHI) is a metric commonly used to quantify the concentration of competition in mature markets. It is typically taken into consideration in the case of mergers and acquisitions when there is a threat of one entity gaining too much market share.

This metric can also be used to quantify the degree of concentration in the hash rate distribution of crypto networks. Combining AntPool,, and ViaBTC into one entity classifies the 2017 distribution of hash rate as highly concentrated with Bitmain associated pools accounting for 50% of the blocks mined.

We have since observed an increase in the share of hash rate controlled by small mining pools as well as a decrease in the percentage of blocks mined by Bitmain-related pools. The HHI figure of the current more distributed network would now classify the Bitcoin network as moderately concentrated.

It really boils down to the network now having a higher hash rate and a greater distribution of hash rate when compared to 2017. Check and check.

Value Transferred On-Chain

In April, the amount of on-chain transactions taking place on the Bitcoin network is approaching record levels observed in 2017. However, the number of on-chain transactions fails to segregate for batched transactions and there are some limitations to the metric.

Data analysis company CoinMetrics introduced the adjusted transaction value metric to estimate the amount of USD value transferred with adjustments made for the existence of numerous phenomenons which can misstate the value (e.g. mixers, change outputs).

The seven day average of adjusted transaction value charted above demonstrates that the amount of value being transferred across the Bitcoin network has been on the rise since the start of this year but still remains at a fraction of what it was in 2017 peaks. The seven-day average reports current figures of $3.5 billion transferred daily with peaks of $14.3 billion recorded in December 2017.

Key Developments in Bitcoin

In terms of developments, 2017 was the year when the Bitcoin community civil war over SegWit came to a head with Bitcoin Cash hard forking from the network and increasing the block size on their own chain. Bitcoin maintained the 1 Mb block size limit and implemented SegWit via a soft fork.

The current estimate for the number of blocks mined by miners that have SegWit enabled is 35%. The latest software release for Bitcoin Core is also pushing miners to upgrade to support SegWit and aims to default to SegWit transactions in a future software release.

The Lightning Network was still at a rudimentary stage of development in 2017. Development and adoption of the second-layer solution have greatly picked up pace in the first quarter of 2019. A review of the first quarter of 2019 from Circle Research reports a greater than 100% increase in the number of open channels on the Lightning Network as well as a greater than 100% increase in the value held in these channels.

The current key development proposals are Schnorr Signatures (i.e. a new digital signature scheme that emphasizes privacy) and Taproot (i.e. a development which would improve smart contract capabilities on the Bitcoin network). Bitmex Research estimates such implementations could increase the transactional capacity of the Bitcoin network by 13%.

Bitcoin the Bellwether

In summary, the network that resulted in the price of bitcoin rising to $20,000 was a far different one than the network operating today. The Bitcoin network of today has a far greater hash rate and a greater distribution of this hash rate. There are also exciting technological developments taking place. While the value transferred was significantly higher in the peaks of 2017, we have been observing a significant increase in values transferred since the start of 2019.