If you’ve only been looking at the price of Bitcoin recently, you might think it is on the way to the grave. I assure you, this is not the case. There is much more to Bitcoin than just the price that it is currently trading at. As I write this, Bitcoin is falling below $30k USD, from its all time high 3 months ago at $65k; a fall of more than 50%. If you know anything about Bitcoin though, you know this is business as usual.
The long term proponents and followers of Bitcoin aren’t scared, or worried, because they’re looking at metrics that go beyond the price. They have very long time horizons, and the patience to wait for things to play out on the world stage. What metrics are analysts following in order to add context to recent events?
User Growth
Measuring user growth is actually a pretty difficult thing to do on the Bitcoin network for at least the following three reasons.
It is impossible to know exactly how many Bitcoin wallets there are
Anyone can have as many wallets as they like
People can split their Bitcoin holdings, into as many wallets as they see fit
The most common way to estimate the number of Bitcoin users at any given time is to derive the number of users from the number of unique Bitcoin addresses with a balance greater than 0. The resulting number is obviously an estimate, because of the uncertainties already listed above.
One of my favourite analysts is Willy Woo, he analyses Bitcoin from an “on-chain” perspective. This means that he uses data from the Bitcoin blockchain that is available to anyone and everyone to derive insights. These insights might help him navigate the market, or make sense of what is happening on a macro scale. As you can see from the following two charts, user growth is at an all time high. New people are still becoming interested enough to create new addresses, with new balances.
Blockchain.com is one of the largest wallet providers in the world. Most of the wallets on their platform are unique as an email is required for signup, and there is little sense to having more than one account.
I recommend you check out BuyBitcoinWorldwide as it offers some interesting statistics on user growth from a wide range of perspectives that I did not cover here.
Growth of the Lightning Network
The lightning network is essentially the main system for executing the narrative of “Bitcoin as a payments technology”. It is well-known at this point that the Bitcoin blockchain is not going to be sufficient for executing a global load of transactions at a speed and cost that is affordable for everyone. The lightning network on the other hand can process hundreds of thousands of transactions per second, and for nearly free.
If Bitcoin is money, then lightning is the network that takes it to the corners of the world. The bitcoin blockchain will be used for final settlement, on an as needed basis.
Bitcoin Visuals does a great job of encapsulating the growth of the lightning network since early 2019 when lightning really got underway. Additionally, I recommend checking out the acinq explorer as it shows you a map of the globe, and the lightning nodes from all around the world. If nothing else, it is a spectacle to behold.
You can see that the lightning network is largely being used by the United States, Canada, Europe, and population hubs in Asia and Australia. It will be interesting to follow the development of this map to see a well weaved spider web of nodes fill the world someday.
Relocation of the World’s Bitcoin Mining Equipment
One of the largest infrastructure relocation events has just taken place on the planet. After China banned Bitcoin mining earlier this year, mining companies have been forced to relocate their operations. Miners within China made up around 50% of the mining power of the Bitcoin network. We consequently saw a precipitous drop in network hashpower to levels not seen since January of 2020.
As you can see from this graph, and many have pointed this out before, price is correlated to hashpower. As miners relocate and rejoin the network from US, Kazakstan, Mongolia, Canada, and El Salvador, we should see the hashrate turn around and continue to rise as expected.
There is one large takeaway from this whole relocation event that has taken place. The Bitcoin network continued producing blocks as expected. A drop in hashrate did cause one block to take 20 minutes to produce, twice the amount of time that it might normally take. The network dynamically adjusted the difficulty of the block, and blocks are now taking 10 minutes to produce, as normal.
There are systems in this world that are fragile, and change when infrastructure, and supply chains are disrupted. Bitcoin is not one of these systems. As we just saw demonstrated in real time, the Bitcoin network continued to function as intended, without any meaningful interruption in the service that it provides its users.
One of the reasons why I believe in Bitcoin as a project is that it seems to be a system that is resistant to disruption, even from the most powerful of state actors. The term for this is antifragility1. This is a very nice property to have in any digital system as it means that the entire system can remain operational, despite being attacked or stressed. Mistakes can take place, and volatility in peripheral systems can occur, all without disrupting the core operations of the system.
Although this exodus of miners from China was untimely, it was necessary and useful to demonstrate the resilience of the Bitcoin network if for no other reason than to know that it can stand up against a forced geographical reorganization of the equipment that runs the network.
Bitcoin Will Be Okay
My conclusion here is that Bitcoin the network will be okay. I will hold my tongue for comment on what the price might be in the coming months. I would like to say that we’re still adhering to the Bitcoin Stock to Flow Ratio, but we’ve deviated heavily from the trajectory, and whether or not we will get back on track anytime soon is a prediction I’d rather not make. Regardless of what the price is at any given time, the Bitcoin network will continue to produce blocks at the same rate it always has. One block, roughly every 10 minutes.
The anticipation from the downward price action is definitely taking a toll on my mental health, although I am trying to remain positive, and look at the big picture. This letter was about exploring the bigger picture, and looking at the trajectory for the utility of the network rather than the price. When faced with so many positive growth metrics, it is hard for me to conceptualize a world 5 years from now where Bitcoin is not significantly higher in price than it is today. With each new user comes an increase in utility, and thus value of the overall network.
Regards,
Keegan