Why Do A High Percentage Of Crypto Transactions Have No Economic Value?

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Why Do A High Percentage Of Crypto Transactions Have No Economic Value?

Cryptocurrency networks are economic value repositories. Or so the theory goes. Investors believe that the more transactions on a cryptocurrency’s blockchain, the higher its value. However, fresh study indicates that a large majority of transactions reported on websites are worthless. Coinmetrics, a crypto analytics firm, examined bitcoin network transactions and determined that two-thirds of the entire number had no economic value. Cardano, the tenth most valued cryptocurrency, has an even greater value. (See also: What Information Does the Bitcoin Blockchain Store?)

Coinmetrics estimates that 98 percent of Cardano transactions are useless. Another analytics firm, Elementus Inc., discovered that 45 percent of transactions on Ethereum’s network are non-economic trades, such as spam. Coinmetrics calculated the “real economic transaction volume” for bitcoin and ethereum in a single day by subtracting the number of non-economic transactions from the bitcoin blockchain.

Why Are There A High Number Of Transactions With No Economic Value?

According to a Bloomberg research, there are many explanations for the large amount of transactions with no monetary value.

The first is the architecture of bitcoin blockchains in which there is no cost to generating network addresses. Low transaction fees and free addresses, according to Lucas Nuzzi, director of technology research at Digital Asset Research, “enable a single user to send small balance through hundreds of transactions.” In the case of cryptocurrency blockchains, that single user could be cryptocurrency exchanges or custodians. According to Coinmetrics, between February 2017 and February 2018, a single user was responsible for more than 90% of transactions on Ethereum’s network.

Mining pools are the second explanation for the excessive amount of zero economic value transactions. Pools, which are groups of crypto mining computers, share fractions of cryptocurrency between themselves, resulting in millions of transactions on a blockchain. A single ether or bitcoin, for example, might be shared among members of a mining pool and used to produce numerous transactions on the cryptocurrency’s blockchain. This hypothesis might have some merit. Bitcoin’s networks were congested last year as the hashrate (or total computer power utilized to generate bitcoins) failed to keep up with the amount of transactions on the blockchain. (See also: Will Rising Transaction Fees Cause Bitcoin’s Price to Fall?)

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Third, spam is a significant contribution to increased transaction volumes. This is particularly true for ethereum, which has hundreds of tokens supported on its blockchain. According to Bloomberg, spam accounts for 19% of all non-economic value for ethereum. This is because currencies may be used in a variety of ways in transactions, boosting transaction volume but without necessarily indicating an exchange of economic value.

When this is taken into account, both bitcoin and ethereum seem to be smaller than previously imagined.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site. The author holds a minor quantity of bitcoin and litecoin as of the date this article was published.

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