The ascent of digital currency Bitcoin has been halted. Transaction levels have been crumbling this year, and priced in dollars total volumes are now back to the levels seen in 2012.
Widely touted as a rival to traditional state-issued currencies, cryptocurrencies such as Bitcoin became increasingly popular late last year.
Prices then hit their current high, trading briefly above $1,000 per bitcoin. While values are now more stable, volume seems to have been falling off a cliff.
Investors in Bitcoin have suffered a strong correction, but the currency continues to trade at levels more than five times higher than a year ago.
The currency has been useful as a rival to traditional payments processors, as transfers made in Bitcoin can be near instantaneous and performed at very low cost compared with conventional services.
Preston Byrne, a fellow of the Adam Smith Institute and a commercial lawyer specialising in securitisation and cryptocurrency in the City of London, says that speculative investment in the currency has pushed up its price.
The Bitcoin protocol employs a built-in transaction fee of 0.1pc per transaction. Many users also choose to pay additional rewards so as to receive their orders more quickly. And as the currency has appreciated, so have the fees.
Mr Byrne suggests that while lower than late last year, historically elevated prices and equivalently high fees have been enough to put off many new buyers. As such, daily transaction volumes have slumped, falling to levels typical for 2012 – when Bitcoin was relatively unknown.
That has meant that many of the currency’s immediate benefits such as lower transaction costs have been “significantly reduced”, says Mr Byrne.
Higher nominal values have driven many users to trade exclusively within private exchanges, which do not show up publicly, as bitcoins are not moved about.
Account balances at these exchanges are merely updated, allowing users to avoid being stung by transaction fees.
Mr Byrne says that Bitcoin’s trading volume to date has consistently represented a very small number of the total tokens outstanding – some estimates place it at less than 1pc of bitcoins in existence.
A study published last December – “A Fistful of Bitcoins: Characterizing Payments Among Men with No Names” – estimated that 64 to 75pc of the dominant cryptocurrency has never been spent.