Abstract
Attempts to accurately measure the monetary velocity or related properties of Bitcoin have often attempted to either directly apply definitions from traditional macroeconomic theory or to use specialized metrics relative to the properties of the Blockchain such as bitcoin-days destroyed. In this paper, it is demonstrated that beyond being a useful metric, bitcoin-days destroyed has mathematical properties that allow one to calculate the average dormancy (time since last use in a transaction) of the bitcoins used in transactions over a given time period. In addition, transaction volume and average dormancy are shown to have unexpected significance in helping estimate the average size of the pool of traded bitcoins by virtue of the expression Little's Law, though only under limited conditions.
Highlights
Since the white paper by Satoshi Nakamoto in 2008 proposing the concept of Bitcoin and its later launch in January 2009, 1 Bitcoin has rapidly emerged to become one of the most unique financial innovations in recent times.[2, 3, 4, 5, 6] As Bitcoin grew and evolved, it became increasingly important to have metrics to characterize the growth and behavior of Bitcoin
While the average dormancy is not a true monetary velocity measure since it does not take the money supply or price levels into account as in the exchange equation, it can give us a good idea about the movement and circulation of those bitcoins that are actively being used in economic activity
While this does not invalidate the analysis it shows that averages, such as dormancy rate, can be affected by large transactions in days destroyed or bitcoin transaction volume that are not accompanied by large increases in the other variable
Summary
Since the white paper by Satoshi Nakamoto in 2008 proposing the concept of Bitcoin and its later launch in January 2009, 1 Bitcoin has rapidly emerged to become one of the most unique financial innovations in recent times.[2, 3, 4, 5, 6] As Bitcoin grew and evolved, it became increasingly important to have metrics to characterize the growth and behavior of Bitcoin This was enabled by the Blockchain whose public and decentralized nature made measurements relatively easy. The heavier weighting for less frequently circulating coins helps remove some “noise” that is due to rapid, repeating short term transactions that may not be indicative of the true demand for Bitcoin usage It has been viewed by some as both a better indicator of relative economic activity than raw transaction volume and a proxy for monetary velocity. Placing bitcoin-days destroyed in a general framework can help us understand the past, present, and future evolution of Bitcoin
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