The Bitcoin Fad Is Over

Summary

• The Bitcoin bandwagon is falling apart.
• Failure to cut out middleman.
• Failure to serve those who could benefit most.
• Current investors fading away as regulation and taxes kick in.

Failure to Get Rid of Middleman

Bitcoin's creator, Satoshi Nakamoto, pioneered Bitcoin as a way to get rid of the middleman (financial institutions) in order to cut out transaction costs, and make smaller transactions cheaper. Unfortunately, Bitcoin has totally failed to serve its purpose in this regard. The cryptocurrency is considered "digital gold," and has regressive transaction fees that make smaller purchases more expensive compared to credit card.

Take a look at the processing fees of these popular credit card companies:

(Source: Value Penguin)

The overall average fee is 2.23% per transaction in the United States. Most transaction fees are baked into product prices for merchants, but sometimes when your bill is too small, merchants charge you a small fee if you use a card. So you are in fact indirectly paying to use a card. Now, since Bitcoin was intended as a payment solution for small transactions, imagine you spend $20 at the grocery store using a credit card: that is $0.45 for the transaction.

According to BitInfoCharts, the average Bitcoin transaction fee was $1.43 on 03/21/18.

(Source: BitInfoCharts)

Looking at the average transaction value on 03/21/18, at $43,000, Bitcoin's transaction fee percentage looks stellar compared to credit cards at approximately ($1.43 / $43,000 =) 0.003% versus the credit card average of 2.23%.

(Source: BitInfoCharts)

However, Bitcoin transaction fees are not proportional to how much you spend, they are proportional to transaction volume on the network. Take a look at the transaction volume graph below.

(Source: BitInfoCharts)

There isn't always a 1-to-1 correlation between the transaction volume graph and the average transaction value graph, but if you look at March 17th, you can see that when volume is low, transaction fees are lower. As you move rightwards, volume increases in tandem with transaction fees. For anyone paying with BTC, this makes transaction fees regressive. Your transaction fee is a flat rate determined by the market at any given time. Smaller transactions equate to higher effective transaction fee percentages. If you went shopping today (03/21/2018) while using BTC, you would have to spend $64.13 to achieve the same 2.23% transaction fee average as credit cards.

To more accurately compare Bitcoin's and Visa's (used as an example) transaction fees, the fees must be adjusted for differences in volume. Visa processed 141 billion transactions in 2016, which is about 386.3 million transactions per day. Bitcoin only processed 195 thousand transactions on 03/21/18. Therefore, Visa theoretically processes 1,980 times as many transactions as Bitcoin. Holding other factors constant, Bitcoin's transaction fees would skyrocket to $1000 per transaction if faced with the same volume as Visa-probably not how much you are willing to pay for each trip to the grocery store.

Finally, this analysis wouldn't be done complete justice without also comparing transaction processing times. The new credit card chip readers take about 5 seconds to read a card. Bitcoin averaged 20 minutes this week, ended 03/21/18.

The point is that despite being created as a practical, superior alternative to current payment methods, Bitcoin is the inferior option with regressive transaction fees that render smaller purchases pointless, and longer processing times than credit cards.

(If you are interested in learning exactly how Bitcoin transaction fees are calculated, click here)

Failure to Serve the Unbanked

Another appeal of Bitcoin was that it, along with other cryptocurrencies, would gain traction with people who did not have banks to rely upon for their transactions.

(Source: Business Insider)

The chart above is based on the World Bank's data from 2014 on the percentage of adults who have a bank account by region. The idea is that Bitcoin would be used as a daily currency in places with higher rates of unbanked adults, such as Africa.

However, that has turned out to be wishful thinking.

(Source: Statista)

The chart above shows the popularity of Bitcoin in each country by tracking the number of BTC ATMs per country. Comparing the World Bank's chart with this chart proves that regions with higher rates of banked adults have more Bitcoin ATMs, which means higher Bitcoin market penetration exists in regions that already have robust financial systems and payment systems. This is purely due to speculative trading of Bitcoin, and has nothing to do with the utility of the coin. In this case, Bitcoin has failed to gain prevalence in regions that would gain most from the utility of a decentralized payment solution, such as Africa, which has the second lowest rate of banked adults and the lowest amount of Bitcoin ATMs among all continents.

Bitcoin's price is $8,700 (as of 03/22/18). As bullish sentiment continues to fade away, the price declines.

(Source: CoinMarketCap)

I was curious how a region that has barely been engaged with Bitcoin would affect the market capitalization and price of BTC if engagement grew. So, I compiled a list of the 46 largest African countries (excluding South Africa and Nigeria since BTC is prevalent, and countries that lack GNI per capita info), and summed their individual GNIs (from 2015) to see how much investment in Bitcoin from these countries could benefit the coin. The total GNI from all 46 countries was $1.38 trillion. If each person in these countries invested just 5% of their annual income into BTC, Bitcoin's market capitalization would spike from $151.5 billion (as of 03/21/18) to $221 billion, leading to a price of $13,100 and a 46% increase in market cap. Likewise, a 10% investment would mean a price of $17,200 and raise the market capitalization to $290 billion-a 92% increase.

Obviously, there are many reasons that prevent people in those 46 countries from contributing a portion of their collective $1.38 trillion GNI towards Bitcoin. That's the point of analysis. Bitcoin's theoretical price is much higher than what it is today. Its actual price is constrained by real-world barriers, such as lack of education, government regulation and access to technology, that will take longer to overcome than many speculative investors care to wait.

Loss of Popularity Among Current Investors

In addition to Bitcoin's lack of growth prospects in developing nations, the virtual currency is also losing interest from current investors in its largest markets: United States, Japan, and South Korea. In the US, SEC warnings about exchanges being subject to securities laws has scared off BTC holders, leading to downward pressure on the price of BTC.

The SEC's warning earlier this month was partly to blame for Bitcoin's price dip below $10,000.

Japan's decision to shut down two exchanges and penalize four others also contributed to the dip, as people scrambled to convert their cryptocurrencies into fiat before exchange closures.

(Source: Bloomberg)

Finally, another important issue is the tax liability that has snuck up on unsuspecting Bitcoin investors in the United States. In Victor Dergunov's recent article on Bitcoin, he mentions an anecdote about someone who "sold $120,00 worth of Bitcoin to buy different coins." This resulted in a $50,000 tax liability for the investor, who did not have any cash to pay the IRS with since his proceeds were fully invested in alt coins. So, what are people like him going to do? They're going to sell their coins to pay the IRS, obviously. Once people start getting audited by the IRS, and asked to pay taxes on their profits, they won't be waiting for the right price to sell. They will sell quickly, because they do not want to mess with the government. Bitcoin, and other cryptos, have enjoyed tax-free trading for a long time, but that is coming to an end. With taxation comes a less efficient market, and downward pressure on current Bitcoin prices in the long-term. If you're not convinced that taxation of cryptocurrency trading is a big deal, check out this article, which includes a Credit Karma survey that reveals "less than 0.04%" of cryptocurrency traders reported transactions in their 2017 tax filings.

Conclusion

There's a lot going against Bitcoin. It is proving to be inferior to current payment solutions (debit/credit cards) due to higher transaction fees and longer processing durations, it cannot break into markets where there is weak penetration (Africa), and it is slowly losing interest from people in its strongest markets due to government regulation and exchange mishaps (US, Japan, and South Korea).

Blockchain is a technology that still has much promise, but Bitcoin as an investment is failing to capture any of that value.

(Source: Yahoo Finance)

As a result, I expect Bitcoin mania to die down, leading to a value of below $5,000, which is where the price was before mainstream media began massive hyping of Bitcoin around late October of 2017.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.