Trade to Transaction Volumes Ratio

[BitcoinAshley]

Hey all, I spotted this comment from a Nick B. Steves, posted after this Timothy Lee article.

The ratio of trade to transaction volume actually has trended down all this calendar year. You can see this (and a host of other charts updated daily) over at the blockchain.info site.

If the recent spike to $266 (or $90, either way still a big spike relative to Jan. 1 price) had been driven, as everybody and their barber and their mother and their Krugman bobblehead doll has been saying, by wild exuberant and insane speculation, we should have seen a steep rise in the trade volume relative to the transaction volume. But that is exactly what we DON’T see! On the contrary, the ratio has trended down (with lots of bumps) all calendar year. Post crash/correction last Thursday, the ratio is so low (less than 1 for a few days) that you really have to wonder whether the USD exchange price is over-sold (maybe by a factor of 2 or 3).

The take away seems to be that there is a real bitcoin economy out there and it is growing at rate that more than kept pace with an almost vertical rise with the USD exchange rate of its currency over 1Q2013. The “bubble” may not have been a bubble at all, but real consumer demand for a particular economy’s currency, which continues apace largely indifferent to the exchange price.

I’ve seen no mainstream coverage of this, and I think it deserves an analytical look. [Hint, hint, Timothy Lee!]

What are your thoughts regarding his analysis using the ratio of trade volume to transaction volume? Are there any other metrics that we can use as evidence to complement the oft-quoted data such as merchant adoption statistics, and therefore support a position that current economic activity does its "fair share" in supporting the current price along with both speculators and savers? Do discuss.

EDIT: In what must be an awkward and embarrassing math error on the part of this Nick Steves character, he actually reversed the ratio. It is properly read as Tx volume:Trade volume, so he completely reversed the trend. This actually makes sense, as recently we have seen a significant glut in trading due to the volatility and increased interest. What we could now do is determine if the ratio is decreasing at a steady linear rate, or an exponential rate - exponential could possibly indicate rampant speculation and therefore price = overbought, but a healthier increase could simply indicate increased interest in trading the currency and perhaps this would stabilize. I am just talking out of my ass at this point, but if anyone has any creative ways we analyze  the Tx volume:Trade volume ratio and its change over time, feel free to share.

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[botlove]

when you do, please put a bitcoin address in the report for donations. =)

[BitcoinAshley]

Timothy Lee got it completely wrong.

It should be noted that I quoted not Timothy Lee, but "Nick Steves" who commented on Timothy Lee's article.

If the ratio is trending downward, then trade volume is increasing faster than BTC tx volume.

Perhaps my understanding of ratios is incorrect, but

Given x:y, 2:5 is a lower ratio of x to y than 3:5. Whereas 4:5 is a higher ratio of x to y than 3:5.

So if we are talking trade volume:tx volume, if the ratio is trending downward, that would mean there is fewer [first number (trade volume)] compared to [second number (tx volume)].

I could have it backwards but I thought that what I just described was standard practice when talking about ratios. You are saying that we should reverse this, and "ratio trending downward" means that there is less of [second value (tx volume)] compared to [first value (trade volume)]? Strange.

I agree that to really nail something like this, we'd have to consider how many blockchain transactions take place on average, per X BTC trading volume, specifically for trading purposes.

[Zaih]

Wow this is good news. I expected this to be the complete opposite tbh

[BitcoinAshley]

So if we are talking trade volume:tx volume [...]

Yeah that is backwards. Trade volume is the denominator. Ratio = TX volume / Trade volume. Here I quote from the article:

Above is a chart showing Bitcoin price in U.S. Dollars (blue) and transaction volume divided by trade volume (red)

If you look at line 31 of the python code that calculates the ratio (see the github link above, this was taken from the codinginmysleep article), it confirm that he is indeed dividing tx volume by the trade volume.

Ooh, that is an awesome math error. So commenter Steve got his ratio backwards and we are actually talking about Tx volume:Trade Volume rather than vice versa.

I will edit my OP so as not to mislead the Zaihs among us