Deutsche Bank, UCL and UW's latest Bitcoin research: Bitcoin economy has matured

A new study conducted jointly by the University of Wisconsin, the University College London Blockchain Technology Research Center and the Deutsche Bundesbank shows that the Bitcoin economy has achieved significant growth and maturity in the past few years.

The development of Bitcoin

The study shows that the number of Bitcoin transactions has increased from about 1,000 per day in 2011 to 300,000 per day today. As the Bitcoin network continues to expand, it has become clear that there is a need to explore how the cryptocurrency is developing, which has largely motivated the research.

The study explains:

“At current exchange rates, Bitcoin is doing between $20 million and $30 million in daily volume. So it’s interesting to explore how the Bitcoin economy took root, the path that led to payment relationships, and how those relationships evolve over time.”

For this purpose, the study took a direction to determine the interconnections between economic agents that use the Bitcoin payment network to transfer digital currency between each other. From January 3, 2009 to May 8, 2015, data from Bitcoin Core was entered and managed through a MySQL database designed to run high-performance application code.

The researchers have collected publicly accessible personal addresses as the smallest unit of Bitcoin identity and classified them into specific business categories by analyzing some of their specific transaction patterns.

The researchers have divided the 75,191,953 unique Bitcoin addresses obtained from the network into 30,708,660 clusters, which will be further filtered to find some superclusters connected to real entities (such as BTCC China, Kraken, Xapo, etc.), which belong to different business categories (Exchanges, Mining Pools, Online Gambling, Black Markets, and Conglomerates). It allows researchers to further create a payment relationship graph between them and draw conclusions about transaction behavior in each business category.

The three development stages of the Bitcoin economy

Based on the results of the transaction relationship analysis, the researchers estimated the relative prevalence of each general business category in the sample and tracked their development during the study period. As a result, the study identified three distinguishable periods.

Period 1 : January 2009 to March 2012, identified as a proof-of-concept period characterized by test transactions between a small number of users and with little commercial activity. Analysis shows that this period was almost entirely dominated by mining.

Phase 2 : April 2012 to October 2013, identified as the early adopter period, with development supported by black market usage and gambling.

It is not surprising that these business categories were the earliest adopters of Bitcoin as they were attracted by Bitcoin’s unique features such as relative anonymity, lack of regulation and legal oversight, borderless transactions, and low transaction costs due to the lack of taxation.

As the study points out, Bitcoin, as a new form of secure digital cash, looked ideal for buying and selling illegal drugs, stolen goods and other activities that could not be easily paid for online. However, in October 2013, when several black markets (the largest of which was Silk Road) were shut down, Bitcoin's 'sin' activities experienced a parallel decline.

Period 3 : 2013-Present, the period of maturity of the Bitcoin network, characterized by the Bitcoin economy's departure from 'evil' enterprises and diversification into legitimate payments, commerce and services.

The study shows that the period between January 2014 and May 2015, which was marked by Bitcoin, was marked by a significant increase in legal services provided by digital currency exchanges.

We will witness further maturity of Bitcoin

This research shows that the Bitcoin economy has indeed matured from a phase dominated by mining to one dominated by exchanges.

Research Report:

“The result of this work is that it shows that the Bitcoin economy, far from being a fleeting and worthless pursuit, has grown and matured over the past few years. It has been operating with different behavioral patterns among the most influential entities and players.”

The paper also notes that as the bitcoin economy continues to develop, the de-anonymization methods used in the analysis could be used to further categorize unknown participants in the bitcoin network into new and distinct business categories.

The research team also suggested that recent attention to Bitcoin’s current use in illegal activities may be overstated, and even if such illegal transactions still exist, they will tend to decrease as the Bitcoin economy matures.