Coinbase transactions do not account for low volume
Some people like to point to "off-chain" transactions as the cause for bitcoin's recent lower volume. While off-chain transactions could theoretically reduce on-chain volume, the commonly repeated causes of such transactions are inaccurate.
Bitpay, for example, does not use off-chain transactions at all, because they claim that they support "transparency." Coinbase does use off-chain transactions, but only when bitcoins are sent within its own network. However, these off-chain transactions are offset by an interesting mechanism that actually increases transaction volume beyond what normally would be expected. To see how this works, log into a Coinbase account and generate a new "receive address." Then send money to the new address. Immediately after receipt, Coinbase moves the money from the receive address into one of its larger wallets.
To pay for his 8% of the production server, a partner in the mining pool recently sent 0.54 bitcoins to a Coinbase account where we hold the pool's reserve. Immediately after the bitcoins were received, he said that they were "moved." I asked him how that was possible, seeing as how the balance was correct, and it turns out that Coinbase reshuffles its wallets periodically. If you had looked at the blockchain and tried to compute transaction volume, you would have thought that 1.08 bitcoins was actually spent, but half of that was actually a duplicate transaction.
Even if Coinbase is handling payments between users off-chain, this doubling of inbound transactions is significantly offsetting the reduction in volume caused by its off-chain transactions.
Danger signs forming
There are some danger signs forming that place the mid-term price of bitcoin as bearish. Every day, I am shocked at how there hasn't been a crash (which I still think is coming). Here's why the big investors are holding back in generating a new bubble.
1. The transaction volume is unbelievably low. It doesn't make sense that bitcoins can be supported at this price for so long with such a low volume. Volume has stopped increasing at the same rate as it was in the past, and that can't be explained entirely by off-chain transactions or any other known reason. If the reason the volume is low is because people simply don't find bitcoins useful, there is no way to fix that issue and investors will wait for a sign that people are willing to adopt them.
2. The regulations in New York significantly increased uncertainty. Lots of people were eagerly awaiting the New York regulations in the hopes that they would bring clarity to companies operating in New York. Instead of bringing clarity, they started a fight that will be waged for years. In the best case, Lawsky relents and produces a minimal set of regulations. The most likely case is where they pass with some revisions, and someone sues the day they are released. Lawsuits then will prevent implementation of any regulations for a long time. It is pretty obvious that this fight needs to go on for years now, even though that is going to significantly delay bitcoin uptake. It is far more important to correct the regulations than it is to give banks clarity to expand their operations.
3. The development crisis in core protocol code continues to hold the technology back. There are many features that could be implemented to make bitcoins more attractive for merchants, payment processors, and small businesses, but the only things getting done now are minor fixes and small improvements. The bitcoin daemon is still difficult to build and deploy on many operating systems, for example, and there are features that are talked about as possibilities but which are far down the road. Investors look at the state of development and are hesitatnt to invest in something where nobody may work on it.
4. The 1MB transaction limit still has no feasible solution. There is a price ceiling that cannot be exceeded because the 1MB transaction limit will make it impossible to move money at a reasonable cost to the exchanges to conduct trades. The bitcoin protocol can no longer be hard-forked, as too many companies have custom implementations and would oppose a change, so any solution to this problem needs to come as a secondary layers (like the "new P2Pool" idea). But there is no progress in resolving this issue, and some people think that it will be resolved in a day once there is a crisis that requires a solution.
Note that these danger signs don't include things like the claim that bitcoins are too difficult to use, or that few merchants accept them. The problems holding them back are all people-based. There aren't any difficult technical issues here.
Every day these problems aren't resolved, the outlook becomes more negative. If the transaction volume stays low for a long time even as more merchants accept bitcoin, there is more evidence that people aren't interested in using them (and I have said that the only way bitcoins fail is if people aren't interested in using them). If the regulations are not revised, the long court battle will encourage banks to adopt other technologies because their outlook is more certain. If developers don't get to work, then altcoins will continue to increase in features and pose a risk of overtaking. If the 1MB transaction limit is not resolved, then the likliehood of a fork increases by people impatient to come to a solution.
Right now, it seems that the current state of bitcoins is an uneasy calm that is waiting for any spark to ignite a big fallout. The timing aligns very nicely with the upcoming point where the current price will cross the lower boundary, as the lower boundary continues to increase while the price does not. If I were a frequent trader, I would be watching that point very closely to sell, because if the exponential growth that has held for 5 years breaks, we start a new pattern where all bets are off. Watching this transaction volume makes it very difficult not to panic sell.
I'm going to search /u/moral_agent's back posts to find on what date the lower boundary will reach $630 and post that date tomorrow. Perhaps we have a new date to watch out for.
Other
- Yesterday, we reached what others might call a "beta" stage of mining pool testing, by successfully deploying it to the production server, so I'll be notifying the people who volunteered to test tomorrow or Thursday.
- Days until July 24: 2