Why Do A High Percentage Of Crypto Transactions Have No Economic Value?

Cryptocurrency networks are repositories of their economic value. Or so the thinking goes. Investors presume that the greater the number of transactions on a cryptocurrency’s blockchain, the greater its value. But new research shows that a significant number of transactions listed on websites are worthless. Coinmetrics, a crypto analytics company, analyzed transactions on bitcoin’s network and concluded that two-thirds of the total number have no economic value. The figure for Cardano, the eighth most-valuable cryptocurrency, are even higher. (See also: What Does The Bitcoin Blockchain Record?)

According to Coinmetrics, 98 percent of Cardano’s overall transactions are worthless. Elementus Inc., another analytics company, found that 45 percent of transactions on Ethereum’s network consist of non-economic exchanges, such as spam. Coinmetrics deducted the number of non-economic transactions from bitcoin’s blockchain and came up with a “true economic transaction volume” of $2 billion for bitcoin and $700 million for ethereum in a single day.  

Why Are There A High Number Of Transactions With No Economic Value? 

According to a Bloomberg report, there are a couple of reasons for the high volume of transactions without tangible economic value. 

The first one is the design of cryptocurrency blockchains in which there is no cost associated with creating addresses in the network. Lucas Nuzzi, director of technology research at Digital Asset Research told the publication that low transaction fees and free addresses “enable a single user to send small balance through hundreds of transactions." In the case of cryptocurrency blockchains, that single user could be cryptocurrency exchanges or custodians. For a single year period between February 2017 and February 2018, a single user was responsible for over 90 percent of transactions on Ethereum’s network, Coinmetrics states. 

The second reason for high volume of zero economic value transactions are mining pools. Pools, which are collections of crypto mining systems, distribute fractions of cryptocurrencies amongst themselves, creating thousands of transactions on a blockchain. For example, a single ether or bitcoin could be split amongst members of a mining pool and generate several transactions on the cryptocurrency’s blockchain. There might be some truth to this theory. Bitcoin’s networks became clogged last year after the number of transactions on bitcoin’s blockchain as the hashrate (or the total computing power employed to mine bitcoins) failed to keep up with the number of transactions. (See also: Will Rising Transaction Fees Bring Down Bitcoin's Price?

Third, spam is also a major contributor to rising transaction numbers. This is especially the case with ethereum, which supports thousands of tokens on its blockchain. The Bloomberg report states that spam contributes 19 percent of all non-economic value for ethereum. This is because there are different ways that coins can be used in transactions, increasing transaction volume, but not necessarily representing an exchange of economic value.

When we take this into consideration, both bitcoin and ethereum look smaller than previously thought.

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin and litecoin      

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.