Transaction volume on the Bitcoin network has surpassed that on some of the best-known card networks
Bitcoin settled more transaction volume in the fourth quarter than all credit card networks combined for the entire year when including change and intra-entity transactions
Bitcoin prices react to the latest FOMC meeting as intraday price correlations with risk assets remain high
Bitcoin Surpasses American Express in Annual Transaction Volume
As of yesterday, each of the four major credit card networks has issued their fourth-quarter reports. With that data, we now know that Bitcoin has jumped ahead of American Express in annual payment transaction volume. In 2021, Bitcoin processed $3.0T worth of payments, placing it above well-known card networks American Express ($1.3T) and Discover ($0.5T), but still below Visa ($13.5T) and Mastercard ($7.7T). This is astonishing growth, in our opinion, for a payment network that just had its 13th birthday. The major card networks have multi-decade histories — Visa was launched in 1958, Mastercard in 1966, American Express issued its first card in 1958, and Discover in 1985. As such, they are some of the best-known consumer brands in the payments space.
Bitcoin has jumped into the number three spot in this ranking through significant growth in transaction volume. That transaction volume growth, while not always even year-to-year, has kept up at a torrid pace when looking at 5-year compound annual growth rates. At the end of 2021, transaction volumes have been growing by nearly 100% annually over the past 5 years.
This measure of Bitcoin transaction volumes (entity adjusted) does not report the raw volume of transaction volume on the chain, but rather relies on statistical analysis by data providers (such as Glassnode) to remove transactions without economic substance. One such transaction type is a change transaction. A bitcoin user’s “balance” is not an account value like what one might have at a bank. It is composed of all the yet unspent transaction outputs (UTXOs) that specify the user as a recipient. To spend bitcoin, a spender needs to use the entire balance of one or multiple unspent outputs, with any remainder sent back to the sender. It is like having to send a pharmacy your entire bank balance to buy a pack of gum and having them return most of it back to you as change — counting that change would result in an overestimate of real transaction volume. Additionally, the measure excludes intra-entity transactions, which are transactions between addresses within the same wallet or owned by the same organization. Exchanges, for example, frequently move bitcoin between addresses to consolidate balances.
But these two techniques — estimating change returned to the sender and identifying transactions within the same entity — are estimates. If we look back at Bitcoin’s entire transaction volume, it is astonishing in comparison to other payment networks. In 4Q21 alone, Bitcoin settled $20.2T, larger than what Visa, Mastercard, American Express, and Discover combined facilitated for the entire year. While we often think of bitcoin as akin to digital gold, we should also remember that it was created as a payment network first and foremost. Indeed, “A Peer-to-Peer Electronic Cash System,” is the title of the whitepaper. As a payment rail, Bitcoin is probably larger and growing faster than most might realize.
Bitcoin and Risk Assets Rally and Then Fall on FOMC News Release
The Federal Reserve’s FOMC meeting on Wednesday was once again a price-moving event for bitcoin and other risk assets. Risk assets had sold off leading into the meeting, leading us to write earlier this week that we may get a relief rally if the Fed’s posture was within expectations. This thesis appeared borne out by the initial price reaction at 2 PM when the Fed released its summary statement. As expected, the Fed did not hike rates. There was no new messaging on the number of expected hikes — the dot plots through which the Fed distributes that information is released quarterly. There also did not appear to be any new information on how the Fed was planning to treat its balance sheet following the end of the taper in March. This lack of news sent markets up. Bitcoin peaked at a +5.5% return from a 4 PM Tuesday snapshot, while the S&P 500 peaked at +2.2%. Some of these gains were given up shortly after, and markets sold off further after Chairman Powell stated at a press conference that all options were on the table for rate hikes and balance sheet reduction. At the end of the market day, the S&P 500 ended up +0.9% and Bitcoin up +0.2%. It is also interesting again to see how closely the two assets track each other’s movements throughout the day. This relationship has been especially strong of late – looking at ticks by the minute, the correlation between the S&P 500 and Bitcoin over the last week has been about 0.6.
Market Update
Bitcoin fell -16.7%. Equities also fell on the week, with the S&P 500 down -3.5% and the NasdaqComposite down -5.7%. Gold decreased by -2.1. Bonds were mixed on the week, with Investment Grade Corporate Bonds down -0.4% and High Yield Corporate Bonds down -1.2% but Long-Term U.S. Treasuries up by 0.8%. Real yields decreased and inflation expectations increased.
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