As Bitcoin’s price rockets upward, an interesting number is trending downward: the correlation between Bitcoin’s price and its active address count.
This suggests that the number of people who actually use Bitcoin appears to be having less and less relevance to how investors perceive its value.
To be clear, Bitcoin's active address count is on the rise — in fact it's near an all-time high. But it's not as correlated with Bitcoin's price as it used to be, according to a Pearson correlation analysis performed by LongHash using data from Quandl.
Bitcoin’s price and its active address count have been closely linked, historically. Looking at Bitcoin's entire history, from January 2009 through January 4, 2021, shows that daily price and daily active address count have a correlation score of 0.77.
That score indicates a “very strong” positive correlation. In other words, historically speaking, when Bitcoin’s active address count has gone up or down, its price has tended to do the same (or vice versa — this is just a correlation, not necessarily one causing the other).
If we reduce the scope to just data from 2020, though, that number drops to 0.55 — still a strong positive correlation, but not as strong as it has been historically. And if we reduce the scope still further, to data from August 1, 2020 through January 4, 2021, the number drops again: 0.28, a weak positive correlation.
In other words: over the course of 2020, Bitcoin’s price became increasingly decoupled from its active address count. The number of people who actually use Bitcoin appears to less and less connected to the movements in BTC’s token price, which reflect how investors perceive Bitcoin’s value.
Could this decreasing correlation simply be a reflection of the nature of a bull run? It’s certainly possible, but the most recent and obvious point of comparison — the 2017 bull run — showed precisely the opposite. Between August 1, 2017 and January 4, 2018, the correlation between Bitcoin’s price and its active address count was 0.82. That’s a very strong positive correlation.
Of course, there are limitations to the conclusions we can draw from Pearson correlation analysis. It tells us nothing about causation, and Bitcoin is still a new enough phenomenon that the data we have to work with is limited.
Still, it’s interesting to note that while the correlation between price and active addresses has dropped over 2020, the correlation between price and overall trading volume has not. Trading volume is a metric with its own problems, of course, but the volume data we do have shows exactly what one might expect: as the price climbs during a bull run, so too does the volume of trades.
Why aren’t active addresses moving in tandem with Bitcoin’s price?
It’s impossible to say for sure, but there are a couple of very plausible theories.
First, as LongHash has previously reported, a lot of 2020’s Bitcoin’s strength in 2020 came from institutional investors. These big players can make high-volume trades that have a significant impact on Bitcoin’s market price, but they’re not going to increase the active address count significantly. A firm that represents 10,000 investors might purchase 10,000 investors’ worth of Bitcoin as part of their portfolio, but they’re not necessarily going to set up 10,000 individual Bitcoin addresses to trade with.
Second, while there’s still plenty of debate about whether or not Bitcoin is a store of value, there’s no denying that many investors see it that way. When an investor who views Bitcoin as a store of value buys tokens and holds them, they’re effectively increasing Bitcoin’s price (by decreasing the supply of tokens available on the market). But long term, they are not likely to be actively trading with much frequency, so an increase in this sort of investor could contribute to pushing Bitcoin’s price upward without having as big an impact on its active address count.
Why does this matter?
If you’re an investor in Bitcoin because you see it as a long-term store of value, this probably doesn’t matter. Demand seems to be stronger than ever, and whether that demand is coming from 10,000 retail investors or one big institution doesn’t really make a difference to you — either way, you’ll be able to sell your tokens if you want to.
If you’re a believer in something closer to Bitcoin’s original vision as “a peer-to-peer version of electronic cash” (as Satoshi Nakamoto put it), then this trend is a bit more concerning. While Bitcoin’s active address count is still trending upward — the network is growing — the fact that this count is increasingly decoupled from the price suggests that Bitcoin is being perceived and used less as money. It suggests that the “Bitcoin is digital gold” argument is winning.
That’s a conclusion that’s supported by data from BitPay, a global facilitator of cryptocurrency payments that allows merchants to accept crypto payments. According to BitPay’s data, while Bitcoin remains the most commonly-used crypto token for online payments, its share has dropped substantially: from accounting for 89% of crypto payments in June of 2020 to 79% in November of 2020 (Ethereum and XRP were the big gainers in that space over this time period).
Long story short: while Bitcoin’s price once seemed to be tightly connected to its active address count, that bond appears to be loosening. And whether you see that as a positive or a negative may depend on how you see Bitcoin itself.