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Can Bitcoin be Trusted? Quantifying the economic value of blockchain transactions

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  • Cole, Benjamin M.
  • Dyhrberg, Anne H.
  • Foley, Sean
  • Svec, Jiri

Abstract

Bitcoin is the largest blockchain, and provides the underlying UTXO architecture used by many other cryptocurrencies. We identify an inherent bias embedded in this architecture (the Notebreaker mechanism) which forces users to ‘spend’ the entire content of a wallet address in order to make a payment, receiving ‘change’ into a unique new address. This inflates both the apparent volume transacted and network users, as well as minimizing the apparent fees of transacting. We develop an innovative Transaction Identification Methodology (TIM) to quantify the economic value of transactions from raw blockchain data. Using four different algorithms across three stages, we achieve 95% accuracy in quantifying the degree of bias in these measures. Validated across more than 430 million Bitcoin transactions involving 600 million wallet addresses, our methodology reveals that the Notebreaker mechanism inflates transaction volumes 8 times, makes the actual costs of blockchain transactions appear 3–7 times more expensive than what is commonly reported, and inflates wallet counts – a common heuristic of unique adopter counts. We provide a remediation strategy to make Bitcoin blockchain data a more accurate representation of reality, and provide a daily data set of these remediated volumes and transaction fees.

Suggested Citation

  • Cole, Benjamin M. & Dyhrberg, Anne H. & Foley, Sean & Svec, Jiri, 2022. "Can Bitcoin be Trusted? Quantifying the economic value of blockchain transactions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:intfin:v:79:y:2022:i:c:s1042443122000609
    DOI: 10.1016/j.intfin.2022.101577
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    References listed on IDEAS

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    Cited by:

    1. Foley, Sean & Frijns, Bart & Garel, Alexandre & Roh, Tai-Yong, 2022. "Who buys Bitcoin? The cultural determinants of Bitcoin activity," International Review of Financial Analysis, Elsevier, vol. 84(C).
    2. Brauneis, Alexander & Mestel, Roland & Riordan, Ryan & Theissen, Erik, 2022. "Bitcoin unchained: Determinants of cryptocurrency exchange liquidity," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 106-122.
    3. Foley, Sean & Krekel, William & Mollica, Vito & Svec, Jiri, 2023. "Not so fast: Identifying and remediating slow and imprecise cryptocurrency exchange data," Finance Research Letters, Elsevier, vol. 51(C).

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