Will Greater Adoption Mean Higher Bitcoin Prices?

Bitcoin Adoption and Prices.

Greater Bitcoin Merchant Adoption Won’t Mean Higher Bitcoin Prices.

Will a greater number of merchants accepting bitcoin drive its price higher or will the price drop as bitcoin holders dump bitcoins on accepting merchants?

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Control of the market by governmental authorities is the instrument of the modern dictatorship, much less cruel in appearance, much less spectacular, but far more effective than the police and resort to naked force.” Faustino Ballve – The Essentials of Economics

Since Peaking in Early December The Price of Bitcoin Has Fallen Nearly 45%

It’s the price of Bitcoin that has always disturbed me. I started following Bitcoin in late November 2013 when the sharp price rise caught my attention. My initial analysis of Bitcoin resulted in the Case Against Bitcoin and Bitcoin – A Mining Disaster Waiting to Happen.

Now there is talk of Bitcoin $50,000 .

Putting aside the lack of a Bitcoin’s intrinsic value, what market need does Bitcoin satisfy to justify the $650 (and dropping) price per coin? I have no use for it as a currency and don’t like it as an investment. What I do or any individual does, however, is irrelevant to determining price. Market price is determined by the sum of the actions of individuals, not the result of an individual’s action.

Bitcoiners argue greater world wide adoption will drive the price of Bitcoin further into the stratosphere. I disagree. As I wrote in Bitcoin – A Mining Disaster Waiting to Happen:

The price of cars did not go up exponentially as more roads and bridges were built, motels and restaurants were added to the sides of the highways and more people used automobiles as a mode of transportation. Competition ensured that Fords would not be the only cars on the road and that prices for cars would remain affordable. Similarly, there will be additional competing crypto currencies, many superior to Bitcoin, that will keep a lid on the price of Bitcoin.

Bitcoin: Who Needs it?

Here are some of the primary uses for Bitcoin, none of which will drive the price higher:

A Day To Day Transaction Currency

In functioning economies market participants don’t need Bitcoin to make day to day purchases. Additional merchants accepting Bitcoin do not create additional demand for Bitcoin as these merchants also still accept cash and credit cards. If you don’t already have Bitcoin there is not need to go out and buy some because your local Subway sandwich joint has just started to accept them.

Bitcoin has Dropped over 25% since Overstock Starting Accepting it as Payment

Wider Bitcoin adoption recently has not led to a higher Bitcoin price. In the past three months we have seen an acceleration in the number of merchants accepting Bitcoin, including online retailer Overstock. During this time there has also been a 40% drop in the price of Bitcoin. This is because most of the Bitcoin accepting merchants are also large sellers of Bitcoin as they are not really accepting Bitcoin; they are processing Bitcoin purchases through companies like Coinbase who immediately convert the Bitcoins into dollars for the merchants. It makes sense for merchants today to accept Bitcoin in this fashion as they avoid the Bitcoin fluctuation risk and they can sell merchandise to early Bitcoin adopters sitting on small Bitcoin fortunes that need to spend them before the price falls further.

If merchants don’t require Bitcoin use, no additional demand is created and therefore acceptance of Bitcoin by more merchants will not cause the price of Bitcoin to rise. Indeed additional merchant adoption might accelerate the dumping of Bitcoins and drive the price down.

As a Speculative Investment

Speculation, not use, has been the biggest driver of the rise in price of Bitcoin. Demand for a new speculative asset that is “revolutionary” and “game changing” driven in part by incessant evangelism by the “Bitcoin community” and in part by sudden mainstream media and government attention has pushed Bitcoin prices higher. Speculative losses will also be the reason for them to go down. If one wants Bitcoin solely because it is going up, one will also not want it when it is going down.

A rising Bitcoin price also draws greater attention from governments and competing entities. Governments or other actors can tax, regulate, disable access (Apple), prohibit (Russia), or otherwise disrupt the Bitcoin network (DDoS attacks) driving down the value of Bitcoin or rendering it next to worthless.

Governments, banks, and private companies can also issue their own digital currencies adding to an ever increasing supply of alternative crypto currencies. If demand increases for thin air unbacked crypto currencies, supply can easily be created to exceed that demand.

As Store of Value – Nothing is the New Something

Bitcoiners like to argue that Bitcoin is a good store of value and is better than gold for this function! Bitcoiners point to the government shut down of E-Gold and the confiscation by the U.S. government of gold in 1933. Gold, Bitcoiners argue can be confiscated by governments, while Bitcoin due to its digital nature can not. This nothing is better than something because governments can’t take it away argument is Alice in Wonderland thinking. It’s like saying I have an imaginary friend who is better than a real friend because I don’t have to talk to him. Or having imaginary food is better than real food because imaginary food won’t make you fat.

Backed by MATH, It’s The Protocol, ONLY 21 Million Will EVER be Mined!

Bitcoiners also like to point to the limited amount of Bitcoin that will ever be mined as a feature that will make it impervious to price declines as demand increases. Putting a fixed limit on something invented out of thin air doesn’t make it worth something. Nothing doesn’t become something because there is less of it. That’s math. Countless other digital currencies can also be invented out of thin air with artificial scarcity built in.

Transfer Money Across Borders

Bitcoin works well to transmit digital bits deemed to have value. This, however, does not have importance for the price of bitcoin. Millions of dollars in various currencies are transmitted daily. The currencies themselves do not fluctuate as a result of these transfers. When money is transferred via a service like Pay Pal there is a fee charged for using the system to make the transfer. With Bitcoin the transaction fee is reduced to nearly zero. This feature presents a huge cost advantage for large institutions and individuals with the need to transfer value across borders.

This feature, however, is not a reason to go out and purchase and hold Bitcoin and be subject to the fluctuations in Bitcoin value. If people need to make international transfers and wish not to use traditional money transfer services like Pay Pal, they can convert their local currency at the time of transfer to Bitcoin. For purposes of each transaction it matters not what the price of Bitcoin is- local currencies can be converted into Bitcoin in the amount that is required at the time, irrespective of the Bitcoin price. This use itself does not increase any permanent demand for Bitcoin. Once the conversion is made on both ends, the demand for Bitcoin goes away. The demand is in having the Bitcoin infrastructure in place to make such a transfer, not the Bitcoin itself.

The idea that people should hold Bitcoin in case they ever have to flee their countries with all their personal wealth is absurd. The total number of people with enough wealth to worry about leaving their homeland with their millions/billions is enough to drive but a niche market. Even if this Bitcoin feature is a solution for millionaires and billionaires needing to flee their countries with their wealth intact for Galtistan, they can always convert their wealth to Bitcoin at the time needed – no need to buy and hold Bitcoin.

To Make a Political Statement

Using Bitcoin to make a political statement holds appeal for many Bitcoiners. Unfortunately for the price of Bitcoin, the anarcho capitalist point of view is in a decided minority and therefore demand from this sector of the population is limited. Deny Bitcoin its rightful place as one of the greatest inventions in the history of mankind and you might be called a bootlicker, statist, closed minded or worse. Bitcoiners will patronize companies that “geddit” and accept Bitcoin. The enthusiastic confident vocal minority that uses Bitcoin are convinced of the invincibility of it, mostly because they view it as just and use Bitcoin as do many of their friends and the price has been rising. Most people, however, could care less or don’t know what a block chain is, what hash tags are, what the Federal Reserve does, the advantages of a decentralized system of exchange or who were Lysander Spooner, Murray Rothbard and Frank Chodorov.

Demand from the libertarian fringe (who themselves are split on its efficacy as a currency) will not drive sufficient demand for Bitcoin to maintain its current high price. Given libertarians’ propensity to support free markets, it unlikely that Bitcoin will remain the only crypto currency that they will support and use.

The Future Price of Bitcoin

The current price of Bitcoin is based on nebulous concepts like the value of the protocol, privacy, encryption, and math and is not otherwised tethered to anything tangible or comparable. The ascribing of value based on these concepts has allowed it to achieve an over $1200 a Bitcoin price. As Bitcoin becomes co-opted, regulated, banned, and imitated by governments, banks, private companies and individuals, its price should stabilize then fall further.

I could be wrong. What do you think?

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Further Reading:

The Case Against Bitcoin

Bitcoin a Mining Disaster Waiting to Happen

Here Comes Bitcoin Regulation

Has Bitcoin Jumped the Shark?



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  • adam

    Price is absolutely not a factor when choosing competing cryptocurrencies. If i want to spend $1000 USD and my options are a coin @ $1/coin or $1000/coin price makes absolutely zero difference. I retain the same purchasing power after my conversion to either coin. My 1000 cheap coins can buy the same amount of stuff as my 1 expensive coin. It is asinine to compare a currency to a physical product in this manner.

    • Smaulgld

      You are correct that price is not a factor in making a choice which crypto currency to use. I even made that point above- it doesn’t matter what price you convert at. The price of bitcoin however may fall as the supply of competing currencies hit the market.

  • Sascha-Oliver Prolic

    You don’t seem to understand much of economics. I give you one more year, then you are pro bitcoin!

    • Smaulgld

      My lack of understanding of economics comes from not believing that bitcoin is some type of invincible currency that just goes higher?

    • Smaulgld

      It’s been nine months and my opinion of bitcoin is even less favorable now and the price is also much lower

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  • DanielHaggard

    I’d love to know what it is about Bitcoin specifically that makes so many people think they can predict the future. How is it that anyone could possibly believe that any of these a-priori leaps assert anything resembling knowledge is beyond me.

    For example – a claim is made that increased merchant adoption won’t drive the price higher because merchants will immediately cash out into fiat so as to avoid the exchange risk. Okay – maybe. But then, maybe increased merchant adoption might increase its perceived legitimacy overall leading to increased investment demand. Who the hell knows?

    I’m not saying any of the predictions are wrong – just that nothing that has been said here should lead you to think any outcome is more or less likely. And the proof of this fact that IF any of these arguments have any truth divining qualities whatsoever, then one should have been able to apply them all right at the beginning of Bitcoin’s existence. If they are applicable now, they were even MORE applicable back then, since it had far less legitimacy – they would have predicted that Bitcoin would never have gone beyond joke status. And yet here we are with thousands of merchants across the world accepting them and a market cap in the billions. If these arguments are so good – why didn’t any of them work back then to predict that bitcoin never would have gotten anywhere at all?

    • Smaulgld

      Daniel
      You are correct- you can’t predict where a speculative asset’s price may end up you can only try to guess based on the available information.
      Bitcoin is hard to value because its mostly based on the visions of the early adopters and speculators with out any meaningful comparables. So the price can be whatever the market hopes or imagines it to be. The post points out that comparable in the form of competition will come soon enough.
      Merchant adoption itself doesn’t drive demand. (although you make a good point re the ancillary effect that it provides legitimacy). For demand to increase merchants would have to make bitcoin an exclusive or preferred method of payment. They would also have to hold some bitcoin like they hold cash as part of their assets. If all they do is accept it and immediately convert it in their home currencies they are in effect net sellers of bitcoin which drives the price down.
      So adoption in that sense actually hurts the price of bitcoin.

      • DanielHaggard

        Have you ever given much thought as to how you would verify this claim that increased merchant adoption would drive down the price? What conditions would falsify it?

        • Smaulgld

          Yes,
          “How would you verify this claim that increased merchant adoption would drive down the price?”

          Merchant adoption needs to be defined. If merchant adoption is solely in the form of “accepting” bitcoin through coin base and receiving dollars then those merchants are effectively only sellers and if you have more merchants accepting bitcoin in this fashion you have more sellers. More sellers added to a market usually means lower prices unless there is increased demand.

          If however the merchants don’t require or prefer the use of bitcoin then no additional demand is created and these merchants by their practice of converting and selling bitcoin depress the price (absent a corresponding increase in demand from some other source, say speculation- but as the price drops speculation generally decreases).

          “What conditions would falsify it”?:

          This can change if merchants prefer or make bitcoin the exclusive currency for the goods and services they sell-then they are creating demand. They push suppy down too if they hold bitcoin instead of selling it.

          • DanielHaggard

            Okay – so that’s a scenario that falsifies your prediction that merchants won’t immediately convert bitcoin – but that’s not the most important claim that you make.

            More interesting is your thesis that: “If merchant adoption increases, then lower prices will result.” (simplifying it a bit).

            This is a conditional if-then statement. Any scenario which falsifies this conditional statement has to be at the least one in which merchant adoption increases but price also increases.

            Suppose this scenario eventuates. But what if in this scenario it is also the case that president Obama comes out and endorses bitcoin repeatedly. Well, then you might feel entitled to claim that your hypothesis is still true; that increased adoption is still causing downward pressure, it’s just that another variable is putting greater upward pressure.

            This would be fair ONLY if Obama’s endorsement is an independent variable. That is to say, he was not influenced to endorse Bitcoin as a result of increased merchant adoption. And for sake of argument, let’s just assume that he is.

            Well – then you still have a falsifying scenario. The problem, however, is that Obama isn’t particularly articulate about why he is endorsing Bitcoin. Well then you can’t even really tell whether he is an independent variable or not. Likely you’ll just decide on the basis of whatever confirms your biases.

            So here’s the rub. You’ve considered one variable – and without any empirical work at all, nor effort in isolating this variable, have made a hypothesis about its causal role in a very complex system.

            But even if your a priori analysis is correct – such that you describe how things would work if this variable existed in an abstract world devoid of all other variables – you don’t have any idea about the myriad of other variables that might be dependent on it. Nor are you likely to ever possess the ability to determine which variables are dependent or not.

            Thus your hypothesis is not falsifiable. And we have no reason to presume that it actually has any predictive power at all.

            So then – I do wonder – what actually is the value of your analysis. What is the point of it?

          • Smaulgld

            Hi Daniel
            Markets dont move on logic.They are driven by a combination of fear, greed, fundamentals and weighting of factors.
            There is little logic to it all.
            With Bitcoin there are hardly any traditional market factors to consider so it is driven primarily on hype and emotion.
            A big mistake bitcoiners make is believing the concept that they have built the perfect system with built in artificial scarcity-just 21 million bitcoins ever!
            Keep in mind that there are no provable or disprovable scenarios in markets as you point out above because of the multiplicity of potential factors that might influence price.
            One can’t prove or disprove a market hypothesis and think that once proven or disproven, it will work and your model is infallible.
            The math geniuses at Long Term Capital Management found that out the hard way.

          • DanielHaggard

            Well – we’ve found at least one point of agreement then. 🙂 Was an interesting chat.

          • Smaulgld

            Thanks for visiting. I checked out your web site You’ve obviously put a lot of thought into this! Visit again soon

          • Smaulgld

            any follow up thoughts Daniel? Its been an interesting past 8 months for bitcoin

          • DanielHaggard

            I don’t think much has changed re our original discussion. I still don’t see how you can verify whether your claim that merchant adoption lowers prices is true.

            Do we even have a strong correlation at this point? Do you have strong data on merchant adoption?

          • Smaulgld

            More merchants have adopted bitcoin during the last eight months and the price has fallen. This doesn’t however prove a causal relationship but it does show strongly that increased merchant adoption on its own is not really a factor that drives prices higher

          • DanielHaggard

            I guess the only thing I was trying to impress upon you was methodological soundness. You understand that the case isn’t made… but you still think that something has been shown ‘strongly’.

            It hasn’t. Not even a little bit… neither way – for or against.

            Without a controlled experiment that isolates variables, or a sufficient data set upon which you can run statistical models, you just have no way of knowing. You shouldn’t ever change your beliefs ever on the basis of a mere correlation. And if you happen to have a bias in favour of a proposition and you see a correlation, then all that means is that there is no reason either for you to revise your beliefs.

            But what if there was no correlation? What if bitcoin prices had gone up? Well – you still wouldn’t rationally be under any obligation to challenge your biases because another variable might have been the thing pushing the price higher.

          • Smaulgld

            Agree there is not method to the claim, just speculation, observation and anecdotal evidence and certainly not proof. Bitcoin has no fundamentals to analyze, no meaningful comparisons, so there is no method to determining its price, just madness!

  • Mike

    QUOTE, “If demand increases for thin air unbacked crypto currencies, supply can easily be created to exceed that demand.” —————- I think you missed a big point of why Bitcoin even exists…… (substitute the word crypto for “Government”) ————– Now think about why Bitcoin (in some fashion) has a chance to run.
    Cheers!
    ML

    • Smaulgld

      Mike- its a good point re governments creating unlimited amounts of currencies vs Bitcooin’s limited issuance (which is limiting nothing and calling its something because its limited). The point goes further- all possible issuers of currencies will do so and via tax, regulation, sheer force, or backing by a valuable commodity may crowd out bitcoin

  • Melvin Petties

    Smaulgld,

    Rather provocative article! Out of curiosity, have you been following the most recent developments with Bitcoin (Mt. Gox bankruptcy, planned Second Market Exchange, Winklevoss ETF, Neo & Bee Bank in Cyprus, etc…)? If so, do these count as evidence of increased demand for holding Bitcoin?

    With the growing traction Bitcoin has with merchants, and Wall Street investors, a scenario seems to be forming where Bitcoin prices are driven up by the inverse relationship between available coins and those required for transactions. Even if merchants immediately convert back down to their local fiat currency, increased volume seems to inevitably drive Bitcoin value higher.

    Finally, I think comparing the history of automobile pricing to Bitcoin may not be the best analogy. For example, scarcity was a driving factor in encouraging competition from other auto makers. In contrast, there is very little barrier to entry in owning a Bitcoin (the smallest fraction of which is less than a penny) or utilizing the protocol (practically free). Also, competition from other coins may not be sufficient motivation to lure merchants and customers into “switching vehicles” especially given the infrastructure and training required for driving digital currency adoption. If all competing currencies could drive on the same road (i.e., the Bitcoin blockchain), then I would have to concede the point!

    Anxious to hear your thoughts,

    – Melvin

    • Smaulgld

      Melvin
      Thanks for stopping by. I have been following the bitcoin events.
      Re Mt. Gox to the casual observer that decreases demand as it paints bitcoin and the ecosystem in a bad light no matter the protestations of the bitcoin community. It may reduce supply but I doubt those coins are missing- they will probably surface.

      Re Second Market Exchange- that is consumer demand neutral- it only indicates that an entrepreneur believes there will a demand to TRADE bitcoin-that proposition has already been established as there are a half dozen exchanges with decent volume. There isn’t a trusted US one. 2nd market will meet that demand. Opening a commodities sugar exchange does not increase demand for sugar.

      The ETF evidences investor demand not consumer demand and would be bad for bitcoin as the ETF could help assist in lending hypothecation etc of bitcoin making fractional reserve bitcoining possible and defeating the limited quantity feature. ETFs and exchanges also destroy the P2P nature of bitcoin.

      If the increased volume is nothing more than original bitcoiners cashing in their winnings, then that would harm the price of bitcoin, Unless merchants require bitcoin use (innovation generally responds to consumer demand not merchant desires) no additional demand is created when a merchant decides to accept bitcoin, Merchants would have to offer incentives to use bitcoin to increase demand.

      I agree the car analogy is imperfect as are all analogies, so rather than defend it, I’ll stick with the concept of competition. Bitcoiners like to think of bitcoin and the bitcoin system as unique. It is- but we know from the history of innovation, nothing stays unique for long. If merchants take bitcoin and a better coin comes along, the infrastruture to support other coins can be put in place by venture capital quite quickly.

      Bitcoin will eventually go the way of pong and netscape.

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  • Zin Clepto

    You raise many of the same concerns that came across my mind initially.
    The difference here is something your not hitting on though…. I’m essence, the USD is not backed by anything either. The USD is also a house of cards, because the value of it’s currency is the bank infrastructure, and the wire transfer/ach system, not the actual note. In fact, fractional reserve banking assure you will lose value via inflation, while the banks that benefit from fractional reserve banking make out by allowing the fed to create money out of thin air.
    In this sense, many people are looking to an alternative method of transacting trade value. The system doesn’t need to be the best, it needs to be the most widely accepted! Once adoption occurs, inflation to benefit the banks and elite will stop! The value of a coin with limits to creation will assure that individuals are not losing trade value due to a federal reserve system that creates money out of thin air and doles it out to banks so that they can lend 10 dollars for every dollar of deposits that exist! That my friend is the value of the bitcoin system! And that my friend, is what will cause bitcoin to become a GREAT investment, provided that it continues to gain widespread adoption. And considering the billions of dollars going into infrastructure by investors, adoption is what will happen. The question is, what’s the US governments real role in bitcoin? I don’t find it a coincidence that China and Russia have clamped down on bitcoin. They have intelligence and would know if the us govt was behind bitcoin. If this was not a govt backed plan, I would expect birth china and Russia to embrace it with open arms as a way of mitigating us control of international money supply!

    • Smaulgld

      All great points. It’s just difficult to value something that does not have any viable comparables. Indeed, if it did it would not be unique.

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  • joelhfx

    I like the analogy of roads even though roads do not put a negative pressure on the price of cars.

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