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?