Suppose that tomorrow, or next week, or sometime soon, some really big merchant were to announce that they accept payment in Bitcoin. For the sake of concreteness, I'll say Amazon.
What effect would this have on our economy?
It seems to me that, right now, Amazon could effectively dictate exchange rates, since their "vote" would far outweigh the rest of our tiny community. In fact, it would probably be in their interest to manipulate the price of BTC, in something like the following scenario:
- Amazon says, "We are now accepting payment in Bitcoin, at a rate of 2 USD per BTC" (or whatever)
- "Gold rush": We get about 1,000,000 new miners in the space of a few days as the value of BTC has increased by over 100%
- Most of these miners spend nearly all their earnings through Amazon, since it's the only well-known vendor accepting the currency
- With a semi-captive market, Amazon now starts dropping its exchange rate while selling off their own BTC for USD
I understand that markets are supposed to be efficient, so there may be some counterforce that would keep this scheme from working. What is it?
Amazon is not that stupid.
Right now the price of bitcoins go for under 1 dollar. Why would Amazon start accepting bitcoins at 2 dollars? But hey, lets suppose they do because I guess you mean they want to raise the price. Two things could happen:
1) Everybody starts selling (or using) their bitcoins to Amazon since they are paying more than double their present price. Now Amazon has all the bitcoins. Now the Bitcoin community starts a new bitcoin chain and the Amazon bitcoins are worth nothing. Amazon has lost a lot of money (and if I remember correcly the value of the bitcoin economy is over 4 million dollars, thats a lot of money) and has given us a free ride.
2) Not everybody sells (or uses) their bitcoins to Amazon, but Amazon setting that price affects the market pushing the exchange rates towards those 2 dollars. Now amazon has a lot of bitcoins because its buying them to keep that rate. You explain that Amazon could start selling them, but what would happen is that as Amazon stops buying at 2 dollars/bitcoin and starts selling the price would drop abruptly. Amazon would have buyed a lot of bitcoins at 2 dollars and would have to sell way under that price. Amazon loses a lot of money again, and gives a free ride to some of us.
There is no way Amazon (or anyone) is that stupid.