New business cycle?

[theta]

In a typical economy, activity is cyclical. Starting from low price levels, demand starts picking up. This attracts producers who start investing to produce more goods and services as it's profitable to do so. Additional investment increases overall income, which further increases aggregate demand, which absorbs the added supply, which results in a virtuous circle with GDP growing. At some point prices reach a high level and demand peaks. Also, competition among producers means overall supply is very high, margins are thin and profitability low. At the first sign of price decline, losses occur, producers can't afford to stay in the market any more, there's less and less investment, defaults etc., prices, income and aggregate demand go down in a vicious circle (recession). Until the economy reaches a low level, where it stabilizes and the cycle starts over.

I'm thinking that something similar happens in bitcoinland. In 2011, as the price was rising, a lot of miners invested in expensive hardware, as it was increasingly profitable to mine. When prices peaked, there was way too much productive capacity in the economy than needed by the then current demand, which created increasing selling pressure. Prices started dropping until an equilibrium was reached (probably after a lot of miners exited the business and others subsidized it with other income). After the prices started climbing again, more and more miners started investing in more expensive hardware as it was increasingly justified with bitcoin at $50, $100, $150 etc. Unless a new high is reached quickly (before the next electricity bill, mortgage payment, credit card payment etc. start coming), this may lead to another bitcoin recession, probably for several months until supply drops to such a low point that a new virtuous circle starts.

Thoughts?

[Adrian-x]

Mining capacity is way over provided. See here
Mining isn't going away in a Bitcoin resection.  The big spike in Jan is not from the price but from new technology coming on board.

The business cycles you describe are a result of managed money supply, or the inability of free banks to regulate the money supply based on market conditions.

Bitcoin does away with that, the "*problem" here is herd mentality. 

*The price is only a problem if you buy high and sell low, that problem is not economic it's intelligence. This market correction is a result of buying high in anticipation of deflation in a developing economy, and thinking it will happen instantly without waiting to see it mature, and then losing faith. 

There is an upside to buying in early as long as all the players are educated, in that as there are a finite number of coins, it can become a store of wealth much like gold.

The downside is if you are one of the sheep that buy high and sell low.