Bitcoin Adoption = Bitcoin Price Stability?

[traderman]

I decided to write this article on what I have observed in the BTC/USD exchange rate last few weeks.

Constructive criticism welcome.

http://razorsforex.blogspot.com/2014/02/bitcoin-adoption-bitcoin-price-stability.html

[RebelWorm]

While higher adoption could stabilize the price it also leads to higher prices since more people need to share the bitcoins available (demand/supply you know).

[traderman]

It would be interesting to see how market forces act on the BTC/USD over the next two months. I think it also depends on how many people actually use bitcoin to buy things at Overstock and others. If we can get some metrics from the retailers on how many people actually use bitcoin on their sites, that would give a pretty good picture on what is actually happening.

While higher adoption could stabilize the price it also leads to higher prices since more people need to share the bitcoins available (demand/supply you know).

[Tomatocage]

I don't think a sample time span of a few weeks is enough data to really go on.

[traderman]

I suppose maybe it is still to early to tell, but I get a gut feeling that something has changed.

Or maybe everyone went over to gamble on Dogecoin, lol.

I don't think a sample time span of a few weeks is enough data to really go on.

[Buddyworm]

Interesting topic!  Finally got me to register after lurking for a while.

The hunch I've been operating under for the past few weeks now is that BTC is transitioning from penny stock-like mode of behaviour to one resembling a more widely adopted, liquid market.  So I think you and I share a similar perspective.

Recent history has shown this currency to be quite resilient to all sorts of pitfalls and I think trust is growing.  At this point, barring catastrophic failures like a 51% attack etc., so long as there is somewhere on the planet to legally and privately convert Bitcoin to other freely tradeable goods, the currency will retain (some) value.

I agree wider adoption could "put the brakes" on BTC's price rise, but to what extent?  Reduced volatility? Certainly.  The wild price swings are going to become fewer and farther between.  The more people believe BTC to be freely and easily convertible to material goods the more likely they are to hold it in lieu of cash instead of a merely speculative investment. 

But, in order for businesses like overstock.com to put a sustained downward pressure on BTC/USD I think you'd need to argue that it's a market characterized by people trading out of bitcoin and into other goods without fully replenishing bitcoin balances.  An ongoing net movement out of bitcoin.  In the long run, given a widening sphere of adoption (presumeably due to increased tradeability at places like overstock.com) I don't see how this is possible unless bitcoin are being mined at such a rate as to overwhelm the new bids entering the market day by day.



As far as trading goes, almost looks like the Bollinger Bands, MACD and RSI are waiting for a catalyst.  BBWidth especially is way down at the bottom of it's range.

Good topic!

[odolvlobo]

It is important to note that adoption itself doesn't affect the price. It is the effect of adoption on supply and demand that affects the price. It seems obvious that increased adoption will increase demand, which will cause the price to rise. However, increased adoption could also increase the supply of bitcoins available to spend and reduce the demand, and that would put downward pressure on the price.

Here are ways in which increased adoption could increase the supply or reduce the demand:

1. Velocity -- increased adoption will make bitcoin transactions more liquid. Fees will drop and it will become much easier to obtain bitcoins and exchange them, and there will be less need to hold them. So, where it now takes 11 million BTC to power the economy, in the future it could take much less. Demand will drop as a result.

2. Fractional reserve banking -- At some point when Bitcoin has become more mainstream, a fractional reserve banking system may develop and the supply of bitcoins will double or triple, or more.

3. Reduced savings -- As the exchange rate begins to stabilize, the return on holding bitcoins will drop and people will be less inclined to hoard them. Spending hoarded bitcoins will increase the supply.

[traderman]

Very nice points. I really hope the fraction reserve part does not materialize. Point #3 I think is very plausible. Once the speculators see that the volatility has subsided, many of them will start buying other cryptocoins and the ones that are not speculators can either convert to fiat once they see no more upside or start
spending their btc.

It is important to note that adoption itself doesn't affect the price. It is the effect of adoption on supply and demand that affects the price. It seems obvious that increased adoption will increase demand, which will cause the price to rise. However, increased adoption could also increase the supply of bitcoins available to spend and reduce the demand, and that would put downward pressure on the price.

Here are ways in which increased adoption could increase the supply or reduce the demand:

1. Velocity -- increased adoption will make bitcoin transactions more liquid. Fees will drop and it will become much easier to obtain bitcoins and exchange them, and there will be less need to hold them. So, where it now takes 11 million BTC to power the economy, in the future it could take much less. Demand will drop as a result.

2. Fractional reserve banking -- At some point when Bitcoin has become more mainstream, a fractional reserve banking system may develop and the supply of bitcoins will double or triple, or more.

3. Reduced savings -- As the exchange rate begins to stabilize, the return on holding bitcoins will drop and people will be less inclined to hoard them. Spending hoarded bitcoins will increase the supply.