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February 22, 2014, 03:15:10 AM |
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Reasons:
(1) SPECULATORS: There is no incentive to buy many BTC when the price is volatile, from an investor/speculator's perspective. If you're trying to make or risk $10k, but the price varies by 50%+ in a month, you're not going to be investing more than $20k, or about 34 coins at current pricing. If you're trying to make/risk $10k when the volatility is only 10% in a month, then you're going to likely invest $100k. More total investment, brings total price up.
(2) MERCHANTS: You're much less likely to accept BTC if its so volatile, and if you do, you're going to be insta-selling most of your position on some service like Bitpay. When Bitcoin's volatility declines, the savings from accepting BTC begin to outweigh the risks, even in the short term, resulting in more merchant acceptance, press coverage, and genuine commerce.
(3) BORROWERS: When Bitcoin's price isn't considered to be overvalued, undervalued, or extremely volatile, people are more likely to borrow whether to short, or spend the coins. This means guaranteed future demand, which at this point is the only thing keeping the USD stable. Just imagine what this could do for Bitcoin.
The result? Bitcoin's boom-bust-volatility cycle.
Bitcoin starts out stable and is considered "dead", and MERCHANTS begin to accept it, and maybe some individuals even borrow BTC whether to short due to its "dead"ness or to spend at the merchants. These merchants generate press coverage, and more SPECULATORS. The SPECULATORS slowly drive up price, faster and faster as the MERCHANTS get more press coverage and the increasing price helps too, and while the BORROWERS have to buy-back at higher prices due to short squeeze. This leads to hysteria as more and more SPECULATORS come in, and while existing merchants continue accepting Bitcoin, new merchants aren't starting at this point due to Bitcoin's volatility. Meanwhile, newer speculators are investing less and less on an individual basis as Bitcoin moves first 5% in a day, then 10%, then 25%, at least less investment than they would when Bitcoin was only increasing at a couple percent or so per day. Finally some bad news happens, causing panic. Merchants begin to realize that they must insta-sell to prevent them from being affected by such panic, and as profit-takers come in selling pressure stops the price from going up. People can tell something is wrong so there is a sell off. Volatility is through the roof with a crash. Slowly the panic & volatility leaves the system leaving bitcoin stable, at a lower price, but a bit higher, due to the new investors' saved coins and the new merchants that began acceptance at the last phase of stability. Then, the process begins all over again.
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