The Impact of Change in Prices on Bitcoin's utility as Currency

[Ayiranorea]

Most of the time users prefer to invest on bitcoin and other cryptocurrencies. When it comes to usage as currency people think it in the opposite manner. If a product is $100, but in terms of bitcoin based on the fluctuation it'll be 0.01 bitcoin or 0.011 btc and counts. Everyone won't wish to have different price for the same product with time variations. People who want something unique other than traditional fiat will buy and spend it while majority of the people are comfortable with fiat.

[Murat]

A good discussion about the Bitcoin issue, I think Bitcoin could be used as a currency because it's a value in the digital market but the issue is the acceptability, I think it's not about the value. it's all about the acceptability when it doesn't have any potential of this purpose then it might be used another way, That's why I think Bitcoin is more than a currency, It's like an investment for me, This is the real scenario that people prefer to hold Bitcoin rather than spending of shopping purpose, In my opinion, If people will get enough space for spending Bitcoin then they definitely use this opportunity but due to huge manipulation Bitcoin 's acceptability is underrated.

[webtricks]

Chart 1 Overall Outcome: Higher the change in prices, lesser will the use of Bitcoin for payment purpose.

Yes, because bitcoin market is a speculator's heaven! However, if you have seen the past trends, you must have noticed that whenever we enter bull's regime, the number of transactions increase. Because speculators rush to book their profit rather than using it as a payment for goods and services!

I specifically cleared in the topic that I am talking about the transactions done for payment purposes i.e. where Bitcoin is used to pay for goods and services.
Else, it is natural that the number of general transactions always increase with the increase in price. So is the fees.

Overall Outcome: If the future expected price of Bitcoin is higher, lower will be the use of Bitcoin for payment purpose. On the contrary, lower the future expected price, higher will be the use of Bitcoin for payment purpose.

Practically resonates the same speculative behavior! If I am optimistic about bitcoin will touch 12k USD next month, why would I spend it to buy groceries? Rather I will hold it for now so that I can fetch the profit in near future!

Exactly! Even I am saying the exact same thing in the quoted text.

Overall Outcome: If the future expected price of Bitcoin is higher, lower will be the use of Bitcoin for payment purpose. On the contrary, lower the future expected price, higher will be the use of Bitcoin for payment purpose.

This is why I think an alt like Doge or litecoin will get used for payment purposes. They can both scale because the blocks are found so quickly, and their value is pretty stable in dollar amounts.

Say that again! DOGE and LTC are stable! I have a chart for you comparing the percentage change in the value of Bitcoin, Litcoin and Dogecoin.
Blue is for Bitcoin
Orange is for Litecoin
Yellow is for Dogecoin



You can see from the graph above that Litecoin is most volatile among three in last 6 months. If I consider graph from 2018 then Doge will also become as volatile as Litecoin.

[Getmon]

Most of the time users prefer to invest on bitcoin and other cryptocurrencies. When it comes to usage as currency people think it in the opposite manner. If a product is $100, but in terms of bitcoin based on the fluctuation it'll be 0.01 bitcoin or 0.011 btc and counts. Everyone won't wish to have different price for the same product with time variations. People who want something unique other than traditional fiat will buy and spend it while majority of the people are comfortable with fiat.

Fiat remains the choice of money for a lot of Bitcoin owners. I am also one of them in a way. I don't want to spend Bitcoin because I know that the value will grow in the long term. But since fiat is nothing but a deflating currency, I don't mind spending them right away. I don't even want to save them in banks because they are losing value while they are sleeping. In contrast, Bitcoin is increasing in value while sleeping.

[buwaytress]

I think it's not so much that Bitcoin's potential value makes people not spend, to be honest.

I think the mindset of the person when they enter is what is important. Speculators and investors come in and will not likely spend it on a microlevel. And the guys who come in to participate in the economy, well, they do.

You see this all the time. The regulars who meet up and discuss Bitcoin at a cafe accepting BTC. The freelancers who accept and of course spend in BTC (like me hey;) ). And then the educators who really just have as much BTC as they have and use it as much as they can.

Price doesn't really affect how these guys use. Yes, it might sway my timing, by a few days, but in the end I have to sell when I have to, get paid when I do.

[deisik]

You can see from the graph above that Litecoin is most volatile among three in last 6 months. If I consider graph from 2018 then Doge will also become as volatile as Litecoin

It is good that you brought up the example of Dogecoin

So why can Dogecoin be interesting for the purposes of this thread? Well, it may be not for the currency aspect of it as such (as no one is using doges as a currency, let's be honest here), but for an aspect that still has nothing to do with sheer speculation, and that seems to be quite resonating with the idea presented here. What I mean to say is that Dogecoin is probably in the list of top 10 coins that have most real-life use and application if not just the most used cryptocurrency in this regard (however paradoxical and counterintuitive it may sound)

This coin is probably the best coin for gambling, and that is definitely not speculation. The implication is that such use will prop up its value no matter where the whole cryptocurrency market is going, especially when it's going down. Indeed, it is not free from the overwhelming impact that Bitcoin's price dynamic has over all other cryptocurrencies out there, but it still should be less pronounced. And what's more important here, the effect of this impact, or rather lack thereof, can be easily assessed numerically, for example, by using correlation metrics

[Dart18]

Overall Outcome: If the future expected price of Bitcoin is higher, lower will be the use of Bitcoin for payment purpose. On the contrary, lower the future expected price, higher will be the use of Bitcoin for payment purpose.

I dont really expect this to happen in this era.
Perhaps when the bitcoin number to be mined is almost depleted.
For now, acquiring it has many options and most of the investors is by buying it.
But not for usage. As you said it is just to keep it or a store of value. Some do use it to avoid taxation and some just prefer it as the new currency which is a small percentage of all those three.

The volatility seems to be the wall of it. If the price keep on jumping to a different number, it will be difficult for merchants to come in.

[davinchi]

Most of the time users prefer to invest on bitcoin and other cryptocurrencies. When it comes to usage as currency people think it in the opposite manner. If a product is $100, but in terms of bitcoin based on the fluctuation it'll be 0.01 bitcoin or 0.011 btc and counts. Everyone won't wish to have different price for the same product with time variations. People who want something unique other than traditional fiat will buy and spend it while majority of the people are comfortable with fiat.

It is because of bitcoin volatility that we still find all these differences and because many of us still pair it to usd as fiat. I think that when bitcoin becomes currency, all these issues will not be there, I mean global currency, but if bitcoin has not become global currency, it may be difficult for people to actually use it alone without paring it with any fiat.

This is why we have to hope that one day, the world's leader will accept it as a single currency so that when people are spending bitcoin, they don’t have to base its value on fiat, but for now, like satoshi said, for the use of the coin will pay even if the volatility as cryptocurrency, we just have to continue suing it that way till the volatility of the coin has decrease and the time that government will fully declare it as global currency.

[dimonstration]

Overall Outcome: If the future expected price of Bitcoin is higher, lower will be the use of Bitcoin for payment purpose. On the contrary, lower the future expected price, higher will be the use of Bitcoin for payment purpose.

I dont really expect this to happen in this era.
Perhaps when the bitcoin number to be mined is almost depleted.
For now, acquiring it has many options and most of the investors is by buying it.
But not for usage. As you said it is just to keep it or a store of value. Some do use it to avoid taxation and some just prefer it as the new currency which is a small percentage of all those three.

The volatility seems to be the wall of it. If the price keep on jumping to a different number, it will be difficult for merchants to come in.

As adoption didn't happen fully yet then there barely no ways to use it as payment, those merchantscan attract some buyers who hold bitcoin. But some still prefers to hold and wait till the supplies are all mined and supplies became limited. Some might only buying in some store just to try to do transactions in real life like what I'm doing in paying bills but when there is chance to buy BTC at lower price I still take that as an advantage as we don't still know what price it can be in the future higher or lower.

[airdnasxela]

It's is undoubtedly the reality why it's harder for bitcoin to be accepted by the public, even the government. Due to changes in price, bitcoin are becoming more of an investment. The public, especially the market wouldn't want to always monitor it's value just to know how much are they going to price their product. For businesses, it's uncertain for them to know if they will gain profit or will lose because of bitcoin's volatility, if ever it will be adopted. Volatility can be the strength of bitcoin, but can also be it's weakness at some point.

[teosanru]

One of the biggest on-going debate about Bitcoin is whether it can be used as currency or is it just a sort of investment? On the micro level, Bitcoin can surely be used as a currency. Since it has value, it can easily solve the problem of double-coincidence of wants by becoming the medium of transaction. But when we consider it at macro level, the story doesn't remain the same. There are several factors come into play when we consider the whole community, the prominent of which is Change in Prices.

The main reason why people won't use Bitcoin as currency is because its value (I'm not talking about fiat value but the real value) in the eyes of investors keep changing radically. Hence making sellers hesitant to accept Bitcoin as payment and buyers hesitant to spend Bitcoin for payment.

I have created following graph to show the impact of Change in Prices on the people's tendency to spend Bitcoin as payments:

CHART #1



Explanation: The above graph assumes that x number of Transactions (for payment purposes) take place when the price of Bitcoin is y. Now two things can happen, either the price of Bitcoin can increase or the price of Bitcoin can decrease. Both  cases can impact the normal behavior of holder. In the case of price rise i.e. increase from y to 2y, bitcoin holder will become optimistic that prices will increase further, this will lead to fall in number of transactions where bitcoin is used for payment purposes from x to x/2. Similarly, in case of price fall from y to y/2, holder may postpone his expenditure or may use other form of payments like general fiat currency for expenditure purposes in the hope that prices of Bitcoin will rise again. Therefore, the number of bitcoin-payments will decrease to x/2.

Overall Outcome: Higher the change in prices, lesser will the use of Bitcoin for payment purpose.


When we talk about Bitcoin prices, another topic comes to play i.e. Speculation! The above chart clearly shows the impact of current prices on Bitcoin's utility as currency but what about the future price? We all know that Bitcoin community loves to speculate. Hence, the speculation also have considerable impact upon the bitcoin's utility as currency. This brings us to our second graph:

CHART #2


Explanation: Unlike the chart #1, future expected price rather have two-ways impact on the number of times Bitcoin is used for payment purposes. Suppose Bitcoin community is expecting the increase in price of bitcoin in coming months. In such case, rather than spending bitcoins for payment purposes, people at large will hold their bitcoins. In other words, if the price increases from y to 2y, the transactions will fall from x to x/2 (it could be anything but I took 50% fall for the sake of simplicity).  Vice-versa, in case if people are expecting the fall in the prices of bitcoin, they may rush to spend bitcoins for utilities. This may pump the number of transactions from x to 2x.

Overall Outcome: If the future expected price of Bitcoin is higher, lower will be the use of Bitcoin for payment purpose. On the contrary, lower the future expected price, higher will be the use of Bitcoin for payment purpose.

I think this can even be explained on micro level using simple Marginal Utility basics. Bitcoin isn't even viable at MicroEconomic level because it violates the basic assumption of Marginal Utility of Money being constant as price increase would increase people's marginal utility in money and they would tend to hold it. Moreover with two economic variables of marginal utility in the MU therom I would say that it would cease to exist. People won't get any satisfaction from consumption of utility at all if the utility derived from not spending that money is higher because basic assumption is that everyone is a Rational consumer.

[shoreno]

i totally agree on the last part on the op  . if btc price is low, many people will use it for paying because its not that valueable  at all  but if the value is high , people will think twice  and will end up hodling thier coins because its too valueable to spend it or waste it when you can earn more thru it if you will treat it as an investment asset . the impact is big if btc price rise and fall but i still prefer it to be a volatile  so that we can use it for both purposes occasionally .

[Bagaji]

My good friend you have made a good analysis of how people react to there usage of Bitcoin any time the market value of Bitcoin is speculated to increase or is expected that its market value is expected to decline.
The bottom line is that most people that holders of Bitcoin are at all time expecting profit from the amount of Bitcoin they are holding and that is the main reason they behave that way.

[barabarian1]

yes I agree with op when the price of bitcoin rises high then people will save it and won't use bitcoin for shopping because they think bitcoin can make more money if it is saved and also they can use fiat for shopping. but if the price of bitcoin goes down or is stable they will start using bitcoin to shop. but actually in my opinion the price of bitcoin can increase as more people use bitcoin for payment tools.

[NathanJB]

yes I agree with op when the price of bitcoin rises high then people will save it and won't use bitcoin for shopping because they think bitcoin can make more money if it is saved and also they can use fiat for shopping. but if the price of bitcoin goes down or is stable they will start using bitcoin to shop. but actually in my opinion the price of bitcoin can increase as more people use bitcoin for payment tools.

In real life, most people won't shop using Bitcoin regardless if its price is high or low. It is only in theory that when Bitcoin goes down they will start using them to buy stuff in shops. In reality, one would not buy something and pay 0.001 BTC for example when a few days or a week ago that exact same amount would have given him 3 more. If Bitcoin is going down, would you buy a pair of shoes at a certain price when just yesterday you could have bought 2 pairs at the same price?

[webtricks]

You can see from the graph above that Litecoin is most volatile among three in last 6 months. If I consider graph from 2018 then Doge will also become as volatile as Litecoin

It is good that you brought up the example of Dogecoin

So why can Dogecoin be interesting for the purposes of this thread? Well, it may be not for the currency aspect of it as such (as no one is using doges as a currency, let's be honest here), but for an aspect that still has nothing to do with sheer speculation, and that seems to be quite resonating with the idea presented here. What I mean to say is that Dogecoin is probably in the list of top 10 coins that have most real-life use and application if not just the most used cryptocurrency in this regard (however paradoxical and counterintuitive it may sound)

This coin is probably the best coin for gambling, and that is definitely not speculation. The implication is that such use will prop up its value no matter where the whole cryptocurrency market is going, especially when it's going down. Indeed, it is not free from the overwhelming impact that Bitcoin's price dynamic has over all other cryptocurrencies out there, but it still should be less pronounced. And what's more important here, the effect of this impact, or rather lack thereof, can be easily assessed numerically, for example, by using correlation metrics

I partially agree with you. When it comes to utility, Dogecoin is surely one of the top 5 coins, no doubt in that. With over 122B supply in circulation and 1 DOGE transaction fees, Dogecoin is heaven for gamblers and to use for micro-payments. Even I am using DOGE as the primary coin in my under-construction gambling site.

But it's wrong to assume that Dogecoin is developed enough to be considered free from the impact of Bitcoin. When it comes to trading market, Dogecoin is just another sheep in the herd that moves in the same direction as rest of the sheep going. But there is one significant difference between the Dogecoin's chart and the charts of other altcoins and that is the pattern of 'Horizontal Parallel Channel'. If we ignore the pump of June 2017 then we will notice that the value of DOGE keep floating between the closed bracket. Even when the rest of market was crashing like hell, Dogecoin was able to maintain its minimum value which is around 30 sats. This may imply that real utility of Doge do have some impact on its trading value.

Chart:

[deisik]

I think this can even be explained on micro level using simple Marginal Utility basics. Bitcoin isn't even viable at MicroEconomic level because it violates the basic assumption of Marginal Utility of Money being constant as price increase would increase people's marginal utility in money and they would tend to hold it. Moreover with two economic variables of marginal utility in the MU therom I would say that it would cease to exist. People won't get any satisfaction from consumption of utility at all if the utility derived from not spending that money is higher because basic assumption is that everyone is a Rational consumer

I have to admit that I don't quite understand what you wanted to say

Regardless, to see things in their true light, we should take a correct position. More specifically, we shouldn't consider Bitcoin (as well as other cryptocurrencies) as money, or a currency (despite what their generic name suggests). That's probably why you arrive at something impossible as a conclusion or inference. Bitcoin (and other coins) is an asset, and more importantly, a speculative one at that. If you proceed from this assumption (discarding its currency aspect altogether), your conclusion should be consistent with the marginal utility basics

[Kyraishi]

One of the biggest on-going debate about Bitcoin is whether it can be used as currency or is it just a sort of investment? On the micro level, Bitcoin can surely be used as a currency. Since it has value, it can easily solve the problem of double-coincidence of wants by becoming the medium of transaction. But when we consider it at macro level, the story doesn't remain the same. There are several factors come into play when we consider the whole community, the prominent of which is Change in Prices.

I don't agree with you on the micro level here, in my opinion, Bitcoin will never be widely used or accepted for transactions under $50 USD (which is classified as a micro-transaction in my book),  I only really see the potential with it in bigger transactions, and especially overseas transfers.

I agree with your charts though, they are accurate, and it's a decent assumption to make, especially with the rising transaction fees we often see with a more expensive BTC, evident during the 2017 market run.

[ajiz138]

About the volatility of Bitcoin will indeed be a problem when Bitcoin is used as a Currency. Significant price changes make people unwilling to accept payments using bitcoin. I prefer bitcoin as an investment, because buying goods using bitcoin is not very good for me, especially if the price of Bitcoin goes up. This will make doubts sellers and buyers who use bitcoin.

But there are some people who use bitcoin as a currency and pay for goods and services using bitcoin. Being a currency or just an investment depends on the person who holds it.

[mu_enrico]

I don't understand what @teosanru said as well. The term marginal utility is for satisfaction "limit" when someone consumes goods or services, right? It might not be a 100% suitable term for money or assets.

I think the choice of spending now vs. spending later is not based on diminishing satisfaction but based on future value or rational/irrational expectation.