Do bitcoin accepting businesses inherently add value to the currency?

[Topazan]

I've only made a limited study in economics, so I'm a little confused here.  I'm hoping someone with a better understanding can clear this up for me.

Until recently, like many here apparently do, I assumed that as more businesses started offering goods and services in exchange for bitcoin the value would rise.  After all, the value in any currency is in what you can buy with it, and therefore increasing the size of the economy should increase the value of the currency.

Recently, though, it occurred to me that you can already buy pretty much anything with bitcoin.  How?  By exchanging it for fiat.

After all, isn't this what many companies will do anyway?  They may accept bitcoin as a payment option, but some time after you give it to them, they'll exchange it.

So, are bitcoin businesses really that important to giving value to bitcoin?  If not, then what does give it value?  Like I said, I hope someone can clear this up for me.  Thanks.

[finkleshnorts]

As more and more businesses start accepting btc (then more, then more), the need to convert to fiat decreases. Using bitcoin cuts out the middlemen, namely governments and all bank-related entities. Yes, initially all businesses will convert to fiat. However, if businesses A and B accept Bitcoin, then A can by it's supplies from business B with its earned bitcoin. there is no middle man to take a cut. That's the allure.

Edit: it just occurred to me that you can buy anything with anything, as long as you convert it to anything that is an accepted medium of exchange

[Topazan]

Well, that may improve bitcoins appeal as a payment service, but any affect on the price of a single BTC would be indirect.  The price will probably go up as bitcoin is more widely adopted, but it seems like it's based on speculation, hoarding, and demand.  All of these things would likely increase if bitcoin became more widely accepted, if only because it would be more visible.

I'm trying to figure out what, if any, effect the businesses themselves have on the price.  Whenever the price of BTC spikes due to media attention, people say it's a bubble, but what else is there to give BTC value besides attention?

[justusranvier]

In the long run the use of a currency as a medium of exchange is the only thing that gives it value.

[kangasbros]

Not all companies are exchanging all the received bitcoins to fiat. For example, some services (paysius/bit-pay?) allow you to setup percentage % of which income is kept in bitcoins, and which is converted to fiat.

If you are bitcoin-enthusiastic merchant, I guess good strategy would be to convert to fiat so that taxes and costs are covered, but profits are kept in btc.

[Meni Rosenfeld]

Let's try to clarify to some terms.

Speculation: Buying bitcoins for the sole reason that you believe the exchange rate will go up and that you will profit from it. (You can take a position on BTC without buying bitcoins, and you can speculate negatively, but let's leave that).

Speculative value: The effect on the Bitcoin price caused by people speculating.

Fundamental value: The price Bitcoin would have in an equilibrium in which nobody speculates.

Hoarding: There is no such thing, it's a description of a person's mentality rather than any action or underlying metric.

Demand: People wanting bitcoins over the equivalent amount in a different currency with the current exchange rate. Demand can be either speculative (due to anticipation of appreciation) or fundamental (because Bitcoin has superior properties), or a combination of both.


Now, speculation is its own thing and is affected by many factors, but we'll put it aside since your question was about the fundamental value. To understand what effects it, we will picture a world in which nobody can profit or lose from changes in the BTC exchange rate. In such a world, what would the price be?

To find it we can use two simple invariants - the total purchasing power of all bitcoins is equal to the number of bitcoins times the purchasing power of a bitcoin, and the total purchasing power of all bitcoins is equal to the sum of the purchasing power held in bitcoins by all Bitcoin owners.

Since converting between Bitcoin and fiat has exchange costs, one wouldn't convert between them on the spot for every transaction; he would keep a certain amount of each, where the amount scales with how much he plans to use. If there are more businesses accepting Bitcoin directly (with a discount due to no fees), he'll spend more purchasing power in Bitcoin form, and thus hold more purchasing power in bitcoins at any given point. This applies both to people who have a Bitcoin income and will not be as quick to sell it, and people with a fiat income who will want to convert it to bitcoins to be able to enjoy discounts and all the other Bitcoin features.

If you apply this to every individual, and then use the two invariants, you'll find that the more businesses are accepting Bitcoin, the higher the fundamental value of a bitcoin will be.

This is a stable equilibrium because every disruption will be corrected. If the price becomes higher, people with bitcoins will find themselves with more Bitcoin purchasing power than they need, so they will sell some, lowering the price. If the price becomes lower, people will sell less to make sure they have the Bitcoin purchasing power they need.

[kangasbros]

Also, one difference is that if you convert BTC to fiat and then pay with fiat, you are doing the conversion work and paying the conversion fees. If the merchant accepts BTC directly, you don't pay the fees.

[cbeast]

I don't think markets singularly add value to BTC. It is the overall acceptance of its usefulness that will drive Bitcoin price. Primarily, it will be as a savings vehicle that will cause people to hoard it and drive up the value. Markets will open to BTC as the only way for people to get their greedy little hands on them.

[realnowhereman]

So, are bitcoin businesses really that important to giving value to bitcoin?  If not, then what does give it value?  Like I said, I hope someone can clear this up for me.  Thanks.

Start with an exchange.  Someone posts a bid offer; they will pay $6 each for 1000 BTC.  That offer sits, and props the price up over a volume of 1000 BTC.  The price cannot fall lower than $6 without the volume being at least 1000 BTC.

Imagine now that all the exchanges group together making one giant virtual order book of bid offers (arbitrage is what makes this virtual order book in reality).  The total volume might be 100,000 BTC to get to $6.

What if we add in the other currencies, but we pretend they are in dollars?  Even more volume to $6.

All that volume represents part of the bitcoin economy.

Now imagine a car salesman is willing to sell you a second hand Suzuki for 1000 BTC.  You can think of that as being a bid offer of one thousandth of a Suzuki over a volume of 1000 BTC.

That Suzuki can go on our virtual order book too.  As can all the baklava, alpaca socks, lap dances, etc on offer at any one moment.

They all represent someone saying "I believe a bitcoin is worth X".  The more people that say that, the more reliable that statement becomes and the more robust the price and bitcoin economy are.  ("robust" here meaning "robust against someone who does not think that")

[Stephen Gornick]

So, are bitcoin businesses really that important to giving value to bitcoin?

Money, just like electrons, flows through the path of least resistance.

If your revenue or income is in the form of bitcoins, then cashing out to buy something using fiat is friction (resistance).  So then when you spend using bitcoins, the next person's revenue is in bitcoins.  And they have that same desire to avoid the friction by using the bitcoins for spending rather than cashing out to fiat.

So there ends up being a multiplier effect.  The longer the friction can be avoided means a longer period that those bitcoins are not available for sale on the exchanges.

And that is why not just having businesses accept bitcoin is important, but that it is seen as a method with less friction (either in a greater value for the money, or in convenience.

[Realpra]

So, are bitcoin businesses really that important to giving value to bitcoin?  If not, then what does give it value?  Like I said, I hope someone can clear this up for me.  Thanks.

Each conversion costs a fee, even if to other crypto currency as the sellers try to hedge their risk. (Buy/sell rates are never the same = a cost).

In other words the real value added is cutting out the middlemen increasingly more.

Once the process is completed all those fancy banker buildings, cars and their hot mistresses will be up for grabs.

Tits for everyone! Value explained?

[Dansker]

Let's try to clarify to some terms.
...
Demand: People wanting bitcoins over the equivalent amount in a different currency with the current exchange rate. Demand can be either speculative (due to anticipation of appreciation) or fundamental (because Bitcoin has superior properties), or a combination of both.
...

I would like to challenge your definition of demand. It is not only representative of the will to exchange a different currency into BTC, but also those who want bitcoins by other means: For example using the "get free bitcoin" sites, or those who sell things and ask for only BTC.

This will also lead to an increased demand for BTC.

This is particularly true in the case of the "free bitcoin" sites, who would not be able to pay out pennies or dimes since the transaction costs and the administration trouble on both sides of the table would far outweight the payouts.

[hazek]

After all, the value in any currency is in what you can buy with it,

Mistake. The value or price is determined by supply and demand for that currency which in turn part of it gets determined by what other goods people are willing to part with in exchange for the currency.

Bitcoins get value by having valued properties and by having a valued utility of those properties.

[niko]

I can use BTC perfectly fine to purchase goods and services, and to transfer value internationally (where exchanges exist) regardless of the "value" (that is, exchange rate to and from government fiat). What sometimes interferes with this is not the supposedly low value, but volatility. I wish for a stable price, not necessarily high price. Wider acceptance would arguably lead to a deeper and more efficient market, and less volatile exchange rates (or less volatile prices expressed in BTC if you prefer to put it that way).

Speculative use implies wishing for a volatile price that I somehow can predict. Good luck with that, unless you have insider information and/or means to manipulate the market, in which case you don't need luck.

Store-of-value use again implies its own set of wishes - a steady increase in exchange rate, and safe long-term legal/regulatory prospects.

Can't have it all.  Am I missing anything here?

[Topazan]

Well, thanks everyone.  I think I have a clearer picture now.

[cbeast]

Well, thanks everyone.  I think I have a clearer picture now.

There is a lock thread option at the bottom if you are done using this thread. Please turn off the lights before you go. Have a nice day! 

[Fjordbit]

Very simply, yes. The people who are willing to accept bitcoin for services or products are what is driving the value for the currency. This does include be blackmarket, which is reliant on bitcoin now, but every legitimate business adds to the value. The essential point of the value is that the desire to exchange to fiat must overpower the desire to exchange to bitcoin. Part of this comes in the trades that occur. When these trades occur, there is, on average, a small different between the buy and the sell of the bitcoins which results in value being injected into the trade. Overall, in the legitimate world, it is apparent that businesses are accepting of 2% of the trade going to the transfer system, but typically it is much less in a bitcoin transaction. Actually, the risks to the seller addressed by irreversibility make it such that many sellers tolerate up to a 5% discount on bitcoin transactions. This further adds to the value of the currency.

[Topazan]

Ok, thanks again, and good night.