A Quantum Immortal

An opinion I’ve heard recently from several angles is this:

As more and more business adopt Bitcoin (Dish.com, Newegg, Overstock etc.), the value of Bitcoin today “should have been higher” than the current $480. One theory behind the fact that Bitcoin hasn’t increased nine month and is still down from its all-time high of $1200, is that new businesses adopting Bitcoin is actually bad for the price. It goes something like this:

New businesses accept Bitcoin, but convert everything to cash. The added sell pressure when these businesses sell their coins decreases the price of bitcoins.

I call bullshit.

I agree that most businesses that adopt Bitcoin sell 90-100% of their coins.

However, in my opinion that does not translate into any downward pressure whatsoever. To understand why, you need to look at the motivation of people who are using their coins.

If the only way people could cash out of Bitcoin was to dump them on stores in exchange for products and services, I would agree with this theory – people would have been waiting for any chance to sell, and now that there are more and more chances to cash out, they do it. However, that’s not the reality.

In most countries there have exited for years now multiple legitimate ways of cashing out bitcoins to fiat, ranging from OTC/Local Bitcoins to exchanges to dealers. If there are liquidity issues in some countries, it’s for cashing out large sums of money … for small sums you can always find a local trader to do a cash deal.  Any ‘new liquidation venue’ effect that can possibly be from a new store that starts accepting Bitcoin is far less than the positive effects of both the P.R, and the actual added utility given to all Bitcoin users by each new store.

A model I like to think about Bitcoin’s network effect is a three-fold one. Very crudely, you can think of this network effect as a multiple of three factors, U x B x G – for Users, Businesses, and Governments. Bitcoin emerged in 2009 a a purely user currency … it took until 2010 for the first pseudo-retail transaction to happen, and until 2011 for the first brick-and-mortar business to accept Bitcoin. Each new Bitcoin user adds incentive for businesses and governments to support it. Each new business attracts users and regulatory attention. New regulation, if it’s done right, makes it easier and safer for users and businesses.

So, every new business increases B, which has a huge effect today on adoption since U is pretty big (in the millions+) and G is progressing nice and steady. This positive effect of business adoption certainly outweighs any possible sale/liquidation pressure.