Bitcoin merchant adoption – the double edged sword
Merchant adoption low, early-adopter hype and Mt Gox
In the recent months the Bitcoin price has been trending downwards leaving many Bitcoin enthusiasts wondering why the price has decreased. There has been little “bad” news about Bitcoin except the BitLicense regulations coming from New York. Most of the news has been good with many electronics realtors such as Newegg, Overstock, TigerDirect, and Dell now accepting Bitcoin for payment. However, it is precisely because the merchants have been accepting Bitcoin that the price is trending downwards.
Late last year, the price of Bitcoin had pressure upwards, and was rising frantically in October/November time frame. At one point prices on the Bitcoin exchange Mount Gox where trading about $200 higher than other Bitcoin Exchanges. It was discovered there was a bot, since named the Willy Bot which was pushing the price higher by periodically putting in large buy orders on the exchange. This WordPress blog named The Willy report exposed the scandal in full: The Willy Report
Enter Coinbase and BitPay
Since this bot was exposed and the Mt Gox exchange dissolved, there is no longer a consistent driver of upwards pressure. There are more Bitcoin sellers than Bitcoin buyers right now, and one of the main reasons is merchant adoption. Envision a simple scenario: You buy a computer from Dell.com with Bitcoin and the price is 1 Bitcoin. That Bitcoin gets sent to Dell, and they manage their Bitcoin account through Coinbase. Dell forwards your Bitcoin onto Coinbase, and Coinbase sends back to Dell dollars. Then Coinbase takes this Bitcoin and sells it onto the market.
The result is that you buying something with your Bitcoin has resulted in that Bitcoin being placed onto the Coinbase market place. There are current laws in place which make it unclear if a business is even allowed to hold a Bitcoin on its balance sheet. For this reason, companies will not take the risk of holding Bitcoin and instead prefer to through a company like BitPay or CoinBase to do Bitcoin transactions. Saying that Dell accepts Bitcoin does not tell the full story, since Dell never really deals with the Bitcoin, it might be more appropriate to say you can pay Dell with Bitcoin, and then that Bitcoin is immediately sold back to the market.
In the short term this constant selling pressure may appear bad to a long term investor in Bitcoin. However, it is increasing the fundamental strength of Bitcoin as well. In the investing world it might be comparable to a company re-buying its own stock. Merchant adoption allows early Bitcoin investors to take profits by buying electronics or plane tickets. It also increases the supply of Bitcoins to be sold, which makes the market more liquid. The more liquid the market for Bitcoin, the better it is. If there are too many coins to be sold, or too many coins to be bought it creates either a boom or bust cycle. One of the main criticisms of Bitcoin has been that it is too unstable.
Stronger Bitcoin in the long-run
The main point is that merchant adoption of Bitcoin is pushing down the price currently, but is a good development for Bitcoin in the longer term. The current price point may present some opportunities, as people who wanted to spend their extra Bitcoins may have already done so. With more merchant adoptions, Bitcoin can be used to pay for so many different items now, and the criticism that Bitcoin cannot buy anything real has been nullified.