Topic: Elasticity and inelasticity of bitcoin's supply and demand - page 4. (Read 4732 times)
I think there are few other scenarios which I think can also add up to the demand part. For instance, right now we still have about 6-7 months before the halving occurs so what if let's say a service or bitcoin infrastructure (for example money remittance business) were to be developed within this time span that sudden causes demand to explode exponentially, it would change everything. Whether the halving kicks in or even before that happens, anything is still possible.
There are some classes of users you overlooked.
Demand:
New users buying bitcoins at any price.
Supply:
If Joe Schmoe is buying bitcoins at any price for remittance, then someone is also selling an equal amount at any price. In short, there is also a class of users who generally sell them immediately at any price.
Merchants accepting bitcoins are immediately selling them for local currency.
People selling bitcoins at any price because they need the money.
Early adopters selling at any price because they can.
Demand:
New users buying bitcoins at any price.
Supply:
If Joe Schmoe is buying bitcoins at any price for remittance, then someone is also selling an equal amount at any price. In short, there is also a class of users who generally sell them immediately at any price.
Merchants accepting bitcoins are immediately selling them for local currency.
People selling bitcoins at any price because they need the money.
Early adopters selling at any price because they can.
Interesting write-up based on your observations, but the conclusions aren't particularly meaningful:
As far as the halving goes, it seems more people than not (based on what I've observed on these boards) expect that the halving will result in a rise in price. If this is the case, you should expect the bulk of the effect of the halving to be priced in before the actual halving occurs, not after.
1. Bitcoin has a floor but practically no ceiling. But it's impossible to calculate where the floor is. True of literally any asset. The floor of any asset is 0 and the ceiling is hypothetically infinite.
2. The effect of the halving really depends on market sentiment at the time of the halving. It could be large or insignificant. The halving could be a significant event but it could also be an insignificant event. This is a truism.
2. The effect of the halving really depends on market sentiment at the time of the halving. It could be large or insignificant. The halving could be a significant event but it could also be an insignificant event. This is a truism.
As far as the halving goes, it seems more people than not (based on what I've observed on these boards) expect that the halving will result in a rise in price. If this is the case, you should expect the bulk of the effect of the halving to be priced in before the actual halving occurs, not after.
Three comments
1. My conclusions become more useful as we approach the halving. If the price still seems to be scraping along in the lower to mid 200s or lower in Spring 2016, then I'd be excited about the halving. If the price starts rising significantly before the halving ("pre halving hype"), I'd be more likely to sell into the halving or even before it. Here in Oct. 2015, it's too early to judge.
2. Most of the people who will be involved in the next big rally don't even know what a halving is. They don't own any bitcoin right now. If there's a truly large pre-halving hype, it will attract newcomers. If the rally smaller and more incestuous (which we can measure in some ways by looking at trade volume, forum statistics, reddit subscriptions, etc) then I agree that it would be priced in.
3. The elasticity is important because when supply falls and demand is inelastic, price rises in a non-linear fashion. So if the supply of oil drops 10% because of a war, we don't just see a 10% rise in the price of oil. We sometimes see a doubling in the price of oil because of a small change in the supply. So another (hidden) conclusion I have come to is that the halving could actually have a very large effect on the price if pre-halving sentiment is very bad and we are scraping along the bottom. But I'm doubtful that this will happen because the halving has been so hyped.
The most likely outcome, IMO, is that we begin with an incestuous pre-halving hype and start rising in anticipation of the halving.
Interesting write-up based on your observations, but the conclusions aren't particularly meaningful:
As far as the halving goes, it seems more people than not (based on what I've observed on these boards) expect that the halving will result in a rise in price. If this is the case, you should expect the bulk of the effect of the halving to be priced in before the actual halving occurs, not after.
1. Bitcoin has a floor but practically no ceiling. But it's impossible to calculate where the floor is. True of literally any asset. The floor of any asset is 0 and the ceiling is hypothetically infinite.
2. The effect of the halving really depends on market sentiment at the time of the halving. It could be large or insignificant. The halving could be a significant event but it could also be an insignificant event. This is a truism.
2. The effect of the halving really depends on market sentiment at the time of the halving. It could be large or insignificant. The halving could be a significant event but it could also be an insignificant event. This is a truism.
As far as the halving goes, it seems more people than not (based on what I've observed on these boards) expect that the halving will result in a rise in price. If this is the case, you should expect the bulk of the effect of the halving to be priced in before the actual halving occurs, not after.
Demand:
1) My experience as a seller on localbitcoins.com tells me that there is a baseline daily demand of bitcoin coming from people who are price-agnostic such as Joe Schmoe who is buying $2000 worth of bitcoin per day for.. something. Maybe remittances. I never ask. But I will tell you that every day he needs $2000 worth of bitcoin no matter what the price is. He doesn't care what the price is. This component of total demand, measured in USD, is inelastic.
2) The second big component of bitcoin's demand is demand from people who are speculating. If bitcoin is in a downtrend and the market is pessimistic this demand can easily dry up to almost nothing. Speculators can take their money and buy some other asset. If everyone is super optimistic about bitcoin, then this demand can skyrocket thousands and thousands of percent and has practically no ceiling. This component of the total demand is extremely elastic.
Supply:
1) There is a fixed supply schedule. Currently, roughly ~3600 coins are created per day in the form of block rewards. Miners choose whether or not to sell part of this, all of this, or none of this. But the maximum amount of new bitcoin that can be put on to the market per day from miners has a ceiling of 3600 coins. If a miner keeps his bitcoin for more than 24 hours or a week after he mines them, he becomes no different from a speculator. So although there's a fixed supply schedule, this component of the total supply is elastic because miners choose whether or not to put mined coins on the market. They can choose to be speculators.
2) Speculators are the second big component of supply. Most bitcoin lays dormant at any given time and most bitcoin are distributed between a small number of big holders. The amount that can move onto the market on any given day from speculators is absolutely enormous. 15 million coins can be put up for sale tomorrow. (In reality, this never happens. Even during the bubble that would've made Satoshi a billionaire and Roger Ver a quarter-billionaire, we didn't see the dumps. Likely because these holders are too smart to dump all at once and suffer extreme slippage.) In any event, this component of bitcoin's supply is extremely elastic.
In the end, the supply is totally elastic and the demand is partially inelastic. We have two extreme scenarios:
1) The price is bouncing along the price floor created by price-agnostic Joe Schmoe because sentiment is very low and miners are selling everything they mine. Speculators are heavily shorting and selling. (It's impossible to calculate what the price floor is, but there is some price floor created by inelastic demand from Joe Schmoe.)
2) When sentiment is very high, we have the supply of coins from miners drying and the supply of coins from speculators also drying. It's hard to get coins at any reasonable price. Speculators borrow heavily to buy.
The Halving:
The next question is what should happen during a halving? It depends on which situation we are closer to. If we are near the floor created by inelastic demand, we would expect the halving to have a big impact. If most mined bitcoin are being sold, and shorters are as short as they can get, then the supply will drastically be reduced when miners have only half as much coin to sell.
But if the price is high and sentiment is high, then the change in supply might be negligible because the supply of coins from (greedy speculating) miners would already be low. It cannot go negative.
Conclusion:
1. Bitcoin has a floor but practically no ceiling. But it's impossible to calculate where the floor is.
2. The effect of the halving really depends on market sentiment at the time of the halving. It could be large or insignificant.
1) My experience as a seller on localbitcoins.com tells me that there is a baseline daily demand of bitcoin coming from people who are price-agnostic such as Joe Schmoe who is buying $2000 worth of bitcoin per day for.. something. Maybe remittances. I never ask. But I will tell you that every day he needs $2000 worth of bitcoin no matter what the price is. He doesn't care what the price is. This component of total demand, measured in USD, is inelastic.
2) The second big component of bitcoin's demand is demand from people who are speculating. If bitcoin is in a downtrend and the market is pessimistic this demand can easily dry up to almost nothing. Speculators can take their money and buy some other asset. If everyone is super optimistic about bitcoin, then this demand can skyrocket thousands and thousands of percent and has practically no ceiling. This component of the total demand is extremely elastic.
Supply:
1) There is a fixed supply schedule. Currently, roughly ~3600 coins are created per day in the form of block rewards. Miners choose whether or not to sell part of this, all of this, or none of this. But the maximum amount of new bitcoin that can be put on to the market per day from miners has a ceiling of 3600 coins. If a miner keeps his bitcoin for more than 24 hours or a week after he mines them, he becomes no different from a speculator. So although there's a fixed supply schedule, this component of the total supply is elastic because miners choose whether or not to put mined coins on the market. They can choose to be speculators.
2) Speculators are the second big component of supply. Most bitcoin lays dormant at any given time and most bitcoin are distributed between a small number of big holders. The amount that can move onto the market on any given day from speculators is absolutely enormous. 15 million coins can be put up for sale tomorrow. (In reality, this never happens. Even during the bubble that would've made Satoshi a billionaire and Roger Ver a quarter-billionaire, we didn't see the dumps. Likely because these holders are too smart to dump all at once and suffer extreme slippage.) In any event, this component of bitcoin's supply is extremely elastic.
In the end, the supply is totally elastic and the demand is partially inelastic. We have two extreme scenarios:
1) The price is bouncing along the price floor created by price-agnostic Joe Schmoe because sentiment is very low and miners are selling everything they mine. Speculators are heavily shorting and selling. (It's impossible to calculate what the price floor is, but there is some price floor created by inelastic demand from Joe Schmoe.)
2) When sentiment is very high, we have the supply of coins from miners drying and the supply of coins from speculators also drying. It's hard to get coins at any reasonable price. Speculators borrow heavily to buy.
The Halving:
The next question is what should happen during a halving? It depends on which situation we are closer to. If we are near the floor created by inelastic demand, we would expect the halving to have a big impact. If most mined bitcoin are being sold, and shorters are as short as they can get, then the supply will drastically be reduced when miners have only half as much coin to sell.
But if the price is high and sentiment is high, then the change in supply might be negligible because the supply of coins from (greedy speculating) miners would already be low. It cannot go negative.
Conclusion:
1. Bitcoin has a floor but practically no ceiling. But it's impossible to calculate where the floor is.
2. The effect of the halving really depends on market sentiment at the time of the halving. It could be large or insignificant.
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