The Impact of Change in Prices on Bitcoin's utility as Currency - page 2.

teosanru

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Quote from: webtricks on November 09, 2019, 12:49:12 PM

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.

airdnasxela

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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.

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Quote from: Dart18 on November 13, 2019, 09:17:18 AM

Quote from: webtricks on November 09, 2019, 12:49:12 PM

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.

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Quote from: Ayiranorea on November 11, 2019, 03:18:29 PM

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.

Dart18

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Quote from: webtricks on November 09, 2019, 12:49:12 PM

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.

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Quote from: webtricks on November 13, 2019, 03:22:52 AM

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

buwaytress

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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.

Getmon

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Quote from: Ayiranorea on November 11, 2019, 03:18:29 PM

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.

webtricks

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Quote from: avikz on November 11, 2019, 01:30:53 PM

Quote

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.

Quote from: alyssa85 on November 11, 2019, 02:05:03 AM

Quote from: webtricks on November 09, 2019, 12:49:12 PM

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.

Murat

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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.

Ayiranorea

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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.

avikz

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Quote

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!

Quote

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!

I don't see such kind of behavioral trend as an issue because speculation is what keeping this market alive and dynamic. But we will definitely see more use of bitcoin as a payment method only if the price stabilizes!

figmentofmyass

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Quote from: odolvlobo on November 10, 2019, 12:44:48 PM

I consider Bitcoin to be hyper-deflationary currently, and I believe that state will come to an end eventually. Once a saturation point is reached and the price levels out over the long term, people who were previously saving will start spending.

but people tend to spend more as the price rises. doesn't that contradict your theory? it doesn't seem like everyone is waiting for some far-off price plateau. people seem to treat bitcoin like any other speculative investment in commodities or real estate---they hold until the price rises and then they sell. it's pure speculation.

we don't think of real estate investments in terms of deflation, do we?

Wapfika

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Quote from: mu_enrico on November 11, 2019, 11:36:56 AM

This kind of price vs. volume chart, usually used in the trading, or Bitcoin as a speculative asset.

So.. it's interesting to see whether the price movement is unaffected by volume or not, so you can make a case about Bitcoin as a currency or a speculative asset. This needs time series analysis though.

Many insurance and investments companies in my country still not consider crypto good for long term as a retirement fund due to it's volatility. It belongs to as speculative investments that can acquire much better if you already have necessary ways to improve your cash flow or already have passive income from other streams of investment like forex or stock. It will be better for chart 1 as the number of transaction increase the price should also be.

mu_enrico

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I think if we view Bitcoin as a currency, change in price shouldn't affect the number of transactions (chart #1) that much because people will transact regardless of the price. For example, if I'm hungry, I'll buy food. It doesn't matter whether the currency that I use appreciates or depreciates. Also, don't forget about the liquidity preference theory in chart #2.

This kind of price vs. volume chart, usually used in the trading, or Bitcoin as a speculative asset.

So.. it's interesting to see whether the price movement is unaffected by volume or not, so you can make a case about Bitcoin as a currency or a speculative asset. This needs time series analysis though.

webtricks

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Quote from: odolvlobo on November 10, 2019, 12:44:48 PM

I consider Bitcoin to be hyper-deflationary currently, and I believe that state will come to an end eventually. Once a saturation point is reached and the price levels out over the long term, people who were previously saving will start spending.

That's true! The thing is Bitcoin's supply is currently hold by very less number of people, making it highly volatile. As soon as we will reach a point where supply is distributed among much more holders, prices will get stabilize with the daily fluctuation of just 0.05-0.1% and Bitcoin can be more widely used as currency.
However, I fear that the large number of transactions but the limited block size may act as constraint at that point.

Quote from: jseverson on November 11, 2019, 04:28:20 AM

Yup, economics support this. Generally speaking, inflation spurs spending while deflation discourages it. This is also why fiat is inflationary by design.
This might be a tough pill to swallow to some people, especially those who believe that Bitcoin will one day destroy banks and replace fiat, but at the end of the day most people are only really going to use it where it's most convienient; cross-border payments, online transfers, etc. It doesn't necessarily have to be a bad thing though, because anyone can still use it for what they want to use it for.

True that! Bitcoin was never visioned to be used as mainstream currency. It was designed as an alternative to mainstream currency with the additional features like privacy.
Here's what Satoshi have to say about it:

Quote from: satoshi link=topic=https://bitcointalk.org/index.php?topic=532.msg6306#msg6306

The current system where every user is a network node is not the intended configuration for large scale. That would be like every Usenet user runs their own NNTP server. The design supports letting users just be users. The more burden it is to run a node, the fewer nodes there will be. Those few nodes will be big server farms. The rest will be client nodes that only do transactions and don't generate.

Quote from: bytemaster

Besides, 10 minutes is too long to verify that payment is good. It needs to be as fast as swiping a credit card is today.

See the snack machine thread, I outline how a payment processor could verify payments well enough, actually really well (much lower fraud rate than credit cards), in something like 10 seconds or less. If you don't believe me or don't get it, I don't have time to try to convince you, sorry.
https://bitcointalksearch.org/topic/m.3819

jseverson

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Yup, economics support this. Generally speaking, inflation spurs spending while deflation discourages it. This is also why fiat is inflationary by design.

This might be a tough pill to swallow to some people, especially those who believe that Bitcoin will one day destroy banks and replace fiat, but at the end of the day most people are only really going to use it where it's most convienient; cross-border payments, online transfers, etc. It doesn't necessarily have to be a bad thing though, because anyone can still use it for what they want to use it for.

Wysi

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Quote from: Mometaskers on November 11, 2019, 12:03:18 AM

Yes I definitely understand the hesitancy to use it as currency. Haven't experienced being on the seller side but when we have bear markets, we feel bad having to use it to buy less goods. When it's on a rally, we feel that we should be doing something else with it. Me and other users I personally know just end up watching the price, converting some to fiat when the price is good and just using those for purchases instead.

Exactly, This is not limited to yourself but most of us feels the same way and that's the reason bitcoin cannot be used as currency because even when the value is at peak we don't risk to use it for transactions because we know about the volatility and cannot afford to lose if value dump, when we being in this industry from long time are hesitant to use it then how can we expect new comes or those with less knowledge about bitcoin into using bitcoin as currency for their daily uses.

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Quote from: webtricks on November 09, 2019, 12:49:12 PM

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

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.

Volatility will always be a big issue not just with Bitcoin actually but generally with cryptocurrency except for the stablecoins. Many are seeing that this is the biggest hindrance for the future growth of Bitcoin as a currency, making it as more of a store of value in function. Though I have a concern on that: How sure are we that if Bitcoin can stabilize its volatility that people will really be flocking into Bitcoin, adopt it and use it everybody? Is there really a guarantee for that or are we not just making another speculation here?

Generally speaking, volatility has had been the biggest reason why many people bought Bitcoin in the first place. They don't care much about the technology behind Bitcoin or what makes Bitcoin tick in the first place. Speculations was the biggest reason why the ATH in 2017 and can be the same reason why there will be one in 2020. This why volatility can be a two-edged sword, a great advantage and a big disadvantage at the same time.

Maybe it is time to ask ourselves this very important question: How critical is Bitcoin or owning a Bitcoin while living in our modern and hi-tech world? Is Bitcoin providing us something that our lives would be radically different without it? If we are talking about payments or generally currency, is Bitcoin really irreplaceable that making transactions can be so hard without Bitcoin? The honest answers to these questions determine if there is really a big future ahead for this cryptocurrency...

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Quote from: webtricks on November 09, 2019, 12:49:12 PM

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.

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