Answering why prices of bitcoins have been declining recently, having traded near $650 to begin July only to drop to just above $300 earlier this month, Coinsetter CEO Jaron Lukasiewicz recently provided his explanation on Quora as well as posting them on the company’s blog. According to Lukasiewicz, Bitcoin prices are suffering from fundamental principles in the sector which are causing more sellers than buyers to appear in the market.
As noted several times on DC Magnates, Lukasiewicz notes that the bitcoin economy is divided between consumers and merchants/professionals. Consumers include users of wallet providers like Circle, Coinbase, and Xapo, Bitcoin ATMs, as well as investors and speculators. This segment is responsible for driving demand for bitcoins. On the other side of the spectrum are merchants such as Dell and Tiger Direct and bitcoin miners who are often immediate sellers of bitcoins they receive.
The results is that “In order for the bitcoin price to increase, downward selling pressure must be outweighed by net buying demand in the market.” However, Lukasiewicz points out that while merchants experience cost advantages in accepting bitcoins such as decreased fees and lower barriers to accept Payments from buyers from around the world, consumers don’t see those cost savings. (Author’s note: There is the chicken and egg theory that if more consumers would use bitcoins, merchants would reduce prices. However, on the surface, most consumers don’t see an economic impact in using bitcoins, and in fact may view the digital currency as being more expensive due to the costs related in buying them.)
Lukasiewicz also points out another value proposition for consumers preference to credit cards versus bitcoins as “American Express and other credit card companies entice consumers through rewards programs, which are not yet available to people using bitcoin.” Overall, Lukasiewicz envisions that “the bitcoin industry is 2-3 years out from matching credit card companies' value proposition to consumers”, with expectations of “weak price growth until that is resolved.”
So what now?
Over the longer term, Lukasiewicz remains positive about the case for bitcoins, but concluded that price appreciation will be dependent on the industry enhancing the value proposition for consumers versus other payment options. Lukasiewicz does point out that items like remittance do provide existing consumer value, but that there aren’t enough Bitcoin ATMs yet to have created enough consumer adoption to affect prices materially.
Irrational Exuberance
Lukasiewicz is one of the few bitcoin company insiders that has publicly stated that there is a need to have a tempered outlook about the future of bitcoin prices. His explanation comes down to the economics of the market and the current benefits experienced by merchants (sellers) versus consumers (buyers). As him and his firm have Wall Street roots it isn’t surprising that Lukasiewicz is focusing on economic fundamentals.
Overall, Lukasiewicz’s explanation, is part of the dual focus of bitcoins. On one hand it is simply a digital payment solution that provides an economic and technological value versus existing products. As strictly a borderless decentralized payment solution, bitcoins can operate effectively without any price changes and it doesn’t matter if it costs $100 or $1000 to buy one bitcoin. However, on the other hand, adoption of bitcoins has benefitted from the currency’s price appreciation as it generated worldwide interest and the entrance of new players in the market. In this regard, many still view bitcoins like any other asset, and its success is a factor of its price like any stock.
Over the longer term, “the future of money is digital”, as such, regardless of prices, bitcoins are well slated to continue to be an important factor in the evolving world of payments.
