More adoption, higher price please ! …..right?
So we have seen a bit of uncertainty in the market of late focused around the Bitcoin Price and why its not moving higher on news of further adoption; particularly news focused around this recent deal with Dell Inc adoption:
Bitcoin Price Drops Below $600 After Relative Stability
BitBeat: Bitcoin Price – Curiously – Gets No Boost From Dell News
So myself as a decentralized economist that helped design a free market system (Quark) I thought i’d help explain to people why they have not seen the expected desired effect of a higher price with further adoption.
It comes down to a few key parameters and effects that some economists have a hard time getting their head around in reference to Cryptocurrency I will explain both :
- Mining for production – the means and the technology.
- Exponential mining difficulty equation.
Both scary difficult sounding parameters right?
So I am going to explain these so anyone can understand them and thus understand why Bitcoin actually needs bad news not good news for probable further immediate price increases.
Bitcoin is an effective monopoly of production But the monopoly can’t be maintained indefinitely this causes a “catch 22” or “Paradox”
The fact that very few people and corporations control the production of Bitcoins into the market in effect means that Bitcoin is Price controlled.
to explain these misunderstood parameters lets use a traditional means, because without understanding how the monopoly works I can’t explain the “Catch 22”.
Welcome to planet Crypto currency. (explaining difficulty)
On this planet lets say there is a particular element lets call it “liquid Gold” and it is only available in a fixed amount on the entire planet;
But there is an important difference – if one tries to mine this element it affects all the other parts of the element, so in effect all mining location have a relationship.
So at location A you have a “liquid gold” mine, but the difference is on this planet all of the “liquid gold” mines on the planet are linked together and have a relationship with each other.
we have another Mine on the other side of the planet at location B.
The miners at location A start to mine the “liquid Gold” and also the miners at location B.
but due to and advance in technology the miners at location A can extract 100% more than the miners at B now remembering that all mines have a relationship on this planet (because “liquid Gold” is linked all across the planet) this in effect makes mining more difficult for the mine at location B because “liquid Gold” is now harder to extract in proportion to how much better the miner at location A can mine it.
furthermore the hardware and advance of technology is unavailable to many on the planet, and the initial sales of the “liquid Gold” allows the miners at location A to keep this technology monopoly.
the net result is that as long as “liquid Gold” is still purchased by the market the miners at mine A can continue to increase their technology monopoly and drive the other mines effectively out of business.
Bitcoin mining monopoly.
This is in effect the Bitcoin story, the net result is that the market of Bitcoin producers is very small in numbers terms of people, many people talk about “Network hash-rate” or “power consumed” this is a complete misrepresentation of participation.
more power and hash rate does not equal more participant in fact it equals less net participants it equals better technology that fewer people have.
but because of the increase in “hash power” “Computing hash power” this drives difficulty out of reach for the majority of the market just like our example :
“Catch 22” The “Paradox”
So if only a very few people are producing all of the new Bitcoins and a very few produced it before the market knew about it, who decides the Bitcoin price?
the answer is “not the free market” (at the moment) , and here is the catch, because if “Bitcoin” wants further adoption it needs to flow in the free market, i.e the few people holding it need to sell it into the market or that market needs to want to buy it from them at their non market manipulated price.
And a few guys can only buy so many Dell computers, furthermore if the Dell corporation trades the Bitcoin sales back into USD on the open market this will then put downward free market pressure on the manipulated price.
As a functional “money” Bitcoin’s parameters are actually pretty bad, but we can cover that at a later date perhaps.
Bad News is Good news !
So in effect the one sure thing that could save the Bitcoin price is another 08 financial crisis, or a Fiat Bank “Bail in” event – but in this case Quark crypto that floats freely in the free market is just as good; (if not a better) investment as a wealth transfer vehicle.