Friday, July 25, 2014

Why Bitcoin Merchant Adoption Is Driving the Bitcoin Price Down

I have made this point several times: The more merchants that start using Bitcoin, the more downward pressure will occur on the price of bitcoins, since merchants who receive bitcoins  are not holding on to them but selling them immediately. In other words, more merchant adoption gives confused Bitcoin fanboys more venues through which to liquidate bitcoins, without them realizing they are doing so.

The Bitcoin price has now broken below $600. Here is Smaulgld, earlier this year when Bitcoin was at $650, discussing the declining Bitcoin price since Overstock started accepting it as a form of payment:
Bitcoin has Dropped over 25% since Overstock Starting Accepting it as Payment

Wider Bitcoin adoption recently has not led to a higher Bitcoin price. In the past three months we have seen an acceleration in the number of merchants accepting Bitcoin, including online retailer Overstock. During this time there has also been a 40% drop in the price of Bitcoin. This is because most of the Bitcoin accepting merchants are also large sellers of Bitcoin as they are not really accepting Bitcoin; they are processing Bitcoin purchases through companies like Coinbase who immediately convert the Bitcoins into dollars for the merchants. It makes sense for merchants today to accept Bitcoin in this fashion as they avoid the Bitcoin fluctuation risk and they can sell merchandise to early Bitcoin adopters sitting on small Bitcoin fortunes that need to spend them before the price falls further.

If merchants don’t require Bitcoin use, no additional demand is created and therefore acceptance of Bitcoin by more merchants will not cause the price of Bitcoin to rise. Indeed additional merchant adoption might accelerate the dumping of Bitcoins and drive the price down.


  1. I don't think it's as clear cut as that. More merchant adoption also means more consumer recognition. Also, merchants seem keen to offer bitcoin related discounts because of the transaction cost savings. Some effects of expanded merchant adoption may drive the price down, and some may drive the price up. There's plenty of complex counter-balance going on.

    Ultimately, over the long term, I can only see the price continuing to rise as the dollar loses its reserve status and ultimately implodes.

  2. "merchants who receive bitcoins are not holding on to them but selling them immediately"

    that's up for debate.

    I know a merchant who keeps 10%. Some may keep more.

    Merchants are people too ;)

    1. A normal merchant takes BTC and converts it into USD immediately. Those merchants that decide to hold on to some BTC are becoming speculators in the process. No sane merchant should do that, unless his merchandise is BTC itself.

  3. Er yeah, seems like a reasonable theory, but remember, those bitcoins are not being "dumped" - like at the wayside - they're being bought by someone else. That means more transaction volume overall and as in a comment above, more merchants = more publicity. Bitcoin getting a bit cheaper isn't a bad thing for public uptake either. At the end of the day mass consumer purchase of bitcoin is what will eventually drive up the price significantly. Nothing else.

  4. Had it been that straight-forward to figure out, we would already have an answer to why Bitcoin value has gone down like this. And since we’ve all seen the downfall to occur with Overstock beginning to accept Bitcoin, I am sure it’s gonna take time to recover.

    One of the biggest factors that we can assume to create problems in Bitcoin’s way to regrowth is no extra demand getting created. Obviously, even if more and more merchants accept Bitcoin again, it is not going to revive with such low value.

  5. I agree with RW, the author of the post. It should be perfectly obvious that when a merchant "accepts" bitcoin via a third-party payment processor like Coinbase or Bitpay, this act creates downward pressure on the price as the payment processor immediately sells those bitcoins to raise fiat for its merchant client.

    The problem in communicating this fact, I've found, is that people are unable to isolate in their minds the different market forces that affect the price of bitcoin. They argue for example that merchant adoption in the sense described above, and the "spending" of bitcoin at such merchants, also creates positive publicity for bitcoin and thus helps the price. That is true. It does not follow, however, that the negative pressure is not also present. There exists no economic law or principle which states that the negative pressure cannot offset and even exceed the positive pressure. To say otherwise is just wishful thinking.

  6. Merchants can be speculators as well. Its not like anyone wants to keep the dollar anymore anyway.Wait until they do something like a reset with the dollar to pay off some of our debt. Your going to lost at least 1 3rd of your money when it happens and bitcoin will definitely be well over 1200. It will boom. So some of these merchants also look at the economy and I am sure put some off to the side just like the rest of us. As long as more businesses get into bitcoin its good for bitcoin. The more popular the better. This is a nice dip its around 400 buy it up. Its already shot to 1200. And its more popular then it was before so its a great buying opportunity imo.

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