Under What Circumstances Would Bitcoin Adoption Decrease its Value?

2018-10-9 20:14

Will Bitcoin Adoption Decrease its Value?

A mathematical concept, called the Quantity Theory of Money, suggests that mass adoption of bitcoin could decrease its value – even if one of the values is fixed at 21 million.

The equation is M(V) = P(Y). M is money supply, which is the amount of money in the economy. V is velocity, which is the rate at which money is spent or how many times a single unit of money changes hands. P represents prices and Y represents production, or real GDP.

With traditional money, it is easy to see how the formula works. However, when it comes to bitcoin, many are wondering if the equation is even applicable because M is fixed at 21 million. However, the counter to that is that when V rises, P will also rise. An increase in prices in relation to bitcoin’s value means that the overall value will decrease.

Recently, there has been a massive push to adopt bitcoin. For example, William Peaster wrote a summary of forces that are driving the mass use of bitcoin and cryptocurrencies. Further, Coinbase’s CEO Brian Armstrong joined in the discussion by arguing that over ten percent of the global population will be using bitcoin in five years.

Those who are pushing for mass adoption of bitcoin may not be considering that if mass adoption does occur, then perceptions concerning bitcoin’s scarcity can be negatively impacted. If people don’t view bitcoin as something scarce, then the price could be negatively impacted. Ethereum’s co-founder Vitalik Buterin discussed the subject, stating “I think there’s too much emphasis on BTC/ETH/whatever ETFs, and not enough emphasis on making it easier for people to buy $5 to $100 in cryptocurrency via cards at corner stores. The former is better for pumping price, but the latter is much better for actual adoption.”

Right now, those who hold bitcoin are shirking from spending it because first, it is difficult to spend. Second, they are rationally holding onto the asset they believe will have enhanced value in the future. Such hoarding practices create a false perception of scarcity, which thus makes bitcoin more valuable.

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