Bitcoin: too much running for the exit?

Having not made divination posts for a while, let’s make a new prediction, that the price of Bitcoin will go down markedly in classic currency terms in the next 3 to 6 months.

Transaction acceptance means net bitcoin selling

The reasoning is pretty simple: one of the main happenings in the Bitcoin world recently has been increased acceptance at legitimate vendors like Dell, Overstock, Expedia (for hotels) and others. Bitcoiners see that as a success and, ironically, some Bitcoin holders see it as doing something of civic value to buy at vendors that accept Bitcoin.

But what happens when someone buys a laptop from Dell with Bitcoin? There is no sign of Bitcoin becoming used in the business supply chain, where it doesn’t really solve any material interesting problem, so Dell will immediately convert the Bitcoins to dollars to pay their employees and suppliers. Indeed one of the reason vendors are accepting Bitcoin is that payment processing intermediaries make that easy by doing it for them and “removing the Bitcoin risk” from the vendor: they price in dollars (or another classic currency) with the payment gateway, and get dollars paid by classic wire transfer.

What happens on the buyers’ side: will people buy Bitcoins to buy Dell laptops? It seems unlikely. Dell is probably more trustworthy than most operators in the Bitcoin ecosystem, and you don’t want anonymity or pseudonymity when buying a laptop: you want them to know your address and deliver the laptop there. So there’s basically no reason to pay using a classic method to get Bitcoin and then use those shortly at a legitimate vendor. So who’s gonna buy Dell laptops with Bitcoins? My guess is mostly people who for some reason or other had accumulated Bitcoins, legitimately or not, and now have an opportunity to spend it on something more useful than Bitcoin t-shirts, and also see it as a “good” thing for the ecosystem.

And then came momentum

As it happens Bitcoin has been on a downward trend since its peak for several months, and has also seen a further boom in “mining” activity. Bitcoin mining, like its real world namesake, is one of those activities which tends to be structurally loss-making as it’s very hard for rational investors not to be outnumbered by innumerate optimists. Volatility and a downward trend may accelerate some of these past optimists giving up on accumulating mining proceeds, and exiting through transactions, which might provide some comfort (product + civic value) even if nursing a net loss.

Raw momentum regardless of mining (“it’s going down because it’s going down”) will also tend to put a further downward pressure, so basically we have a fundamental trend towards sale of Bitcoin created by transaction acceptance, amplified by momentum and mining dynamics.

Absent any new net buyers of Bitcoin, it’s hard to see how it could go anywhere but down on a simple demand and supply basis. It’s hard to think of a source of new net buyers. Most people who may be interested in Bitcoin at this stage — where it has acquired some maturity but is still an emerging underground tech — have probably already jumped in and are sustaining steady-state flows. I just don’t see any new major demand source coming in to offset transaction-driven sales.

Show me the money

So to quantify the prediction for verification, let’s say that BTC/USD will touch US$ 250 (approximately halve in value from now) for at least one day at reputable exchanges before April 1, 2015.

(Disclosure: I have a few pennies on downward Bitcoin bets at shady blockchain betting operator bitbet.us — not a recommended counterparty or investment. Note that if I win I get my payoff in devalued Bitcoins, which, if my fellow gamblers don’t discount that effect correctly, as I expect them not to, will be a pyrrhic victory.)

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