Pricing Bitcoin

As the supply of bitcoin is fixed then pricing is determined by demand.

What drive bitcoin prices up

• Network size.
  The size of the network is related to the size of the audience and the number of people demanding bitcoin. While the network is small compared to the population, the growth would be exponential. When the network approaches scale with the population the rate of growth would slow to practically stop at full penetration. With the network only in the size of millions of people, the 2018 network will still be small and lead to exponential growth. All other factors being equal, an exponentially growing network would lead to exponentially growing prices.

• Publicity.
  The rapid gains in prices lead to more publicity helping to expand the network (beyond network effects) and intensifying the demand and FOMO.

• Non-crypto alternatives are unattractive.
  Opportunity cost, low rate of return, risks for debt based economies, institutionalised corruption and diminished privacy or freedom.

• Demographics.
  The population growth of new generations of digital native favour new approaches with technology and systems.

Things that dampen prices

• Complexity and newness.
  Combination of generational, educational and technical literacy issues which can magnify fear of change from old style financial services. Old style leaders, potentially with vested interest, can also provide concerted voices to support fear and uncertainty.

• Futures markets
  As seen in other markets (like gold and silver) futures markets can allow for a type of infinite supply that could be used to undermine price.

• Legal or regulatory intervention may scare off some participants.
  General fear, loss of government control and the support for established institutions like banks can drive more regulations which will degrade user experience and some of the value of bitcoin such as anonymity.

• Improved alternatives.
  High interest rates, booming economies and new technologies in crypto space can compete with bitcoin. It should be noted that there are several more advanced technologies currently available which have, at times, detracted from Bitcoin demand.

• High prices and volatility undermining confidence of new entrants.

What is the dominant factor

The 2017 bitcoin population is small compared to the complete market of most human beings, arguably not even the early adopter stage. This provides for a massive opportunity for growth in the network leading to higher rates of price rises than previously experienced. This means that while growth curve has been exponential, this is likely to continue until a peak rate of growth is achieved when the mainstream is well engaged. After a peak growth rate, the growth curve would likely to follow a typical ‘S’ curve for adoption with the saturation phase likely years away. The motivation for participation will be fashion and fad in addition to the economic return. The economic return will spark speculative price rises and consequential corrections to pricing more matched to the network size and extent of adoption.