Sunday, May 8, 2011

Bitcoin Price Deflation

Deflation in the bitcoin economy has been significant in the last month. Prices of goods and services have halved almost across the board. The rapidly changing price of bitcoin has led to challenges for merchants. It has also paved the way for profit for early adopters. We will discuss steps that merchants and customers can take to minimize their risk due to currency exposure.

Merchants who accept bitcoin are in a predicament. If they set a bitcoin price it tends to be out of date within a day or two. The dollar price of the good or service becomes so high so fast that people won't want to buy the product. At the same time merchants are worried about a sudden drop in the price of bitcoin back to former levels, which makes it difficult to lower the price to make up for the increased traditional currency price of bitcoin. These same issues cause problems on the buyer's side.

One way to guard against the rise in the price of bitcoin is to keep some on hand. This goes for merchants as well as consumers. If merchants hold on to bitcoins they accepted as $1 for goods, then they have hedged against a rise in price to $2, and confidently lower their prices guarded against a fall in the price of bitcoin to previous levels. Also consumers that know that they will want to buy products for bitcoins in the future can buy them early also guarding against a rise in the price in the future.

The good news is that as the market cap increases one should expect the percentage change of the price of bitcoin to be less dramatic. If all of a sudden someone decides to spend $100 on bitcoin then they can only buy around 27 bitcoins today while that may have bought 125 bitcoins a month ago. A rising price in bitcoins means that any individual will have less of an effect on the price of bitcoins with any given purchase. This past month we have seen the market cap grow from $5 million to $22 million. Without a dramatic flux in the amount of new users we should see the price be a bit more stable. There is speculation that on Monday night when the difficulty increases there will be a small rise in traditional currency price of bitcoin.


Anonymous said...

I don't listen to economic speculation from those who haven't taken the time to learn their homonyms.

Anonymous said...

Our merchant pricing strategy for Bitcoin is to link it to the current Bitcoin exchange rate at time of order, but minus a discount for the customer to retain an incentive and cover some volatility.