Bitcoin

Authors: Anna, Alisa, David & Preslava

This article is designed to analyze the cryptocurrency market from an economical perspective during the period from 2018 to 2022 with several instances from other timelines.

Economics & Public Policy

Equilibrium

Supply Shifts

While bitcoin supply is extremely transparent, bitcoin demand is rather opaque. That said, there are a few quantifiable items that we do know about bitcoin demand. First, we have a pretty good idea of the number of bitcoin transactions performed each day. Secondly, and more importantly, it appears that fluctuations in bitcoin transaction costs play a major role in determining price corrections. For example, the number of transactions stopped growing in 2012, about one year before bitcoin’s 2013 peak and bear market. It began to rise again in 2014 before bitcoin prices began to recover in earnest but have been stagnating since the end of 2016, perhaps foreshadowing the recent correction.

Bitcoin’s demand and supply are both considered perfectly inelastic. The reason is very simple but before that, it is very important to understand how bitcoin price moves and how bitcoin mining works. First thing first, bitcoin has its ultimate quantity of supply which is known by every buyer/trader/investor, which is only 21 million of bitcoin. Meanwhile, there are around 18 million bitcoins in circulation. How then does the quantity of circulation go up? It depends on the bitcoin miners, as bitcoin miners contribute their computers’ GPU and electricity to verify the transaction among the decentralized network, in return, they will be rewarded with bitcoin from the quantity that is not in circulation (hence the quantity of the circulating bitcoin goes up). In the long term, the rewards decrease, while each block is formulated the less the miners can earn.

Published on: 22nd of March 2022 Publisher: Olga Larina

Demand Shifts

The supply inelasticity explains in large part why bitcoin is so volatile. Items with inelastic supply show a greater response to demand shifts than items with elastic supply. The same is true of demand: the more inelastic the demand, the greater the price changes in response to small fluctuations in either supply or demand. Bitcoin’s limited and highly inelastic supply is also a major factor driving its price appreciation, a rise so spectacular that it can only be appreciated when seen on a log scale. In bitcoin’s first four years, supply grew by roughly 2.5 million coins per year. Even then prices were rising as the user community grew. Since then supply has continued to grow but the pace has slowed substantially while demand has occasionally dipped, even on a year-on-year basis. Bitcoin’s limited supply and soaring price make it difficult to be used as a medium of exchange outside of the cryptocurrency space.

Cryptocurrencys' Impact on the Global Economy

The relationship between bitcoin prices and transaction costs is even more compelling. This third spike in transaction costs may be closely related to the recent correction in bitcoin prices as high transaction costs may play a role in causing demand for the cryptocurrency to wither. We are not suggesting that bitcoin prices are a function of trading costs or vice versa; however, there is an association between the two with mutual feedback loops. When bitcoin prices rise, eventually transaction costs appear to rise as well. When transaction costs reach levels that market participants can no longer bear, the price of bitcoin often corrects. A decline in prices puts downward pressure on transaction costs which, at least in the past, allowed for another bitcoin bull market once they had corrected to lower levels.

Bitcoin Price in Relations to Costs

Impact of Global Economic Events on Bitcoin Price

GEPU - Global Economic Policy Uncertainty BCP - Bitcoin Price

Since the moment of Bitcoin was created, it was always considered the legitimate cryptocurrency which is leading the market now. Bitcoin works as an anchor of the market. To be more specific and clear, bitcoin itself can be considered as important as the s&p 500 to the entire stock market to the crypto market. When the price action rises, most of the other crypto currencies' prices will go down. Same as the price goes opposite.

Perspective 1: Bitcoin itself

Perspective 2: Market competition

Ultimately, it is also essential to consider the external factors which have been very influential to Bitcoin price actions. Which are the political decisions and ongoing events. Even though in 2022, many countries have started to legalize bitcoin as legal tender, there are still not many regulations regulating bitcoin and the entire crypto market.

Perspective 3: External factor

Perspective 4: Retail investor (Fomo)

The existence of forks in bitcoin serves to modify some of our intuitions on supply. That is, while bitcoin’s supply is fixed, the supply of cryptocurrencies is not. Indeed, rising bitcoin prices incent bitcoin forks. This makes a lot of sense but it does complicate the analysis as it is a reminder that one should not look at bitcoin in isolation but as an anchor for the whole cryptocurrency space.

What will happen with the Revenue and Profit of One Player in this Market after the Indicated Shifts?

Uptrend’s price action (Firms & Organizations Individual player, Retail investor, Long term holder & Trader) Downtrend’s Price action (Trader & Long term holder) Bitcoin Sideways Price (Long term staking holder)

When Bitcoin is generated profit from firms & individuals as an investment there are several factors to consider at the same time. But in this part when the demand & supply shift there are three kinds of situations to be taken into consideration which are Uptrend’s price action, Downtrend’s price action & Sideway price action. And there are the followings:

Khan, K., Sun, J., Derindere Koseoglu, S. and Rehman, A., 2021. Revisiting Bitcoin Price Behavior Under Global Economic Uncertainty. SAGE Open, [online] 11(3), p.3-6. Available at: <https://journals.sagepub.com/doi/full/10.1177/21582440211040411> [Accessed 21 March 2022].

Liu, Y., Tsyvinski, A. and Wu, X., 2019. COMMON RISK FACTORS IN CRYPTOCURRENCY. [online] Massachusetts: National Bureau of Economic Research, pp.15-22. Available at: <https://www.nber.org/system/files/working_papers/w25882/w25882.pdf> [Accessed 21 March 2022].

Putnam, B. and Norland, E., 2018. An In-Depth Look at the Economics of Bitcoin. [online] Chicago: CME Group. Available at: <https://www.cmegroup.com/education/featured-reports/an-in-depth-look-at-the-economics-of-bitcoin.html> [Accessed 21 March 2022].

Trivedi, V., 2022. With Demand Curve Growing Bitcoin May Behave like Apple Stock: Exec. [Blog] YahooSports, Available at: <https://sports.yahoo.com/demand-curve-growing-bitcoin-may-135227504.html? guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAFp8_jqSrBNGPPFH VuLaDBuy-yYVfedhkdA4ousSIWzbNpQRSmJEJzCB72NyQCkpMV5YQRlmsSakpV3lmR8CH7aE- RKQ8YRVfDUAQJauhlTbPWxfDgArDLLNo9-5Za4bC9P5iwWlx04luq8MjWbR2WQRXpdYctI6DLEg8O9ZvFoI> [Accessed 21 March 2022].

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