Five Fundamental Effects in Bitcoin
Cobweb Supply, Reservation Demand & the Foundations for Understanding Bitcoin’s Price
Bitcoin’s value has little to do with its quotidian price histrionics. Yes, exuberant speculation routinely outplays rationality. And, of course, there are complex interactions from extant and expected financial market innovations, growing or abating regulatory risks, and the insidious exertions of misinformation.
But price is important. To say you are interested in Bitcoin, but far too cerebral to care about its price is as daft as saying that you are interested in gold, but only as an element on the periodic table.
That said, I fear that you learn nothing of value about Bitcoin from looking at charts and following the mood swings of ‘traders’ on Twitter (especially about its price!). What you need to understand price is a deeper understanding of the effects that are unique to Bitcoin and how they come together in a market in interesting ways.
Therefore, in this piece I wish to give you a simple demand and supply model that has helped my thinking about Bitcoin, and it continually helps me absorb the insights of others. And, to make the model real for Bitcoin, I will also enumerate five of the most basic effects that are important to Bitcoin’s price.
Together, the model and the Five Effects, will, I sincerely hope, help you appreciate the splendor of the forest rather than be distracted by its weirdest trees.
Supply and Demand Redux
Let’s start with the demand and supply model. The Five Effects we will examine below are each part and parcel of an overarching market dynamic that the model helps bring together.
Simply put, the model shows how Bitcoin’s market price emerges from the ideas of a cobweb supply and a reservation demand.
The cobweb model, developed in the 1930s, favors the supply-side in its construction. Essentially, it relies on decisions made by firms on production volumes reacting to extant market prices with a lag between current market supply and future market supply. Suppliers produce based on extant resource costs and permit the ramifications of these ex ante provisioning decisions to play…