Stripe and Square both announced their intentions to incorporate bitcoin into their payment systems this week. Most people would assume that the more merchants that accept bitcoin, the stronger the bitcoin ecosystem. However, things might not be so simple.

Currently, the largest merchants that accept bitcoin (Overstock.com, TigerDirect.com, soon Stripe and Square) accept BTC from their customers, then, to limit their exposure to BTC price volatility, instantly exchange BTC for USD via Coinbase. Thus, on behalf of the merchants that accept BTC, Coinbase sells BTC for USD on bitcoin exchanges.

The more BTC that merchants accept in this fashion, the more BTC is available on the exchanges. This increase in supply should result in a downward pressure on the price of BTC.

Here is a potential problem for bitcoin. Most people will want to buy bitcoin for a combination of two reasons: 1) it has transactional advantages over fiat currency, and 2) it appreciates in value. However, if most merchants that accept bitcoin dump it back onto the exchanges, more customer-to-merchant BTC transactions translates to depreciation of BTC. If the depreciation of bitcoin significantly outweighs its transactional advantages for an individual, then the individual has little reason to buy bitcoin.

Of course, once the price of BTC drops low enough, demand should rise. However, until the price for BTC finds a floor, the use of bitcoin for merchant transactions may fall. The length of time of this fall in BTC price could be critical. If an extended drop in transactions results in merchants dropping bitcoin as a payment system, the transactional advantages for bitcoin fall as well. As a result, bitcoin could find itself in a death spiral.


JakobVirgil:

A very possible scenario but the first bit has to happen for bitcoin to become mainstreamed one really can not expect the retailers to buy and hold for liquidity issues alone. unless their vendors also accepted bitcoin I guess the dream scenario for bitcoiners.

If one of these major Bitcoin accepting retailers demanded that their suppliers accepted bitcoin then we gots a story.


posted by mk: 1691 days ago