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107 sats \ 11 replies \ @Scoresby 13h \ on: Is increased merchant adoption reducing bitcoin's purchasing power? econ
Ah, the ugly beast of supply and demand raises again its hoary head...
The person who spent the bitcoin was already willing to exchange it at current fiat price. And the merchant presumably will not so exchange it to another person at a loss. So their demand for the bitcoin is equal to the previous holder's demand for fiat.
I see no increase in supply / change in demand.
The person who spent the bitcoin was already willing to exchange it at current fiat price.
Ahh, you're omitting the other component to supply or demand: they were willing (in some sense) but they were not able because they didn't have any. The bitcoin moved from hodl'ers who were persuaded to start spending it to merchants with much lower reservation exchange rates.
The supply increase really happens at the willingness-to-spend-more step. It's not in terms of fiat prices yet, but the exchange rate of bitcoin for stuff increased at that step, which is when the amount of bitcoin available increased (just not necessarily for dollars).
I don't really like talking about money velocity, but if you want to think of increased willingness to spend as increased velocity, you can get to the same place.
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The bitcoin moved from hodl'ers who were persuaded to start spending it to merchants with much lower reservation exchange rates.
This is what I don't understand: why is the hodler's willingness to spend less meaningful than the merchant's?
The merchant is not willing to sell the bitcoin they receive at a loss, are they? So if they accepted it in exchange for some perceived value, I would think they would only be willing to sell that bitcoin in exchange for a similar or greater value. I can't imagine why we would expect a merchant who accepts bitcoin at a certain level to have any greater willingness to spend than the holder who sold it at the exact same level.
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The merchant didn't have any bitcoin before they started accepting it in trade (or they had already sold their bitcoin at the current price). The transaction gives them more bitcoin to exchange for fiat, which the customer was not willing to do.
You're confused because these are what economists would probably call irrational preferences, but we know there are bitcoiners who are willing to use their bitcoin as money but are not willing to sell it for fiat.
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The merchant didn't have any bitcoin before they started accepting it in trade (or they had already sold their bitcoin at the current price).
We assume this because in the example the merchant is auto-converting to fiat, right?
If so, would you say a hodler who sells to another hodler increases the supply of bitcoin?
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We assume this because in the example the merchant is auto-converting to fiat, right?
Right. You could also infer their different valuations from the fact that the merchant is auto-converting and the customer wasn't.
A hodler who becomes more willing to spend increases the supply of bitcoin. That's basically tautological. However, it might take several steps for that to work through to fiat prices if the spending is with another hodler.
We could contrive scenarios where there's no impact on btc/fiat exchange rates, though, and maybe even where they move the other direction,
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