The Entry Factor of Bitcoin

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As demand for bitcoin shifts and raises bitcoin’s price in dollars, the inducement for bitcoin substitutes to be marketed rises. For example, litecoin, one of the newer entrants, has risen accordingly. Litecoin is billed as silver to bitcoin’s gold. That analogy is not important. What’s important is that litecoin is a close substitute and many such close substitutes can be supplied. These will reduce the price of all such substitutes, including bitcoin. This is a matter of time.

How low might price go and when? The when depends on the dynamics of demand relative to an expanding supply. These are unknown. The how low depends on the equilibrium demand and supply, also unknown. It’s possible for the cryptocurrency industry to keep adding new cryptocoins up to the point where the electricity costs no longer are covered by what the market demand is willing to pay. In that scenario, these coins once in abundant supply due to substitutes will exchange at the marginal production cost of bringing new ones to market, and that cost is far below recent levels at which bitcoin is selling. These high levels result from improving demand coupled with a known supply and little competition yet having occurred. That situation is temporary. The entry factor is already coming into play with litecoin and some other cryptocoins.

I am not discussing other factors, positive and negative.

12:25 pm on December 1, 2013