The price of a bitcoin has been extremely volatile as of late, with it dropping 44% since the start of the year. That’s right, bitcoin has dropped 44% since January 1st, 2015. That is in fact TWO WEEKS, the value of this currency has dropped from $316.23 to the price of $177.63 on January 13th. This has since recovered slightly to $217.36 at the end of January. This volatility and steep decline of bitcoin’s price has been due largely to bitcoin’s own success. The way bitcoin works, as described by Sweden Boden in his article The Magic of Mining is that bitcoin ‘miners’ have machines that “try to solve fiendishly difficult mathematical puzzles. The solutions are, in themselves, unimportant. Yet by solving the puzzles, the computers earn their owners a reward in bitcoin, a digital “crypto-currency”. As the price of bitcoin has rose to its peak of $834.03 back on January 15th, 2014, more and more people became bitcoin “miners” using data processers to solve these complex math problems which has raised the overall supply of bitcoins to over $3.8 billion worth in circulation. This rise in supply has driven down the price of bitcoins by oversupplying the market.
Michael Casey talks about in his article, Bitcoin’s Plunge Bites ‘Miners’, “The people who most believed in the long-term value of bitcoin holdings are the people who got hurt the most… the price decline is causing turmoil for bitcoin ‘miners’.” These miners are the biggest supporters of bitcoin and believe so much in it that they devote cast resources solely to mining for more coins to earn money. This has created more and more miners creating more and more bitcoins in the market. As the demand for bitcoins hasn’t risen to compensate for this increase in supply, the price of bitcoins has to drop. There have been so many new bitcoin miners that, “the financial challenge has been made more acute by increasingly tough competition to earn bitcoin, the result of a 30-fold increase in the computer firepower being deployed by miners.” . Graph 1 demonstrates what happens when you increase the supply. It drives both the price and quantity down. The only way that the price of bitcoins will go back to making it financially viable to mine for them is if enough people stop their mining efforts. The supply has to decrease in order to raise the price of bitcoins again as demonstrated in Graph 2. This is how bitcoins success has lead to its own demise.
Another potential solution would be to increase the demand for bitcoins. Increasing the amount of places that accept bitcoins, making bitcoin a more viable option to cash, could do this. This will require breaking up the monopoly that governments currently have over currencies. As more places start to accept bitcoins, and as bitcoin becomes more than a safe haven for criminals, this will increase the demand for bitcoin, thereby driving price back up.