Tag Archives: Supply

Revised: Bitcoin Success It’s Own Worst Enemy

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.

Supply Drop Graph

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.

Decreasing Iron Ore Prices in China

The traditional notions of supply and demand are still relevant in modern economy. Demand, supply and their interactions often determine price and the most efficient means of production in a market. A low supply and high demand typically indicate that there will be a high price in equilibrium. Conversely, a high supply and low demand should lead to a low price. In an ideal world, suppliers and demanders will work in equilibrium to avoid any significant dead weight losses.

Applying these fundamentals to a real-world situation, we can look at the iron-ore industry. Iron-ore, typically utilized in the production of steel, is a large industry and the big 3 are the 3 companies currently leading it. According to the Wall Street Journal article by Rhiannon Hoyle, “Rio Tinto Digs UP Record Volumes of Iron Ore in Australia,” one of these big 3 companies (Rio Tinto) has been increasing output as of late. Hoyle suggests that this expansion has been because they see China needing more steel in the future to build its industries.

Providing more steel to a place that will likely utilize is it is a competitive advantage in this supply-demand model where there are multiple suppliers. Ideally, you want to be the only supplier in order to make the most profits. By being there and producing record amounts, they are able to over-supply China with this resource so they do not seek it from elsewhere. This increased supply while the demand in China has not changed too much drives the price down. This lower price could mean that other suppliers, particularly small mingling companies, may not be able to continue in this market without losing money. By moving beyond equilibrium, Rio Tinto is creating a market surplus.

An article by the Daily Times is entitled, “Big iron ore miners supply strategy working partially.” This questions the effectiveness of Rio Tinto’s tactics in the Chinese market. While they do note that the market share of the big 3 remains strong, other suppliers in this market will not be driven out easily. The article states “Iron ore prices may have to further fall if the big 3 really are determined to drive competitors out of the market.” This suggests that there will be further price decreases if Rio Tinto and the other 2 of the big 3 continue this attempt to fully control supply. Moving even more out of equilibrium could have detrimental effects to the market but only time will tell what the result will be.

 

 

Sources:

 

http://www.wsj.com/articles/rio-tinto-digs-up-record-volumes-of-iron-ore-in-australia-1421705710

 

http://www.dailytimes.com.pk/business/19-Jan-2015/big-iron-ore-miners-supply-strategy-working-partially