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What would happen to miners and merchants if the bitcoin price reached $500?

(@danielcawrey) | Published on August 9, 2013 at 19:39 BST

Bitcoin’s price has been relatively stable the past few months. That’s save for a nail-biting drop in value to almost $65 per BTC for investors in early July. Sixty-five USD was a low number that hadn’t been seen since the skyrocket-then-drop valuation of bitcoin in spring this year, when many believed we would perhaps see bitcoin reach a value of $250 or even $500.

Well, we did see the price of bitcoin surpass $250, albeit very briefly. The breaking through of the $250 barrier, however, still makes investors and bitcoin enthusiasts alike salivate at the idea of such a heady valuation. Yes, $500 sounds like a great price if you’re holding onto bitcoins. But bitcoin and the network surrounding it might be affected by such a lofty price in ways that many probably aren’t even considering. How would a $500 valuation affect the bitcoin economy?

bitcoin price chart

Mining

The environment that exists for bitcoin mining today can be best described as a race that has no finish. It has no winner that will take first place as the pace of technical innovation proceeds. Mining companies with the latest and greatest ASIC technology are constantly trying to squeeze the highest hashrates possible out of hardware that is hungry for both power and cooling.

Graph showing the rise in total network computational speed and difficulty. Source: Bitcoin Network Graphs

This year, the bitcoin mining difficulty has gone up exponentially, starting in March when ASIC technology began to take over from the FPGAs that were on the market. The percentage change that we have seen in the mining difficulty has been huge: at this point, only ASIC chips are capable of making any money by mining bitcoins.

Bitcoin difficulty history for 2013. Source: Bitcoin Mining Forecast

What’s clear, though, is that if bitcoins were worth $500, the incentive to mine would be increased. It’s unknown what mining equipment manufacturers like Butterfly Labs would do, since they have said that they do not mine with their own equipment.

There is no doubt, however, that some mining companies would at least consider doing so. It almost seems like a given when the price for equipment versus the value of a bitcoin at $500 would be enticing, to say the least.

Payments

Many companies have decided to get on the bitcoin bandwagon by making announcements that they accept BTC. Some of this is for the free marketing that is provided by putting out a bitcoin press release. It makes sense, because any business that ends up accepting bitcoins will gratify any BTC supporter. Yet it’s not likely that many companies are holding a lot of their incoming revenues in bitcoin, as it still is not generally easy to pay invoices, employees and vendors with it.

Foodler uses the latest Mt. Gox price to calculate its bitcoin exchange rates.

Foodler is seeing growth in bitcoin orders at thirty percent per month. And to use that company as an example, the purpose of adopting BTC for them was to reduce the amount of transaction costs that come from banks. Companies like Foodler rely on electronic payments in order to survive, and the cheaper they are, the better.

Bitcoin at $500 per BTC might not be bad for companies like Foodler. A $500 bitcoin means that a lot more people will know about it, and the transaction volume will rise in terms of a payment choice for businesses that accept it. The developers of bitcoin had in mind that a high valuation would require that it be broken down into smaller amounts. A bitcoin can, in fact, be broken down to as little as something called a “satoshi”, which is 0.00000001 BTC.

Hype

As the value of something rises, hype ensues. Hype almost stacks on top of hype. This is a probable scenario that will take place with bitcoin: a break above $266 will set off a hype reaction, but anything less than that won’t trigger it.

A great example of this was the seminal moment when a barrel of oil broke through the $100 barrier. Based on the trading prices, towards the end it was clear that oil was going to break that mentally important barrier of $100 because of traders trying to get to that point, and not because of its true valuation.

Oil’s run after it broke $100 and its subsequent fall. Source: YCharts

Fundamental analysts versus technical ones might disagree with that statement, but whenever it does happen that bitcoin passes $266, you can probably expect it to reach much higher. But if you use oil as a case study, the end result was not good: oil took a big drop with the economy, after nearing $150 a barrel before steadying out. Today, at the time of writing, it’s worth $103.15 per barrel, which is near that $100 high back in 2008.

Fiat

If a digital currency like bitcoin were able to reach a $500 valuation or higher like some have prognosticated, what does that mean for fiat currencies? It may be that an event such as this would mean a loss of faith in some fiat currency that has reached a breaking point. Or, it could mean a revaluation between fiat and math-based currencies. It’s hard to predict, but it is a likely future that we face.

IMF’s tally of Chinese money supply. QE1 started in 11/08, QE2 in 11/10. Chart Source: Quartz

There’s only so much money to go around. As the United States has embarked on quantitative easing (QE) revaluation in the past few years, countries like China have had to keep up with the money printing. Just recently, the People’s Bank of China had to release 17 billion yuan (roughly $2.7 billion) of capital into its banking system just to stave off deflating prices and continued credit problems there.  They don’t have a choice but to do so: they are so linked with the US that they have to revalue their money as well.

When do you think that the price of bitcoin will hit $500? What kind of effects would such a valuable decentralized currency have on the global economy? Let us know in the comments.

You can now view our own index of the bitcoin price: Bitcoin Price Index (BPI)

Update: October 2013 price spike highest since April 2013

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