This is my opinion, not necessarily shared by CCN.

I realize that for me it’s very easy to be philosophical and detached about the price of Bitcoin: I don’t hoard Bitcoin, and the few coins that I make I change immediately to fiat currency to put food on the table. Of course, in today’s recession, I am hardly the only one to do so.

Bitcoin price is going down because we are starting to use Bitcoin to buy things instead of holding Bitcoin for speculation. I am not invested in Bitcoin financially, but I am invested in Bitcoin intellectually, because I think it will help bringing about a better world. Therefore, I am glad to see that a “real” Bitcoin economy is taking off, where a critical mass of people use Bitcoin as a real currency for real transactions. That will, simply put, change the world.

Remember that there is no such thing as “intrinsic value.” The value of Bitcoin is uniquely determined by the marketplace of buyers and sellers – how many people want to buy, or sell, for how much. Until some time ago, most users wanted to buy and hoard Bitcoin for speculation, in the hope that the price would go up, and also because there wasn’t much that you could do with your coins anyway. That pushed the price up.

The “speculation phase” of the Bitcoin economy has been terribly important because it has put Bitcoin on the map and generated a lot of press coverage. As a result, today we have a critical mass of Bitcoin users, and we see the beginning of the first “real phase” of the Bitcoin economy.

More and more people want – or need – to sell Bitcoin to buy goods, and more and more merchants accept Bitcoin. But remember that, in the vast majority of cases, your coins are converted to fiat currency on-the-fly, because fiat currency is what the merchant wants to receive. That is a sell order that pulls the value of Bitcoin down. If more and more people use their coins to buy things, the result is that the price of Bitcoin goes down.

Now and then there are important and positive announcements, game-changers, which temporarily push the value of Bitcoin up. For example, last week PayPal partnered with three major Bitcoin exchanges. This very important announcement, which clearly shows that Paypal is committing to Bitcoin, pushed the value of Bitcoin up for a few hours… but then it went down again and continued to go down. The good news is that, sometime soon enough, Paypal users anywhere in the world will be able to do their Paypal purchases with Bitcoin. But there is a price to pay: the 150 million (and growing) Paypal users will be able to spend their coins with one click. What is the result? Yeah, right.

Toward a closed-circuit Bitcoin economy

In my previous article I said that the trend toward declining Bitcoin price will reverse when more consumers, instead of converting their Bitcoin to cash on-the-fly to buy goods, will be able to buy goods directly in Bitcoin.

But it isn’t so simple. Say a merchant starts accepting Bitcoin directly, without going through a payment processor that takes Bitcoin in and gives fiat currency out. So you buy from the merchant, and that doesn’t pull the value of Bitcoin down. Perhaps the merchant will hold the coins for speculation. But it’s more likely that they will use the coins to buy goods or services themselves, and so forth. At some point in the chain somebody will convert the coins to fiat currency, and that will pull the value of Bitcoin down.

Last but not least, the trend toward declining value of Bitcoin is a positive feedback loop (a process where the output goes back to the input and make it stronger). If the price of Bitcoin goes down, there is even less incentive to hold and buy, and even more incentive to sell.

Therefore, I think the price of Bitcoin will continue to go down, and only stabilize when a significant part of the Bitcoin economy is closed-circuit with coins that stay in the loop and never go out.

That is what I think will happen. I hope I am wrong about the price trend, and I look forward to hearing good arguments to prove me wrong.