Price matters

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This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

With the daily total volume on the Bitcoin SV network reaching nearly four times (400%) the total number of transactions of all other blockchains—there are thousands of them—combined, but BSV price showing no response, lingering at less than 0.1% of the total digital currency market cap, it is natural to ask the question below:

Is it possible that the utility level of an asset goes through the roof, but the asset price never moves up?

A simple answer is to wait at least another 10x increase in the BSV transactions.

This is because the Bitcoin market is not moving based on any real utility data, let alone any economic fundamentals. Everything is pure speculations driven by social media, so far.

But that does not mean that utility and economic fundamentals will never matter. They don’t matter now, simply because they are still too small to matter. Even with BSV, the transaction fee is still tiny, with a fee/subsidy ratio presently at around 2/100.

But if the number of transactions increases by another 10x, it will be close to 20/100, creating a kind of profit surplus that is hard to be ignored by the bitcoin miners.

In the even longer term, if the number of transactions increases by 100x, and even if the fee per transaction is reduced by 4x, the fee/subsidy ratio would be around 50/100, creating a kind of profit surplus that is impossible to be ignored by the bitcoin miners.

Once the miners move, hashing power shifts, and the coin prices also move. It’s hard economics. See the Economics of Bitcoin Mining.

Beyond the mining power shift, there is a further factor that affect the acid Price: when the actual asset utility demand rises to a certain level, it will also directly drive the asset price up.

Factors that affect the price

It is axiomatic to say that the price is determined by supply and demand. But there are multiple factors that play at different levels:

Level 1 – Pure speculation driven. This is low-info speculation at the most superficial level. When the market has no fundamentals to act upon as a guide, prices are the result of pure speculations, and anything goes. There is no rational reason for any price point. The Bitcoin market is presently almost entirely at such a superficial level. It is completely a popularity-voting arena controlled by narratives and rumors. The price is completely detached from the value. A higher price does not mean an asset is more valuable, and vice versa. There is no truth in such a market condition.

However, such condition is not permanent. Once some of the assets start to develop objective fundamentals, such assets will emerge from the superficial level and start to tell some truth. See below.

Level 2 – Factual utility information driven. Market with a bit of intelligence may react to factual utility information, such as actual transaction volume, transaction price, and overall scalability reports. Such a reaction would still be speculation, because it is not based on fundamentals nor driven by real economic forces. But at least it is utility fact-based, and therefore is more intelligent. Depending on the strength of the information, and the media power supporting it, it may break out from the pure low-info speculations, but there is no guarantee. For example, BSV currently has very impressive utility performance, but the market is so delusional that it is almost completely oblivious to such facts.

 Level 3 – Economic forces driven. This comes from the actual participants of the economy behind an asset. For example, miners are mostly driven by real economics rather than by narratives. They will move to a different blockchain that has better economics if it offers irresistibly higher profitability. Once that happens, the blockchain that has better mining economics will attract more mining power to migrate over. And this will inevitably drive the asset price up on the destination blockchain. This is hard and objective economics, not at the whim of market speculations. If anything, it will change the directions of the speculations. For more detail on under what conditions such migration may become inevitable, see the Economics of Bitcoin Mining.

Level 4 – Actual asset utility demand driven. This is the act of a true intelligent market that tells truth in the price information, the all-important economic information of the market. This happens when users (individuals or companies) start to buy an asset not because they speculate a future higher price of the asset, but straightly because they need them for an actual utility at the moment. For example, when an application uses BSV as actual payment medium, or an application uses BSV as a carrier of data or tokenization, etc., users will need to acquire BSV coins. This kind of demand is inelastic in nature, meaning that the demand is not a price-induced, and users need to purchase a certain amount of the asset regardless of the price (usually within a certain range of course). This kind of inelastic demand, when large enough to create a pressure on the existing supply, always drives up the price, and is therefore a much stronger force than speculations.

For an asset like BSV that is hated and biased against by the public narratives, there may be zero hope in the above level 1, and only a little bit hope in the above level 2. But because it is growing rapidly in transactions, it is the most hopeful in the above level 3 and level 4 factors that drive the price.

The good news is that the above level 3 and level 4 factors (namely economic forces and actual utility demand), once occur at an appreciable level, would be real and unstoppable. With that, the asset will objectively break through all other adversarial market conditions, even the weightiest biases against it.

The various scenarios for the above level 3 factor – economic forces driven conditions – can be found in the Economics of Bitcoin Mining. Overall, in the case of BSV, if the transaction volume increases in the next 12 months as much as it did in the previous 12 months, the coin price will have to move due to the mining power shifting. This will be the case even if the overall public opinion about BSV remains negative. But if the public opinion also shifts to become positive, the above level 1 and level 2 would also come into play, and the price effect will be multiplied.

Whether the level 3 factor will materialize with BSV depends on the actual transaction volume growth on the chain. Based on the growth track of BSV, the timeframe for the transaction growth to be manifested in price actions is not far away, likely in the next 12 months.

The above level 4 factor—actual asset utility demand driven condition, might take longer to materialize. See below for a scenario analysis. 

A scenario analysis

Scenario assumption: Average 1 million transactions per second (i.e., average TPS 1 million); average transaction fee 100 sats.

Because there are 100 million sats in every bitcoin, we need 1 bitcoin per second (1 million x 100 sats /100 million sats per coin) to transmit the 1 million transactions per second.

1 bitcoin per second is equivalent to 86,400 bitcoins per day.

Because there are only 21 million bitcoins altogether, it means a total turnover of the entire 21 million bitcoins in about 240 days.

Now, a 240-day turnover speed means that a bitcoin economy with a money velocity of 1.5 annually (365 days/240 days). This would be comparable to the money velocity of a traditional economy which typically ranges from 1 to 2, meaning that at this level, bitcoin would start to feel a demand pressure from pure payment circulation alone, excluding all other uses.

However, with the tokenization development in the BSV ecosystem, BSV is not only serving as a currency for payment but also serves as “digital land” on which digital “buildings” will be constructed (See Bitcoin SV is “land”​ on which economies are being built). The satoshis used this way are not circulated quickly.

The average turnover time for land is once many decades, not several times a year. Satoshis used as ‘digital land’ may have a faster turnover than the physical land, but will more likely to be years rather than months.

In this respect, the demand pressure for BSV will be tremendous when the transaction volume reaches 1 million per second. The pressure is likely to be felt long before that.

Even just the currency part, the actual velocity would be much higher than 1.5 annually, because the above assumes that all 21 million bitcoins are available for real utility transactions (i.e., nontrade transactions). That would be 100% utility, zero trade, and zero holdings. This is an extremely conservative estimate, considering that the current top digital currency such as BTC and Ethereum are almost the opposite, close to 0% utility, 20% trading, and 80% hodling. Therefore, the real velocity of BSV in the above scenario is likely to be multiple times of 1.5, easily above 10, much greater than the money velocity of a traditional economy which typically ranges from 1 to 2.

High velocity means high demand exerting pressure on the available supply, pushing the asset price up.

In reality, BSV price in the above scenario would have already been pushed up by the above level 3 factor (economic forces) alone, well before the TPS reaches 1 million to activate the level 4 factor.

Therefore, it seems impossible for BSV to reach TPS 1 million without causing major price shifts.

The above conclusion does not change even if the market sentiment would somehow manage to remain adverse to BSV in face of such disruptive adoption, because the hard economic forces will have started to drive the price long before that point.

On the other hand, it is quite safe to say that the above level 4 factor is not going to have visible effects before the average TPS reaches at least 10,000.

But as discussed above, the level 3 factor is likely to cost visible price actions much earlier, perhaps at TPS 1000, which is about 10 times from now, and reachable within a year (see above).

Given the fact that the current average TPS on BSV is around 100 only, it is no wonder why BSV price does not reflect the transaction volume growth, yet.

Of course, whether the above level 1 and level 2 factors start to pick up the signals from the level 3 and level 4 factors before these factors themselves start to have a direct effect, is a different matter.

Regardless, the price mechanism driven by actual asset utility demand provides a bottom-line scenario. It assures that the actual utility growth is bound to drive up the asset price, ruling out a scenario where the utility level goes through the roof continuously while the coin price never goes up.

Price matters

Price does matter, but only to the extent that it affects the economics.

This may sound harsh, but the sentiment of BSV coin holders has virtually no impact on the BSV economics. Only that of the users, developers, miners, entrepreneurs and venture investors does.

At the present stage, the effect of the price on BSV economics is seemingly paradoxical: on one hand, lower BSV price benefits user adoption (because it makes transactions cheaper); on the other hand, higher BSV price makes the developers and miners happier. But in terms of the real economics, the two sides are not contradictory to each other, because the developers and miners also directly benefit from higher transaction volumes. Ultimately, their business is not in the coin itself, but in the blockchain utility.

The success of the BSV ecosystem needs both the users and developers. The market will find a sweet spot in the longer term. If it can’t, some external nudging might be needed. But if nothing works, the ecosystem fails.

This of course does not mean that developers and miners will try to drive the BSV price lower. Price is emergent not fundamental. In other words, price will emerge from the economic dynamics as a result, not as a fundamental goal nor fundamental driving force. Pursuing higher price does not lead to higher price. Pursuing better economics does, because it enhances the asset value. Therefore, do not follow shallow narratives. Follow the economics.

The benefit of sound economics

The entire digital currency market as it stands now focuses on momentary prices only. It is the biggest distraction to the real development of blockchain, DLT and Web3.

Price matters, ultimately. But Bitcoin SV developers, supporters and investors should focus on applications and utilization, not the short-term coin price, and consider everything within a framework of sound economics.

Bitcoin SV (BSV) the original Bitcoin is the only blockchain that has sound economics both from ground up and onto long-term with unhindered parallelization, unbounded scalability and uncorrupted competition.

The benefit of sound economics is that utilization eventually and automatically solves all other problems, including the coin price. And the solution is long-term and sustainable.

Not when economics is wrong. With wrong economics, you could have all kinds of short-term irrational market reactions, but nothing sustains in long-term.

Disclaimer/Disclosure: Like everything expressed on this website, this is absolutely not financial advice. I am not a financial advisor. I only write to express my own understanding of the technology, the economics, the law, the business, and the related systems, mostly from a technical standpoint, and all for education only, not for financial advice. With regard to Bitcoin SV (BSV) specifically, I am a supporter of Bitcoin Satoshi Vision and believe it is the truthful and original Bitcoin. I am also a user and holder of BSV bitcoins. Therefore, consider either I have put money where my mouth is, or that my views are biased – it is up to you the reader, but I take no responsibility on your own decisions.

This article was lightly edited for clarity.

Watch: CoinGeek New York panel, Bitcoin & Blockchain – Can Real Value Come from Real Utility?

https://www.youtube.com/watch?v=IBAJr8vP5Bw