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My understanding is that Coinbase and Bitpay process payments made in BTC. They receive BTC from a buyer (for example someone buying patio furniture) and send USD to merchants who don't want to keep bitcoin (for example Overstock.com). In order to get the USD to send to the merchant these companies must be constantly selling BTC on an exchange and thereby devaluing bitcoin. Is my logic correct?

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For every Bitcoin they sell, someone else had to obtain that Bitcoin. So they increase the demand for Bitcoins by at least as much as they increase the supply.

In addition, they increase the utility of Bitcoins, which increases their value. All other things being equal, a currency you can spend at more merchants is more desirable than one you can spend at fewer merchants.

  • I agree with your second argument. These companies add utility to bitcoin. This will increase demand and force the value of BTC higher. However, regarding your first argument: the act of selling something does not create or increase demand. Bitpay and Coinbase are increasing the supply of BTC on the market and creating a downward force on the price of BTC. I doubt anyone could say for sure which force is greater. – Alex Millar Mar 24 '14 at 5:20
  • @AlexMillar You can't sell a Bitcoin you don't have. If McDonald's offered to trade tissues for cheeseburgers, the demand for tissues would go up. – David Schwartz Mar 27 '14 at 23:34
  • That's a complicated example, because tissues and burgers go together so well! Ignoring that issue, tissues would definitely become easier to get if you could buy then with burgers, and more tissues would be sold. I would argue this would be due to decreased price/availability, not increased demand. But maybe we are getting into semantics now. – Alex Millar Mar 28 '14 at 16:29
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Alex,

You're logic is correct. While the payment processors are facilitating an enviornment for increased demand, they are also putting downward pressure on a fairly thin market when they have to be a continual seller to convert the Bitcoins to dollars. I think the hope overtime is that the market becomes much thicker and various derivatives pop up to help them hedge this with less disruption.

Miners are also are creating a bit of downward pressure on the price because it is their incentive to convert their newly minted coins to dollars in a similar process.

So the hope is that someone from the demand side keeps coming in and picking up this supply. I think right now it is people who are holding them as investments (dollar alternatives) and in that case they would be less interested in using them to buy things.

Perhaps increased public awareness or legislation would be a catalyst to change this. I don't think it's going to be a make or break but it's definitely a little bit of a sticking point.

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Yes, of course they must be continuously selling BTC in the markets. But I seriously question they'd inflict a serious devaluation to Bitcoin as a whole:

  1. The Bitcoin markets are usually very big - millions of dollars in BTC exchange hands daily. Unless the amount these companies sell approximates a significant fraction of the total daily traded volume (say, 10-20%) the effect they'll have on prices will be negligible.
  2. Even in such a case, it'd be a poor trading strategy to just dump all the BTCs they receive right away at whatever price the market is willing to pay for at that particular time. Most probably they have reserves in fiat to pay from, and place several orders at various prices in different markets (this is what multipools like middlecoin do) and surely they'll try to hedge their BTC holdings to protect themselves (or even profit) from sudden increases/decreases in their value versus fiat.
  3. Bitcoin is several different things to several people. Some see it as the currency of the future, others look at it just as an international transfers and payment system, a semi-anonymos, cheap and efficient one but no more. By providing a valuable service that the market wanted, these companies give promotion and respectability to Bitcoin, thereby appreciating it a bit.
  4. To buy something with Bitcoin, you first need to get them somehow, right? So in the long run the amount of BTC bought with the intention to pay for such goods should aproximate the amount these companies are selling in exchange for fiat.

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