Imagine 3 pools of people:
- HODLers — they want to not sell, and, accumulate bitcoin
- Traders — they want to extract fiat out of the market, but not accumulate bitcoin (any bitcoin they buy, they will eventually sell back)
- Miners — they produce bitcoin. They are a mix of HODLers, Traders, and pure miners. Pure miners sell all the bitcoin they produce.
Now think of where demand comes from:
- Pre-coiners becoming HODLers, or HODLers wanting more
- Miners not selling new bitcoin
NOT traders (although some traders HODL some bitcoin)
Supply comes from:
- HODLers taking some bitcoin off the table.
- Miners — the bitcoin issuance.
Now, imagine two extremes Scenarios:
Scenario A: Imagine that HODLers NEVER sell. That would mean that all demand is satisfied by miners’ new coins. (Remember that trading volume is net neutral and not included). In this scenario, the price is equal to the daily bitcoin supply from miners divided by the average daily fiat influx into the market. The amount of fiat coming into the system strongly influences the price. Eg. 900 bitcoin per day, and 18 million USD per day, gives a price of $20,000 USD
Scenario B: Next, imagine that there is no new issuance of bitcoin (but ignore the security implications for the moment). Then, new demand can only be satisfied by HODLers selling some bitcoin (by definition, they will not sell all of their hoard). What would be the price? It will depend on what HODLers, on average, think bitcoin is worth, because they control the supply. There is no miner undercutting their asking price. Let’s say HODLers on average want 1 million USD per bitcoin. Then, no matter how much fiat enters the system per day, the price will approach 1 million USD. (If a lot of fiat comes in, more bitcoin will exchange hands. If minimal USD comes in, minimal bitcoin will exchange hands.) The amount of fiat coming in has no influence on price. This is the opposite of Scenario A.
We can conclude:
We can then understand reality. Reality is a combination of Scenario A and Scenario B. Bitcoin started purely at scenario A. But as the Bitcoin subsidy reduces over time, and the stock of bitcoin held increases relative to the new supply, Scenario B dominates more and more over Scenario A.
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