Altcoins dragging the Bitcoin down – Federal Reserve

The Federal Reserve Bank of St. Louis has published an article today with respect to Bitcoin price stating that the Bitcoin price has three probable futures – indefinite, infinite appreciation; zero; or it may be somewhere in between. It also said that the price might end up being somewhere in the between

As per the opinion of the authors, David Andolfatto and Andrew Spewak, the primary factor that is lowering the price of bitcoin is the continuous supply of alternatives, popularly termed as altcoins. Bitcoin, by nature, is an inherently speculative and volatile asset. A constant supply doesn’t mean that the value will keep on increasing. Demand is the ultimate factor that determines value. Due to frequent launches of other tokens in the market, a portion of the market is getting attracted and diverted towards them. In case, there was a scenario of existence of only one cryptocurrency – Bitcoin, then the situation would have been entirely different as all the money would have gone into Bitcoin.

But the Bitcoin maximalist believes that Bitcoin will simply grab any improvements by other tokens that is still not come to action. The Federal Reserve economists quoted “Consider the following thought experiment. A restaurant selling meals for $10 will happily accept payment in the form of one Hamilton bill ($10) or two Lincoln bills ($5). That is, the nominal exchange rate between Hamilton and Lincoln bills is 2:1. Now, suppose that the supply of Lincoln bills is increased, but the supply of Hamilton bills remains the same. The exchange rate remains unaffected […] That is, the increase in the supply of Lincoln bills has led to a decline in the purchasing power of both Lincoln bills and Hamilton bills, even though the supply of Hamilton bills has remained fixed. Might an expansion in the supply of Altcoin have a similar depressing effect on the price of Bitcoin?”

Further, bitcoin price is not just limited to just one factor. There are other factors also that effects the bitcoin price valuation. On the one hand, Bitcoin is the cryptocurrency which has the most liquidity in the market. Still no one will remember when were ICO’s issued for Bitcoin. At the same time, on the other hand, Ethereum has been issuing ICO’s in 2017 and 2018.  Ethereum has a large supply and might not stop making new units due to which its value remains low, which is but so obvious. As higher the supply, its value shall remain low.

The Federal Reserve’s article also talks about the “intrinsic value” of Bitcoin and states “Consider now the bearish case for Bitcoin. This outlook is based on the view that Bitcoin has no fundamental value and that sooner or later the market will recognize this fact. In our view, one can accept that Bitcoin trades above its fundamental value without claiming that its fundamental value is zero. In fact, many securities trade above what might be considered their fundamental value. Gold, for example, trades above its value as measured by its industrial applications.”

Many economists still believe that Bitcoin and the other cryptocurrencies are still in a price discovery stage. Few of them believe that Bitcoin raised due to a hype bubble in 2017 and was overbought, which also lead to an increase in prices of the other cryptocurrencies as well. Whereas, others believe that it was just by chance.

A Federal Reserve economists said, “We think the future price path is more likely to remain bounded between these two extremes.”