From the “Double Spend” scare of January 20, 2021 to the flight to the relative safety of cryptocurrency’s decentralized trading platform on January 30, 2021, a ten day window in the life of Bitcoin illustrates the power of fixed supply versus variable demand on prices.
When rumors surfaced of a possible glitch in the blockchain system supporting Bitcoin, buying interest in the megacrypto briefly waned. In all markets, any seed of doubt, especially in a still nascent, somewhat hard to understand asset, will send some investors to the sidelines. This is what happened for about a week in the Bitcoin markets, and prices pulled back. But when instability hit trading platforms in the wake of the Reddit inspired investing frenzy in heavily shorted securities, resurgent demand for Bitcoin popped prices back up towards their all time highs, largely because Bitcoin supply did not increase rapidly enough to meet demand.
The “double spend” Bitcoin rumors were unequivocally proven false, stemming from a naturally occurring but extremely rare bifurcation in the resolution system for blockchain transactions that basically self corrects as blockchain activities progress. (At least that’s the best way I can describe things with my very limited understanding of the process. Suffice it to say, in plain English, that the system is rock solid and Bitcoin lives on unscathed.)
Market prices decline when there is a lack of demand; buyers pull back and those needing to sell, being more motivated for whatever reason, have to chase prices lower in order to cash in their holdings. In Bitcoin’s case, the double spend rumors temporarily chased buyers away and left those needing to sell searching for buyers at lower prices. When the sellers had completed their initial round of selling, prices for Bitcoin had dropped around 15 percent from their peak in the early morning hours of January 20, 2021 to their trough in the evening of January 21, 2021. This is what happens when demand for something dries up. Prices go lower.
Prices also go lower when supply of something exceeds demand. In Bitcoin’s case, this rarely happens, because Bitcoin’s current supply is known, the rate of Bitcoin’s possible added supply (from mining activities) is also known, and the ultimate supply of Bitcoin is fixed at 21 million. In a macro sense, the supply of Bitcoin, being fixed, can’t really ever keep up with demand, so long as demand keeps rising.
And while one-off events like the double spend rumors may negatively impact demand for Bitcoin temporarily, in the long term scheme of things demand for Bitcoin has more reasons to keep rising than can be reasonably enumerated in this article. But one reason stood out on January 30, 2021 more than others.
The actions that Robinhood and other brokerage houses took to limit the ability of investor participation in trading…