Merchants accepting bitcoin have a disproportionate effect on the price due to the large number of entities they interact with daily. A normal user would maybe do only few P2P BTC transactions a month. Its is surprising to keep hearing stories of new merchants adopting bitcoin, yet the price of BTC keeps tumbling down. Let us investigate this by looking at what kinds of entities are adding real value to the bitcoin ecosystem

HODLers— Speculative Value

A system with only HODlers creates a bubble

HODLers hoard bitcoin and don’t believe in spending it. This increases its speculative value. A system having only HODLers is a bubble that would eventually burst. HODlers do help to amplify something that already has an intrinsic value.

Spenders — Network Value

Network of bitcoin users

Entities spending BTC and using it for P2P transactions create network value. Number of users in the network gives an indication of the inherent value in the network. Turns out that according to Metcalfe’s Law, it is proportional to N exponent of 1.69 (Ref). It is no coincidence that the price of bitcoin surged when large number of users were using it and blocks were full in early 2018.

One analogy we can think of this is how Steve Jobs hypes up the sales of iPhone. iPhone has an inherent value which is similar to network value in case of bitcoin. However, the charisma and hype acts as a multiplier to the price of iPhone. Similarly HODLers hype up the price of BTC, though they may not have the charisma of Jobs !