I’d like to offer some alternative views:

Merchant adoption is outpacing consumer adoption

This is a key issue that is creating sell side pressure for Bitcoin. The number of new merchants now accepting Bitcoin globally has grown in the region of 5-10 times in the past six months, especially since Bitcoin popped late last year and become an increasingly valuable (albeit volatile) asset to own. The number of consumers (and realistically, mainstream consumers) using Bitcoin has grown fractionally in the same period — partially due to the perceived price and some other issues which I’ll dive into below. One reason is that the promise of micropayments for Bitcoin has not been realized, which is what is holding back mainstream adoption.

What’s now happening when new merchants start accepting Bitcoin is that it’s giving people who have existing coins the ability to use it as a currency and effectively “sell” their coins to the merchant. The processors such as Bitpay (which Gyft uses to sell gift cards) then in turn either sells these coins to private buyers (off book) or via exchanges (such as Bitstamp) to exchange for local currency for the merchants. This money is understandably used to continue to replenish inventory and operate their business, and more importantly, pay taxes to Uncle Sam.

Although many Bitcoiners are hoping for more large retailers like TigerDirect and Overstock to adopt Bitcoin, it may have a negative impact on the BTC price as these retailers will most likely convert 90% of their coins to cash — putting additional selling pressure on Bitcoin. This outcome may not be as desirable in the short term, but it will create a better long-term outlook for Bitcoin given the liquidity options. Again, if you asymmetrically add large retailers without driving consumer adoption at the same time, the demand supply curve will shift undesirably.

As the number of transactions via Bitcoin processors increase, it ultimately creates more sellers in the marketplace — which obviously creates downward pressure on the trading price. Now, I’m not saying that this is a bad thing in the long term, but the problem is that if you have asymmetric growth in new Bitcoin users and Bitcoin “acceptors”, it will create a lopsided marketplace which will suppress the price — which is exactly what is currently happening. We’re seeing the impact of this in the market right now, I believe. There is another factor, which brings me to my next point.

Lack of trust with exchanges and limited ability to purchase

Consumers are spooked right now. MtGox ran away with $500m+ in Bitcoins and is bankrupt. No one really trusts any of the exchanges — even some smaller exchanges went under the past 3 months. The only “safe” place to buy Bitcoin in the USA is via Coinbase and they are not an exchange.

The US does not have a single licensed Bitcoin exchange and the rest of the world is reeling from MtGox. Bitstamp is proving to be the new global exchange of choice but the media has done a great job of keeping new potential Bitcoin users at bay with the usual inflammatory headlines whenever something negative happens in the Bitcoin space.

Most people I know who want to buy and sell Bitcoin are doing it “off-book” — which means the transactions are going instead via trusted networks. This will take buyers out of the marketplace and will ultimately mask the true supply/demand curve for Bitcoin. Anyone who doesn’t know a buyer will sell their coins via an exchange or via a merchant accepting Bitcoin which will put sell side pressure on the BTC price.

So instead of “buy side” money winding up in the exchanges which would be used to drive up the price, it’s sitting on the sidelines which has the impact of lowering the demand side of the equation within the marketplaces where Bitcoin is priced.

Loss of momentum

Given the above, the Bitcoin price has been struggling and this creates downward momentum. The good news is that it keeps out the “get rich quick” types (for now) who typically almost justify the reasoning of some of the non-believers who think that Bitcoin is a Ponzi scheme.

In reality, anyone who buys Bitcoin with the view that it can only go up and up forever is most likely a speculative and uninformed buyer who will sell at the first sign of blood. Although every new technology will have these buyers, the recent dip in prices is likely to keep these types away and as a result, less speculative buying which will allow Bitcoin time to find equilibrium, before it runs again (historically Bitcoin goes through spikes and consolidation phases regularly).

Again, a lack of buyers will leave Bitcoin with a lower settling price and equilibrium point in the broader market.

Miners margins being squeezed

If you were a miner 2-5 years ago, you could comfortably mine Bitcoins and make profit margins of 50-95%. Input costs would have been electricity and additional hardware. The difficulty of mining was low and it was not very competitive, so labor costs were cheap (hobbyists mainly) and you didn’t have to invest in chip R&D.. Since then, we’ve seen a surge in competition amongst miners and an astronomical increase in the difficulty index (far outpacing the price growth in the actual Bitcoin).

Miners were mining 50 coins every 10 minutes just over a year ago. With the geometric progression in the distribution of coins that happens every 4 years, the allocation is now 25 coins every 10 minutes. Less coins, albeit at a higher price. Even six months ago, miners were probably holding onto at least 50% of the coins they made and spending the other 50% on costs (electricity, salaries, hosting, hardware).

That number is now probably closer to 80% and dropping (lower margins at lower BTC prices and lower efficiency of mining equipment given the difficulty index). What does that mean? If miners need to cover their costs, they need to sell the BTC at market prices to pay the bills. If now they are only keeping 10% or less, then it’s another 22.5 coins on average hitting the exchanges every 10 minutes vs 12.5 coins in a 50% margin scenario (in actuality, the pools pay out on different timescales, but this is an approximation and oversimplification in order to make the point).

If someone wanted to track the flow of coins via the pools and see how many of them wound up on the exchanges or spent at retail, I think the results would be fascinating (let know if you or someone you know has or wants to do this).