Bitcoin Price Lowered By Altcoin Crowding: Federal Reserve Economists From St. Louis

By Prashant Jha

In a new article penned by its economists Andrew Spewak and David Andolfatto, the Federal Reserve Bank of St. Louis, has opined that the price of Bitcoin is possibly being pulled down by the increasing supply of altcoins. In addition, they have noted that the future of Bitcoin price lies somewhere in between indefinite rise and zero rise.

They feel that since Bitcoin is a virtual asset with built-in volatility and speculative aspects, having an increasing number of competing altcoins has an adverse impact on the actual price of Bitcoin. This lies in the simple reason that having a chunk of demand chipped away causes the value of Bitcoin to drop substantially.

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Their opinion is that Bitcoin would have fared much better if it had continued to be the sole crypto player in the market as it would have managed to take all of the market share that is now being split many ways among altcoin contenders.

According to staunch supporters of Bitcoin, Bitcoin will benefit from the advantages of the other crypto tokens in the markets, especially dApp- oriented products. But the Federal Reserve economists contest this view. They write:

“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?”

In addition, the limitations of Bitcoin in a market hugely dependent on blockchain smart contract application proves to be a major deterring issue. Plus, they say, the pioneering cryptocurrency in itself does not have a great deal of intrinsic value.

To quote them:

“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.”

Therefore, in view of all these facts they believe it is not all that worthwhile to be super optimistic about Bitcoin. However, a moderate level of success cannot be ruled out, even with altcoin competition.