Demand, Supply and Elasticity of Bitcoin: Economics Assignment

This economics assignment discusses the demand, supply and elasticity of Bitcoin. It covers the shape of demand and supply curve, elasticity of demand and supply, and the factors contributing to the rising prices of Bitcoin. It also discusses the effect of cryptocurrencies on GDP and monetary policies of Australia.

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Economics Assignment
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Table of Contents
Introduction......................................................................................................................................2
Demand, supply and elasticity of Bitcoin........................................................................................2
Rising prices of Bitcoin...................................................................................................................4
Effect of Cryptocurrencies on GDP and monetary policies............................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
Bitcoin, a form of crypto currency introduced in 2009 has spread rapidly on the platform
of digital currency. Bitcoin is beyond the control of central bank regulation and is issued through
a mathematical algorithm. Transaction made using Bitcoin as a medium of exchange is recorded
in blockchain. Because of increasing flexibility and ease of transaction, demand for Bitcoin is
growing at faster pace (Baur, Hong and Lee 2015). The supply of Bitcoin is limited in relation to
its demand. This raise price of Bitcoin to a considerably high level. Central banks of different
developing and developed nations closely monitor the movement in Bitcoin market in order to
maintain a monetary control in the nation.
Demand, supply and elasticity of Bitcoin
Shape of demand and supply curve depends on the dynamic movement of demand and
supply with change in price. Demand of a good signifies collective wants of buyers as a whole in
context of the specific good. A few years ago, price of Bitcoin was 1200 USD each. Following
high price there were only few people who are able and willing to buy Bitcoin. In August 2015,
price of Bitcoin reduced to 225 USD (Wilson and Yelowitz 2015). The lower price by allowing
more people to buy Bitcoin increase demand of Bitcoin. This makes the demand curve of Bitcoin
to slope downward.
The term supply refers to the ability of producers to supply a certain good. Unlike regular
currency, supply of Bitcoin comes from Blockchain. It involves a series of calculation, which are
solved by different computers known as Bitcoin miners (Datamonitor 2012). The miners are
awarded only a small portion of Bitcoin for every time the miner solve the blockchain. The
calculations in blockchain secure transactions of Bitcoin from one person to another. This

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restricts the supply of Bitcoin as for creating in order to mint a Bitcoin the miners have to solve a
portion of blockchain.
Demand and supply elasticity of a commodity refers to response of quantity demanded or
supplied in response of change in price. A good is said to have elastic demand if there is a drastic
change in quantity demanded following change in price. Demand is inelastic when it does not
exhibit drastic changes in response to price (Polasik et al., 2015). Similar is the case for supply
elasticity as well. The demand for Bitcoin is considered price elastic as there many close
substitute available for Bitcoin as a currency. Consumers can easily choose any other similar
kind of crypto currency or fiat currency in place of Bitcoin. The demand elasticity of Bitcoin has
been demonstrated in 2013. During this time, one Bitcoin costs 266USD in April. In the same
year price rose to 1250 USD in November (Kelly and Saoshiro 2017). The drastic change in
price and demand indicates that Bitcoin indeed has an elastic demand. As far as Bitcoin supply is
concerned, the supply of Bitcoin is inelastic, as supply cannot adjust much in response to price
change.
Figure 1: Demand and Supply in the Bitcoin market

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(Source: as created by Author)
Rising prices of Bitcoin
Bitcoin has enjoyed an astonishing price gain as measured by Bitcoin Price Index.
Bitcoin is the largest currency of the world has accounted increases by more than 1300%
(theconversation.com 2018). Several factors contribute to a rise Bticoin price.
Growing visibility
The visibility of Bitcoin has skyrocketed as revealed from the data of google searches and
activity in Social Media. Social media posts that involve Bitcoin hit to a recorded high level.
Bitcoin has received a growing appreciation from different social media. The increasing
acceptance and awareness is considered as the main driving factor for Bitcoin (Lam 2017). It
receives acceptance in many businesses as a medium of transaction.
Growing interest of investors
The interest of investors in Bitcoin has increased sharply. In the digital currency market,
a great institutional interest has been observed. Announcement relating to future of Bitcoin
attracts interest of Bitcoin industry players resulting in higher adoption of Bitcoin as a means of
exchange. In 2017, there were nearly 120 active crypto hedge funds with another 70 is in
formation stages. The interest of retail investors is also growing as indicated from increasing
number of users account.

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Figure 2: Increase in Bitcoin price
(Source: as created by Author)
Political risk
The political risks find around national currency affects the Bitcoin price. People uses
Bitcoin to hedge against price fluctuations of a particular currency. For example, in 2015 the
purchase of Bitcoin increased following economic crisis of Greece (Peters 2017). Bitcoin price
also recorded two months of steep increase in price during election of Donald Trump as the
president of US.

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Figure 3: Closing price of Bitcoin
(Source: theconversation.com 2018)
Effect of Cryptocurrencies on GDP and monetary policies
In Australia, users of credit, charge and debit cards paid nearly $3.4 billion for processing
fees in 2013. However, with 16 percent average transaction cost of EFTPOS, little room is left
for crypto currencies to make any improvement in domestic point of sale. Bitcoin plays a crucial
role in supporting the economy and enhances export driven growth. The spread of Bitcoin and
other crypto currencies reduces cross-border transaction fees and increases accessibility of
Australian goods in global market (Peters, B. 2017). As the crypto currency market develops
overtime, there is an expected decline in trading cost. Other elements contributing to trading
frictions like GST, complication arising from requirement for maintaining record and other
operational limitations are also contributed. All these expected to increase GDP of Australia but
at the cost of increasing volatility associated with price movement of crypto currency.

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The adoption of crypto currency could restricts the ability of RBA to set monetary policy.
The spread of Bitcoin reduces effectiveness cash rate indicating a loss of control of RBA on
creation of money and credit in the economy. Expanded use of crypto currency has a potential
threat on the revenue of central banks earned from currency issuance. This can inject instability
in the financial market (Rajadhyaksha 2018). The reduced power of RBA to control inflation
increases volatility in the price level that can affect economic activity of Australia.
Conclusion
Growing acceptability of crypt currencies has increased interest of different economic
agents such as investors, policymakers and government. One such popularly used crypto
currency is Bitcoin. The demand curve for Bitcoin is downward sloping with a relatively elastic
demand. Supply of Bitcoin on the other hand is relatively inelastic. Increasing demand along
with almost fixed supply raises Bitcoin prices to a considerably high level. Growing visibility,
increasing interest of investors and political risks are other factor contributing higher prices of
Bitcoin. Spread of crypto currencies though is expected to increase GDP of Australia but it can
bring economic instability by reducing effectiveness of monetary policy.

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References
Baur, D. G., Hong, K. and Lee, A.D. 2015. “Bitcoin: Currency or Asset?”
https://mbs.edu/getattachment/fircg/FIRCG-2016/Papers/8-Adrian-2c-KiHoonBitcoin-Baur-et-
al-2015-P.pdf. Accessed 6 February 2018.
Datamonitor. 2012. “Virtual currencies are on the radar of central banks, but regulations remain
a long way off.” MarketWatch: Financial Services, 12(12): 23.
Kelly, J. and Saoshiro, S. 2017. Bitcoin plunges below $US13,000, heads for worst week since
2013, Canberra Times, December 23, viewed 6 February 2018,
<http://www.canberratimes.com.au/business/banking-and-finance/bitcoin-plunges-below-us13-
000-heads-for-worst-week-since-2013-20171222-p4yy0c.html>
Lam, E. 2017. What the world’s central banks are saying about cryptocurrencies, The Age,
November 27, viewed 6 February 2018 <http://www.theage.com.au/business/markets/bitcoin-
should-be-outlawed-says-nobel-winner-joseph-stiglitz-as-cryptocurrency-hits-us11000-
20171129-gzvjx4.html>
Peters, B. 2017. Here’s what Fed Chief Janet Yellen thinks about Bitcoin. Business Daily, 13
December 2017.
Polasik, M., Piotrowska, A.I., Wisniewski, T.P., Kotkowski, R. and Lightfoot, G., 2015. Price
fluctuations and the use of Bitcoin: An empirical inquiry. International Journal of Electronic
Commerce, 20(1), pp.9-49.

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Rajadhyaksha, N. 2018. Monetary policy’s crytocurrency challenge, viewed 6 February 2018
<http://www.livemint.com/Opinion/49fqM520KSoQR2OvkfnVNI/Monetary-policys-
cryptocurrency-challenge.html>
The Conversation. (2018). Four factors driving the price of Bitcoin. [online] Available at:
https://theconversation.com/four-factors-driving-the-price-of-bitcoin-87244 [Accessed 10 Jun.
2018].
Wilson, M., and Yelowitz, A. 2015. Characteristics of Bitcoin Users: An Analysis of Google
Search Data, Applied Economics Letters, 22 (13): 1030–36.