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Image source: https://www.flickr.com/photos/105644709@N08/

Image source: https://www.flickr.com/photos/105644709@N08/

After nearly a month of relative price stability, bitcoin prices took a nosedive late last week. While a drop of $30 over the course of a few days is hardly unusual in the bitcoin world, such movements generally seem to follow major news or some specific trend. This time, however, many explanation-seeking bitcoiners have been baffled. Is it the reality of the proposed New York Department of Financial Services (NYDFS) rules finally sinking in? Is it the failure of a technical analysis-predicted mid-summer price bubble to materialize? Is it the Ecuadoran ban on digital currency?

Given the optimism spurred by recent news of mainstream bitcoin adoption by companies like Dell, the launch of the first fully compliant U.S. bitcoin exchange, and the recent moves by investors like Barry Silbert to focus full-time in building a Wall Street-friendly bitcoin, it’s hardly surprising that many people expected bitcoin’s trading volume and price to rise. There is much to be excited and optimistic about, particularly from the perspective of a daily user or long-term investor. Bubbling underneath, however, is a simple fact of economics: Too much supply, not enough demand.

It’s often noted that roughly 3,600 BTC are mined every day. At the recent price level of roughly $620, this means that the market must absorb nearly $2.2 million in new bitcoin purchases every day. That’s $66 million in bitcoin purchases needed every month just to keep the price stable. What’s more, when big retailers like Dell begin accepting bitcoin, they generally use a service like BitPay or Coinbase to instantly cash those purchases out. If there was considerable pent up demand as Expedia, Newegg, TigerDirect, Overstock, Dell and all of the now bitcoin-enabled Shopify clients began accepting bitcoin, this could equate to a massive amount of BTC that needs to be sold, driving up supply.

Many of those announcements are weeks old, however. So why is the price falling now?

Although we may never know for sure, there is one theory that seemingly holds up to most tests: The end of the month. After weeks of relative stability, many miners and investors are now faced with the everyday reality that rent and utility bills will soon be due. Miners sell some of their BTC stock onto a market with tepid demand. Too much more hitting the market than the $2.2 million predicted by the price, and the exchanges are now flooded with too much bitcoin. Until the demand again outstrips the supply, the price will fall. If true, modest gains may be seen in coming weeks as the oversupply of BTC is slowly dissolved on the exchanges.

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