Types of Users
Most users of Bitcoin and Ethereum are of one of the two types: the commercial user and the speculative user.
The commercial user uses bitcoin to purchase stuff from either physical or online store. Similarly, the commercial user of Ethereum uses Ether for staking against contracts such as the issuance of initial coins. Other applications could include supply chain payments, betting contracts and prediction markets.
The speculative user holds onto the crypto-currency in the hope that its value would continue to rise. The commercial user pays a small fee each time he spends Bitcoin/Ether. This fees could be as low as 0.0001 BTC (the median transaction fees is about 18 cents). You can look at how to calculate and choose your transaction fee here.
Supply and Demand
Bitcoin and Ethere, unlike any other form of asset e.g. Gold or diamonds or cash, is limited in supply. The table here provides the schedule for production of Bitcoin. New Ethereum issuance would stop when Proof-of-stake is enabled by the nodes.
The total number of Bitcoins produced reduces exponentially, as time passes, and by about 2041, almost all new Bitcoin production would stop. New Bitcoins are produced as a consequence of mining. Each miner, who creates a new block after validating a set of transactions is rewarded in Bitcoin by the network. Over time (approximately 2-4 years time), these rewards halve.
As the number of merchants such as Microsoft X box store or Overstock starts accepting Bitcoin, the number of commercial users for Bitcoin would increase. Imagine remitting money or purchasing a digital good from a non-local store without needing to pay a 30$ transaction fee to the bank. Here is a list of US merchances accpeting Bitcoins. Simultaneously, as awareness about Bitcoins and Ether increases, the number of buyers purchasing these for speculation increases.
Economics works until regulation
Given these facts i.e.
- A limited supply of bitcoin and Ether.
- Increasing commercial usage (by means of increasing number of global merchants accepting BTC and using Ether).
- Increasing number of speculative users ( by means of real time trading and buy-and-hodl investing for BTC and Ether).
It is almost a no-brainer to see why conversion rates (for BTC-Ether) are increasing. We’re not accounting for the lost BTC/Ether per year.
However, these laws of economics hold only until some external event (what economists call shock) happens. For example, a regulatory authority decides that it is too risky for its citizens to bypass financial controls and engage with a global market. The regulator could then entirely ban BTC/Ether and make it illegal to hold/trade in the same within the country. This is what we saw during the past week in China. Venezuela another country that saw massive deflation of their local currency banned bitcoin earlier.
But most global markets that want to encourage a free flow of capital to their economy would not ban any asset, in the name of protecting it’s citizens from speculation. (For example, would any country prevent its citizens from collecting art, or vintage cars or any other antiquity in limited supply.)