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It has recently been observed that majority of Bitcoins in circulation have been hoarded for at least six months. This is probably not unconnected with the slump in the price of the digital currency.

This observation was made by The Great Wall of Numbers’ author Tim Swanson, based on available data. It was observed that up to 70 percent of Bitcoins have experienced no movement since the onset of the slump in the price of the crypto currency in June.

The worrying thing about this conclusion is that this observed hoarding is coming at a time when more and more merchants have started to accept Bitcoins for payment. Obviously, the significant increase in the number of businesses and non-profits ready to accept the digital currency has not proved enough to convince those holding different units of it to release them into the public domain. The drop in fiat money value of Bitcoins has no doubt played a role in this unhelpful behavior.

Influence of fiat money

Data has shown that there is significant Bitcoin activity when the value of the digital currency in fiat currency rises. The reverse is the case when the price is down. From this perspective then, it is easy to understand the reason behind the hoarding being experienced in the system. It is apparent that there will be ready buyers now that the price of Bitcoin in fiat currency is low — there is high demand. But those on the supply side are highly reluctant to give up their precious crypto currencies, having paid higher amount for them prior to the slump in price.

This hoarding behavior is similar to that usually seen in the gold market. People are unwilling to sell at low price and ready to when the price shoots through the roof. Just like in the case of the yellow metal, people are more likely to turn to Bitcoin, even at higher prices, when their faith in fiat money is shaken. One thing that drives the value of gold is its scarcity and this has contributed to limit its wide use as a medium of exchange, especially for smaller transactions. Bitcoin hoarding certainly creates scarcity, which can work against its wide adoption if care is not taken.

Finding the way out

The main problem at the heart of the significant Bitcoin hoarding observed is the measure of the digital currency’s value in terms of fiat currency. The most viable solution, therefore, lies in having businesses that value items exclusively in Bitcoin rather than the amount the digital currency can command in national currencies. This will greatly help to insulate Bitcoin against the indirect effect of monetary control by national authorities. If this is possible, such a move can help carve out a somewhat autonomous subset of the economy.

Rather than hoard Bitcoins, they are best used for transactions so as to avoid discouraging those looking to buy in into the digital currency. Hoarding has the potential to give off an impression of an illiquid market. Gradual sale or purchase can help raise prices and interest in the crypto currency.