Steem-Backed Dollars - Could a Rise in Supply Lead to a Rising Price?

Traditional wisdom holds that a commodity's price, especially when said commodity has no intrinsic use-value (as is the case with currencies, crypto or otherwise, and stocks), is largely dependent on supply and demand. When supply outstrips demand, prices go down. When the existing supply cannot meet the demand, prices go up.

Look then at a "stable" cryptocoin or stock. All else being equal, we assume their price is stable because the supply and demand are matched. What would happen if the supply were suddenly to increase? The price would go down.

So how does Bitcoin's price keep rising, even though new coins are continuously minted? Well, the supply can't meet the demand. Moreover, the rate of supply is constant, so people can plan for it.

Let us now look at Steem-Backed Dollars, or SBD, in which we receive half of our reward's value (simplified, but this was the original design behind the system). The higher Steem's value, the more SBD that gets printed. Steem is worth $1 USD? Then for every "$1 Author Reward" we receive, we receive 1 SBD. Steem is worth, say, $6 USD? Then for every "$1" we receive as an author reward, we actually receive 6 SBD.

Steem has been worth about $3 USD over the past month, and recently made a jump to a value of over $6 USD. I recently wrote a post about how Steem's rise might not be good for us. I recommend also checking my reply to myself as it includes an important correction. Regardless of the fact that Steem's rise is good for us, it does mean more SBD is printed, and as SBD is the liquid form of our rewards that we can easily translate to other cryptocurrency or fiat (dollars, euros, etc.), it's not all good.

But I've recently come across a counter-intuitive idea that goes against classic market wisdom: What if an increase in SBD's supply will actually lead to its price going up? Crazy, right? So let's go over why that would happen.

Take a look at CoinMarketCap's page containing all coins. What is the default way coins are sorted by? Their market cap. How do you get a coin's market cap? You simply multiply its circulating supply by the price of a single coin. How do you make a coin rise in the standings? Well, you increase one of either multipliers. Now, we can't control SBD's price, and in fact, that is the controlled variable, but we can increase its supply. If more SBD is printed, all else being equal, it will rise in the table. And while it was done by increasing the supply, which should reduce its price, it might make it more lucrative to potential investors, simply because it's placed higher in the standings.

Furthermore, SBD is currently in the bottom 20-25% of the table when sorted by "Circulating Supply." One of the reasons Steemit is such a successful coin is that it can be used more widely and easily. If you want more Steem, it's readily available. If you want to sell it, the same thing. It's a more easily exchanged currency, and more exchanges and markets are interested in it, also because of its "translatibility," due to its higher liquidity. For comparison, Steem is present on 5 exchanges, as part of 12 markets (trading duos), whereas SBD is present on 4 exchanges, as part of 7 markets. In both cases, two exchanges and markets dominate the picture, but the willingness of exchanges and markets to be there for Steemit over SBD is a limiting factor on SBD's tradeability and thus growth.

Finally, due to the small circulating supply, and thus low volume of SBD, it's highly volatile, where a single actor has the capacity to move its price up or down to a large degree. Quite a few investors do not like this volatility, and like something a bit more stable (yes, even in the cryptocurrency market - just look at Tether's success, as the currency with the 4th highest 24-hour volume). Increasing the supply and trade-pairs of SBD will help stabilize it on that front as well.

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So, do I think an increase in SBD production, due to Steem's rising price, is going to translate directly to an increase in its price? No, I don't. I think on the short term it'll lead to a slight uptick because it's related to Steem, followed by a slightly larger downtick because, well, supply will outstrip demand. But I think in the slightly longer term, an increase in supply is a requisite condition for SBD to become more widely adopted, and for its price to increase.

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_{^{Image taken from Pixabay.com}}