Cos e litecoin vs bitcoin33 comments
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Continued from the first part, "Is Bitcoin a fraud? In this writing, I use Bitcoin almost interchangeably with cryptocurrency. For example, when I say Bitcoin economy, I could have said cryptocurrency economy. This writing is not an investment advice. You should follow your own judgment and be responsible for buying or selling cryptocurrencies.
If the value of the cryptocurrency is not zero and if it survives thanks to its advantages over the fiat currency, we can now think about what a reasonable price of it. How do we do it? But that value is the total utility people enjoy, not the price of currency. Now we need to get USD-based and Bitcoin-based prices. The quantity theory of money is an old economic theory about the relationship between quantity of money and price level.
Here is a simple explanation. If the quantity of products is the same and only the quantity of money increases, products will be more scarce relative to money. So the price of products will go up. When the quantity of money increases, this will happen with many products and services and the price level of overall economy will go up. For our purpose it is not important whether to base on production or transaction.
As long as we apply the same variable for both Bitcoin and USD. We now have methodology ready. We just need to get prices with the equation of exchange, and apply them to the PPP to get the exchange rate. The assumption of 10 years is not critical.
What is important is for us to be able to see cryptocurrency economy: If you think 10 years are not enough, you may take 20 years or even longer. Based on that, here is a forecast of the US economy in If we get price level of the US economy in based on these assumptions, we get 1.
That is, the price level became 1. The preliminary analysis was done to show the process, not the final number. Even if the model was rational, the assumptions and input numbers should be reasonable for the forecast to be predictive. Especially important are the variables which have wide range of input numbers and can have large impact to the result.
Of these, the variable that has the largest impact to the result as well as is most difficult to predict must be the size of Bitcoin economy. Supplies of USD and Bitcoin are important variables in determining prices. Maximum Supply of Bitcoin is predetermined, towards which the addition every year is also well projected. Before we dive into the numbers, we have to address what the measure should be of currency supply.
But there are more options with a fiat currency. There are different measures of money supply, such as monetary base MB , M1, and M2. Monetary base is all of the paper currencies and coins that exist in the market.
I think monetary base is a good choice to compare with the Bitcoin supply. Measure like M1 and M2 include monetary supply through banking systems, of which meaning makes it more difficult to compare directly with the Bitcoin supply.
We could use even longer term data using another source. But if we believed that the sudden growth of money supply after the financial crisis of had been an exception, we could take 6. Maybe it feels a bit underestimating as a long-term forecast, but I am inclined to take a less optimistic stance for Bitcoin valuation. Velocity of money means how many times a currency changes hands.
The preliminary analysis assumed that the velocity of Bitcoin was equal to that of USD. But if the nature and market of Bitcoin are not the same as those of USD, the velocity is likely different too. Many people seem to think that Bitcoin, a digital-native currency that does not need an intermediary, must have a higher velocity.
Silicon Valley venture capitalists seem to imagine people conducting transactions on a mobile phone incessantly. An Investopia article suggests the cryptocurrency will have the same or higher velocity than that of a fiat currency. Models often consider the velocity of money, frequently arguing that since bitcoin can support transfers that take less than an hour, the velocity of money in the future bitcoin ecosystem will be higher than the current average velocity of money.
Another view on this though would be that velocity of money is not restricted by today's payment rails in any significant way and that its main determinant is the need or willingness of people to transact. Therefore, the projected velocity of money could be treated as roughly equal to its current value.
The velocity of Bitcoin is more likely to be lower than USD or other fiat currencies. Velocity of money means how many times the entire currency supply changed hands to make all the transactions. But we do not do an unnecessary transaction just because it is easy. Transaction itself is quite easy to do even now with Internet banking, credit cards, and mobile payment.
I doubt that people are holding transactions back now because transaction is difficult. We should rather understand the velocity of money in relation to the demand of money. To put in words, people want to hold some portion of income as cash, the total demand of cash is shown as a ratio of nominal income. So the money calculated from this is the cash that people have as paper dollars or coins, in a wallet, under a bed, or in a safe.
People will hold cash when it is preferable. On the other hand, buying goods, making investments, or depositing in a bank are actions that reduce the cash balance. If M in the exchange equation and M in the cash balance equation are equal, meaning supply and demand are equal, the following relationship is derived.
Therefore, velocity of money is inversely proportional to cash balance ration. The implication is this. People holding their money under their beds has the effect of quantity of money being decreased. For example, if more people hold cash, price of goods will go up. Real commercial transactions using cryptocurrencies are increasing, but more seem to be for investment in cryptocurrencies themselves. We could say people are holding Bitcoins.
It means high cash balance ratio and low velocity of money for Bitcoin. What about in 10 years? When the price of Bitcoin is high enough, the speculative demand for Bitcoin will decrease. But I think the cash balance ratio will still be higher than that of USD. The government, or the Fed, controls the supply of fiat money, and historically they have kept increasing the supply.
As a result, we live in an economy that has inflation as a constant feature. But most of cryptocurrencies including Bitcoin explicitly limits their supply. An economy without constant inflation is possible, and maybe one where decreasing price is normal assuming rising productivity. Of course, financial markets will develop in the crypto economy, and people might deposit at banks rather than hold cash of cryptocurrency.
Cash balance ratio is still likely higher as the benefit of holding cryptocurrency is higher compared to the current fiat money. So, I believe the velocity of Bitcoin will be lower. The most important variable is the size of Bitcoin economy.
If we apply 3. The underground or black market consists of transactions made outside official economy. But the number below only includes transactions of illicit products and services like drugs, prostitution, and counterfeit products. IMF forecasts that the global economy will grow at 3. The above source predicted And we get 3, billion USD in If Bitcoin represents the overall cryptocurrency, market value may be better than price to compare with the present.
As of this writing, total cryptocurrency market value is about 1. If the more conservative scenarios of 1 or 2 are right, the market cap will become 2. Scenario 4 or 5 implies that cryptocurrency reaches a status of an internationally accepted currency, and if that happens the market cap will be 20x to 72x of the current. No one knows which scenario will become reality. The usefulness of this analysis to apply a prediction to estimate the price and market value of cryptocurrency.
I believe the model is pretty sound, but the real difficulty lies in foreseeing how the Bitcoin makes progress in the real markets. I did not present any scenario in which cryptocurrency replace a fiat currency of a national economy, but no one can say it is not possible. Perhaps countries with very high inflation or poorly managed economy may adopt cryptocurrencies. Or you could have a scenario based on micropayment. It differs by country, but currently people tend to pay small amount with cash rather than a credit card.
And online micropayment is still a problem to solve. If cryptocurrency can address these cases, it could make micropayment its market. One thing to keep in mind is, none of the scenarios presented is the worst case. It is possible for cryptocurrencies to fail to take roots in the world and simply disappear.
Try your own cryptocurrency valuation with an Excel spreadsheet that I developed.