The Evolving Economics of Bitcoin, Gold and Fiat Currencies

http://www.cmegroup.com/education/featured-reports/evolving-economics-of-bitcoin-gold-currencies.html

by brakmic • 9 years ago

131 160 9 years ago

This was an interesting article, thanks for sharing it.

But as an average consumer and amateur investor (at best) I'm much more interested in using Bitcoin (and other digital currencies) as a medium of exchange rather than as a store of value. For short term transactions (ex: exchange fiat for bitcoin -> transfer bitcoin to recipient) digital currencies offer a very fast, secure, and simple method for transferring value across borders that would traditionally take much longer than a few ticks of the blockchain. And over that shorter term their value is relatively stable and suitable as a medium for such exchanges.

josh2600• 9 years ago

Did the CME group just call bitcoin dramatically undervalued??

cko• 9 years ago

I didn’t read it that way. The article seems to have a balanced tone, though the conclusion is that bitcoin is kind of digital gold and lacks the economically stabilizing effect of fiat currencies.

vslira• 9 years ago

"While there is no logical reason to suppose that bitcoin should have the same value as gold, if it did, each bitcoin should be worth approximately $285,000, 45 times the current market price. As such, one might wonder: is bitcoin still vastly undervalued even after a 6,000,000% rally?"

Only if btc's total worth equates gold's. Which is a possibility, for better or for worse

lsd5you• 9 years ago

Yes but we don't have to industrialise the asteroid belt to dump equivalent quantities of crypto-currency into the market ...

throwaway5752• 9 years ago

"The phenomenal increase in the value of bitcoins, by 6,000,000%, over the past seven years, has taken the investing world by storm. CME Group will launch Bitcoin futures in the fourth quarter of 2017."

This is promote an upcoming product.

nikcub• 9 years ago

Their ads are everywhere - took me a while to notice that it's the same CME that run all of those expensive video ads that have that scammy "get rich working from home" feel to them.

Their user acquisition cost must be $1k+ because barely a day passes that I don't see them somewhere - and it's a pretty broad base they deliver to since I use multiple profiles / incognito windows

pelario• 9 years ago

Why the downvotes?

marcosdumay3• 9 years ago

Aren't there 4 zeroes too many in that number?

once_inc3• 9 years ago

In juli 2010, 1 bitcoin was worth 0.08 usd.

jiggunjer4• 9 years ago

Again the flawed gold comparison. You can still trade gold after the miners stop mining.

saalweachter3• 9 years ago

I'm honestly curious what role Bitcoin has played in the relative stability of gold over the last ~five years.

stevehawk• 9 years ago

I'm gonna gamble and guess none

thriftwy3• 9 years ago

Nothing prevents you from mining yourself and still confirming transactions if you're the last Bitcoin user in the world.

bhaak• 9 years ago

It depends on how fast the other miners disappeared so that the difficulty can adjust in a timely manner.

If the hash rate drops to fast and you are the last miner left, you will have trouble finding a block and so you actually can't mine new blocks.

Of course, as the last miner in the world you won't have trouble conducting a hard fork the resets the difficulty.

jiggunjer4• 9 years ago

Common sense prevents me. How much value will it still have if there is a single miner? The integrity of the blockchain is ensured by the number of miners.

Also the gold analogy is still flawed.

thisisit2• 9 years ago

The whole article in a single sentence: "However volatile they may be, the reason why gold and bitcoin are perceived as stores of value is simple: their money supply doesn’t grow quickly and, in the case of bitcoin not at all, some day."

Ergo, bitcoin is like gold. Hence, should be valued as gold.

paulgb2• 9 years ago

Then shouldn't every deflationary alt-coin also be valued like gold? You can see where this is going...

thisisit2• 9 years ago

I know, that's why I highlighted the flawed logic therein. Sure, one can talk about bitcoin and blockchain as being revolutionary but every time someone with a finance degree writes something, they go by hype and not substance.

icahnvalyou• 9 years ago

Shouldn't every resource be valued like gold? There's a limited supply of copper... You can see where this is going.

Gold is a weirdly sticky anachronism of a wealth store that never made any sense in the first place.

vintageseltzer• 9 years ago

By that logic, gold would have crashed long ago and been replaced by all the other alt-rare-metals out there. It has not.

The network effect should not be underestimated. The world is filled with examples of inferior systems that exist simply because they have more momentum than others. Investors demand a “store of value” investment vehicle. Up until now, gold has led that role. Now Bitcoin will take over. Not because it is the best, but because it is first to market and has enough momentum and utility to replace it.

bluGill3• 9 years ago

No, gold has one advantage over bitcoin: in the worst case scenario (where you survive, though a couple religions let you take it with you) it is a physical thing that is somewhat pretty to wear as a ring on your finger.

Bitcoin and the like are entirely based on the idea that somebody else will want them as currency forever. Gold is based on somebody will want ti for either currency or jewelry forever. That gives gold a slight edge.

I don't know if it is significant, but it is a factor.

QAPereo• 9 years ago

Gold is also truly fungible, and has maintained some value for thousands of years.

wuliwong2• 9 years ago

I've thought about the idea that the value of a cryptocurrency is in its network. Since bitcoin has a large network it has some value that can't easily be copied or replicated. I have wondered if the value is actually closer to something like Facebook stock than gold.

KomradeKeeks• 9 years ago

Gold is also a pretty good conductor of electricity

joosters• 9 years ago

Yes, there will be only 21 million bitcoins.

Oops, fork! Now there will be 42 million.

Another fork! Now the maximum is 63 million. There's no such thing as scarcity for a virtual currency.

zodiac• 9 years ago

Post-fork, two coins like BTC and BCH are not fungible either from the networks or from a user's point of view

genericacct• 9 years ago

Finally a way to short bitcoin without having to worry about counterparty risk!

anonemouse145• 9 years ago

Bitcoin isn't Fiat currency. Bitcoin Cash doubles the number of coins in an instant, and future updates could do more, and the market value of each coin increases rather than halving.

Choose one.

neilwilson• 9 years ago

No clue at all what money is, or about.

Yet another 'money is a commodity' view that just doesn't fit reality.

Money is a representation of credit. That's actually what we use it for.

https://medium.com/modern-money-matters/crypto-shilling-8799...

indescions_2017• 9 years ago

Bitcoin comparison with Gold has become gospel. And with it a typical upper bound on the price estimate of a single coin in the ~$100K range. The assumption is that the total Gold market is about $10T globally and Bitcoin will displace some percentage of that. With the current Bitcoin market valuation based on exchange rate approaching $1T and 25% or so mining complete.

But a much better estimation might arise from looking at global consumer demand for Digital Payments. By the year 2020 its conceivable that we are at 1T digital transactions. At an average value of $10 each, we are again speaking of roughly the size of the total market for Gold.

The million dollar question is: What percentage of all digital transactions globally will be made in BTC?

Approaching the problem from the FinServ lens, rather than FinTech, can radically alter your view ;)

rublev• 9 years ago

Approaching the problem from the FinServ lens, rather than FinTech, can radically alter your view ;)

What do you mean?

immad• 9 years ago

Bitcoin is valued at $110b with 16.66m mined out of 21m. So ~80% mined [1]

1 - https://coinmarketcap.com/currencies/bitcoin/

saalweachter3• 9 years ago

To evaluate the price of a Bitcoin from the perspective of its value as a unit of exchange you need to take into account the volume of the transactions and the time currency is held between being paid and being spent.

If there were $1T of Bitcoin transactions each year and the coins were held for 1 year in between, then yes, the total value of all circulating Bitcoin need to be $1T. If the coins are held on average for a week, you only need $20B worth of circulating Bitcoin.

When you leave out that last number, you implicitly assume whatever interval you're talking about is the transaction duration, which is usually a bad assumption.

altern8tif2• 9 years ago

How does Bitcoin make the transition from a gold-like store-of-value to a medium-of-exchange then?

If the general consensus is that Bitcoin's value will continue to appreciate, it makes more sense for one to hoard it rather than to use it as digital currency.

ploggingdev• 9 years ago

A digital currency that replaces fiat currencies as a medium exchange cannot have a fixed supply. In fact, central banks, like the Federal Reserve, might even create their own cryptocurrencies but ones that are designed to optimize economic growth. It will probably need to have constant money supply growth and preferably money supply growth that matches economic needs and not some algorithm’s hard, mathematical constraint.

Finally someone acknowledges this reality. I've brought this up multiple times in Bitcoin discussions and never heard one good argument to backup the claims that Bitcoin can became a mainstream p2p fiat replacement for the masses all while having a 21 million coin limit.

Sangermaine• 9 years ago

Bitcoin can became a mainstream p2p fiat replacement for the masses all while having a 21 million coin limit.

Does anyone outside of the most zealous ideologues really believe this?

wuliwong2• 9 years ago

My anecdotal experience is most believers in the future of crypto believe that there will be a number of cryptocurrencies that will be used.

grubles3• 9 years ago

Why does one have to be zealous to understand bitcoins are divisible up to eight decimal places? A single bitcoin is really 100,000,000 bitcoin "satoshis" (1.00000000). "Satoshis" being the smallest unit (0.00000001).

So, there really are 2,100,000,000,000,000 bitcoin units. When you purchase a single "bitcoin", you really are purchasing 100,000,000 "satoshis".

rthomas6• 9 years ago

Yeah, money velocity is important, aggregate demand is real, and currency hoarding is unavoidable with a deflationary currency. Why buy something when you can buy more somethings tomorrow?

kekeblom• 9 years ago

Practical issues aside and from an individual’s perspective, why use an inflationary currency at all if you can use a deflationary one?

ErikVandeWater• 9 years ago

Because everyone wants things much more today. Seems like a partial solution for our failure to save.

https://www.theonion.com/chipmunk-s-plan-for-future-better-c...

Lasher• 9 years ago

"Why buy something when you can buy more somethings tomorrow":

In anything technology related, this has already been true for a couple of decades now. I can buy a phone, TV, computer, tablet etc today, or I can wait a year and get much more for the same amount of money.

People still buy all of those things because, as others have posted, you reach a point where you just have to or want to upgrade because the alternative is you spend years on old technology endlessly waiting for "just the right time to buy".

IIAOPSW2• 9 years ago

Thank you so much! I'm tired of all the goddamn Philistine's that have dunning-kurger'd themselves into thinking that deflationary currency is a good idea and inflation is a central bank conspiracy.

That said

It will probably need to have constant money supply growth and preferably money supply growth that matches economic needs and not some algorithm’s hard, mathematical constraint

Why not have a "hard math" algorithm which looks at the trade volume in the blocks and adjusts accordingly.

colordrops3• 9 years ago

Can you explain to us idiots why a growing money supply is necessary? I've heard various reasons but none convincing.

stri8ed• 9 years ago

Why not have a "hard math" algorithm which looks at the trade volume in the blocks and adjusts accordingly

Because it will be gamed.

wmf• 9 years ago

Why not have a "hard math" algorithm which looks at the trade volume in the blocks and adjusts accordingly.

Indeed. https://blog.ethereum.org/2014/11/11/search-stable-cryptocur...

QML3• 9 years ago

Not sure if I agree with your use of 'Philistine' and 'Dunning-Kruger'..

Having a hard math algorithm would be either too rigid or technological for our government.

There is probably a monetarist argument that looking at trade volume alone cannot understand the nuances and needs of an economy; mind that trade volume would be one of the more easily-accessible data. And that centralized banking is needed to aggregate that information, analyze it, and then relay that to government to decide what to do.

But what you're talking about has already been implemented in Bitcoin Cash during their emergency difficulty adjustment.

beaner• 9 years ago

It's possible to have a different opinion on things without being a victim of "Dunning-Kruger".

ojr3• 9 years ago

deflationary currency is not that bad of idea, the S&P 500 is an index of 500 of the best American companies and last time I check the number of shares do not increase year by year and it seem to be working for $FB, $GOOG, and $AAPL and for now $BTC...

coconutrandom• 9 years ago

never heard one good argument to backup the claims that Bitcoin can became a mainstream p2p fiat replacement

There are many reasons Bitcoin will not be the currency for daily transactions. Some of them are even technical. But, that is ok because it will be used as a store of value filling a need similar to gold. So I guess I'm agreeing with you. But it's taking people awhile to come to understand this subtle difference.

feriancek• 9 years ago

Bitcoin are (effectively) infinitely divisible. Money supply creation on it's surface is meant to replace notes that age out of supply. Inflationary growth is a byproduct (albeit a good one). Bitcoin supply will also age out (as people lose access to private keys). This creates a natural inflationary action that pushes the value up. No new coins need to be created, just take what's in the supply and break it up into smaller values. This also removes the politics out of the money supply.

Many users are already using mBTC as a base unit (0.001BTC) as it's much easier to transact with at a human level. 1mBTC currently is ~ $6.50. The current smallest unit (1 Satoshi) is worth 0.0001USD, plenty of room for further unit division. It's been confirmed on a technical level that moving that division deeper is possible, but unnecessary in the short term.

baron816• 9 years ago

You definitely have inflation and deflation backwards here.

wodenokoto2• 9 years ago

Bitcoin is the digital version of returning to the gold standard (right now I'd say it's more like digital gold, but if they can get fast micro payments, it will be like an actual currency)

What might surprise you is that there are a lot of people who think that planned inflation is a way for governments to rob people who are prudent with their personal finance (and save up money)

If we are 10 people who each have 100 dollars, we have a money supply of 1.000, evenly distributed. If I'm the national bank and I print another 1.000, the money supply has doubled, while the value of the total money supply has remained constant. Only now, instead of holding on to 10% of the total supply, I now own 55%!

So as long as somebody have control of the money supply, it is not a free financial market. Limiting the money supply, either through the scarcity of gold, or cryptography of bitcoin ensures that the market will distribute money, and not the printers.

wodenokoto2• 9 years ago

I get that people consider this a poor argument, but parent asked what the argument for bitcoins deflationary nature, and to the best of my knowledge this is the argument for it, and it is found within groups who identify with anarchistic economics and austrian schools of thought.

jackcosgrove• 9 years ago

Given this reality, why not create a multiplicity of currencies, all convertible with each other and with different inflation rates? Currently we have a hodgepodge of assets with various interest rates that are all convertible with the fiat currency, but as with the gold and silver standards, we are mapping objects with other kinds of utility, such as houses, onto the financial asset spectrum and distorting those other uses. Interest rates should just be used to efficiently allocate resources across time, and the vehicles we have of doing so are very rough and prone to supply and demand shocks for reasons that have nothing to do with one's value of current time and future time.

etr-strike5• 9 years ago

I believe a fixed supply of currency is beneficial when determining price. The ability of an institution to secretly change the amount of a currency used to measure price introduces yet another variable into the valuation equation.

Additionally, when the dollar was fixed on the gold standard, employers needed to be upfront and honest with their employees. When they needed to cut wages, employees knew it was happening. Much of the labor movement and union formation happened because employers needed to be honest about what they were doing.

I've yet to hear a convincing argument that inflation is good for me.

sordidasset• 9 years ago

But the fed doesn't change the dollar's value in secret. Indeed, wages are worth less now, but it's not because employers are having back-room chats with the central bank.

dreamdu5t• 9 years ago

What’s clear from all these comments is that economic theory is bankrupt and impotent at explaining or predicting anything. It’s quite odd constantly hearing why bitcoin can’t work or whether it can be labeled a currency according to academic theory X, yet reality doesn’t care.

Bitcoin is amazing simply for showing us that monetary economists have no clothes. They’re astrologists that use math.

matt40772• 9 years ago

Nobody is saying that bitcoin can't reach new heights every day. All it needs is enough idiots to buy.

What they are saying is that it has exactly zero chances at becoming a serious rival to the US$ or other currencies as a medium of exchange.

And that prediction still seems pretty accurate, considering there's just about exactly almost no transactional volume happening in bitcoin. It's also now more expensive than credit card fees for anything <$100, and it takes much longer than PayPal or Apple Pay or cache. It's also not really anonymous, but of course everyone always knew that. It's so risky to store your private keys on anything with ethernet the real pros print them and put them in bank safes. It's about as decentralised and bottom-up democratic as you can be when you're basically living at the mercy of the Chinese government, which, by the way, has shown that autocratic governments can shut it down with less effort than it took Obama to kill a fly.

andr3w321• 9 years ago

"What they are saying is that it has exactly zero chances at becoming a serious rival to the US$ or other currencies as a medium of exchange."

There is definitely a non zero percent chance of this happening. How much % chance is debatable, but it's certainly >0.

Jeff_Brown• 9 years ago

Some fiat currencies lose their value slowly, others do so quickly. That loss of value is precisely what makes them useful. Without the fear of inflation, holders of currency tend to hoard rather than spend it. Hoarding currency depresses economic growth and creates financial instability.

Economist here. That relationship is not clear. A currency skyrocketing in value induces suboptimal willingness to delay spending, yes, but one plummeting in value induces a similarly suboptimal willingness to spend too early.

Moreover, a depressed economy can cause deflation, rather than the reverse: Sluggish economic activity implies weak aggregate demand (people not buying a lot of stuff), which can lead prices to fall.

TheGrassyKnoll2• 9 years ago

"...the Federal Reserve, might even create their own cryptocurrencies..."

  If that happens, wouldn't demand for Bitcoin take a hit ?

tradersam• 9 years ago

I don't think so. It would be the government legitimizing the industry, yet the need for non-government controlled currencies would still be extant.

The Evolving Economics of Bitcoin, Gold and Fiat Currencies

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