Inflation and deflation are gathering an increasing part of our consciousness recently with the US Feds continual hype and delay of raising there interest rates from "near zero". Next month it is fabled that they may move it up after 7 years of at zero and fiat credit creation for longer still. It is interesting to consider what happens to the fiat (normal) money supply in the midst of a bitcoin boom?
When the bitcoin price goes up, people are buying it generally with fiat money, they are putting an increasing spend into bitcoin and in that sense the supply of fiat money is stretched (proportionally reduced) and there are deflationary forces on that fiat currency. In the first instance if most bitcoins are bought and then simply held by Americans then the USD will experience deflation. Ie: the value of the USD is forced up locally to some degree because there are not as many around to use.
This assumes that the exchanges or traders do not spend or exchange their fiat immediately. It also assumes that bitcoin are not spend as much at this time. Something that is fair in a way, considering the speed at which a boom can happen. Buyers and sellers are likely not to spend bitcoin, to hold reserves or reinvest funds in other traded things.
The current measure of inflation "the basket of goods" also does not include the bitcoin. This point however may not hold in the future. We know that bitcoin is quite different to other consumer investments. Many bitcoins are simply held and not speculated with. It also has a practical everyday use and that is spending. Bitcoins don't need to be exchanged for fiat in order to make purchases. In this way when the price goes up for holders, money or value is literally created out of thin air. The effective money supply in the bitcoin economy is increased. People selling things for bitcoin are likely to experience more sales in the period after the boom with this new money, which could lead to increased prices. In reality however the price in bitcoin of most items is pegged on the USD price and this updates in real time. So whilst prices in bitcoin experience inflationary pressure, they do not change relative to this, rather the inflationary pressure are transferred to the fiat currencies that the products are pegged or to the fiat items that are further up the supply chain. As a transaction enabler the effective fiat money supply is increased in this way.
Can these two things happen at once? It is difficult to comprehend the dynamics here but unlocking this certainly be important for the modern crypto economy or simply for making millions out of bitcoin trading. It seems we may initially we get a deflationary impact during the boom followed by inflationary once the bitcoin price has levelled out.
At the moment with a market capitalisation of $5 billion the bitcoin price has only a marginal impact on the global economy, if that. An increase in the value by a factor of 10 could potentially result in and increase in the money supply of $50 billion when people start spending their bitcoins. This is still not huge when compared with the $3.2 trillion M1 money supply in the USA. Considering booms like this have happened multiple times in the past, we may well see a global impact here in the future. In a world flush with crypto currency a complete rethink may be required. Increasing bitcoin value could boost global spending.
When the bitcoin price goes up, people are buying it generally with fiat money, they are putting an increasing spend into bitcoin and in that sense the supply of fiat money is stretched (proportionally reduced) and there are deflationary forces on that fiat currency. In the first instance if most bitcoins are bought and then simply held by Americans then the USD will experience deflation. Ie: the value of the USD is forced up locally to some degree because there are not as many around to use.
This assumes that the exchanges or traders do not spend or exchange their fiat immediately. It also assumes that bitcoin are not spend as much at this time. Something that is fair in a way, considering the speed at which a boom can happen. Buyers and sellers are likely not to spend bitcoin, to hold reserves or reinvest funds in other traded things.
The current measure of inflation "the basket of goods" also does not include the bitcoin. This point however may not hold in the future. We know that bitcoin is quite different to other consumer investments. Many bitcoins are simply held and not speculated with. It also has a practical everyday use and that is spending. Bitcoins don't need to be exchanged for fiat in order to make purchases. In this way when the price goes up for holders, money or value is literally created out of thin air. The effective money supply in the bitcoin economy is increased. People selling things for bitcoin are likely to experience more sales in the period after the boom with this new money, which could lead to increased prices. In reality however the price in bitcoin of most items is pegged on the USD price and this updates in real time. So whilst prices in bitcoin experience inflationary pressure, they do not change relative to this, rather the inflationary pressure are transferred to the fiat currencies that the products are pegged or to the fiat items that are further up the supply chain. As a transaction enabler the effective fiat money supply is increased in this way.
Can these two things happen at once? It is difficult to comprehend the dynamics here but unlocking this certainly be important for the modern crypto economy or simply for making millions out of bitcoin trading. It seems we may initially we get a deflationary impact during the boom followed by inflationary once the bitcoin price has levelled out.
At the moment with a market capitalisation of $5 billion the bitcoin price has only a marginal impact on the global economy, if that. An increase in the value by a factor of 10 could potentially result in and increase in the money supply of $50 billion when people start spending their bitcoins. This is still not huge when compared with the $3.2 trillion M1 money supply in the USA. Considering booms like this have happened multiple times in the past, we may well see a global impact here in the future. In a world flush with crypto currency a complete rethink may be required. Increasing bitcoin value could boost global spending.
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