Theories of Bitcoin Value and a Multi-Currency Economy

What is the best way to think about the valuation of Bitcoin? Is it in terms of U.S. dollars? In terms of other cryptocurrencies? Or look at Bitcoin in terms of the goods and services it is meant to be used to exchange for – but is yet to be adopted to do? 

If the adoption of Bitcoin occurs, demand for Bitcoin would rise, demand for the U.S. dollar would fall, and in simplicity terms, it might be that the value of a Bitcoin would fall, relative to goods as goods become more inflated in Bitcoin, and the value of a U.S. dollar would rise, as demand for goods in dollars falls and the dollar experiences a deflationary environment. In an environment like this, the USD/Bitcoin exchange rate would decrease based on perhaps changes in demand of the currencies themselves (Bitcoin value would fall as we think of it today).  

Perhaps a different way to look at the valuation of Bitcoin is through the lens of the velocity of money formula (which is theoretical). The velocity of money is the average number of times a unit of currency is used to buy goods or services, or essentially how much it is flowing through the economy. The velocity of money formula in a formula definition is given V = PT/M, where V is the velocity of money in a specific time frame, P is the price level, T is the total value of transactions in real terms, and M is the supply of money. 

M stays constant with Bitcoin, as the supply of Bitcoin in the long run is constant. If Bitcoin were to become adopted, Velocity would be increasing through the transition to Bitcoin from the USD. Total real value of transactions would be rising through this transition as well, which, by terms of the formula, would likely keep P, or price levels, more stable. But as transaction volume stabilizes through peak adoption, price level would be the only thing that could hypothetically affect the amount a unit of Bitcoin flows through the economy. 

In the contrary, in terms of the USD, you may speculate that a transition to Bitcoin could lead to drastically lower price levels in USD terms, especially if the money supply continues to be controlled and grown through central banking. Control of the money supply would need to be extremely “hawkish” and would need to real supply of dollars out of the system through monetary policy over time.  The velocity of a dollar will begin to fall, as will real value of total transactions in dollar terms in the economy. If supply does not fall during a currency transition, high inflation in the currency being transitioned away from would, in theory, ensue. 

One may be able to argue that a competing currency to the dollar could be able to fight the idea of inevitable high inflation with a domestic existing currency. Introducing the second (or third, fourth, etc.) currency could manage the price levels in the opposing currencies as new forms are introduced. Competing currencies could in a hypothetical sense keep prices of goods low in relative terms across currencies, especially if the supply of those currencies is tightly controlled or limited to a finite number. Perhaps a theory to say is the more currencies in a single economy, the lower prices will become, as consumers choose competing currencies by the cost of goods and services relative to the multi-currency universe. 

In retrospect, it could be understandable why the existing system and those in control of it would like to limit the introduction, prosperity, and adoption of new currencies in an existing economy. If viewed in a certain perspective, it would degrade the ability to control the continuation of price levels rising, which trickles into other ideas like the continued growth of circulating supplies, continued equity market growth, and the ability to somewhat manage growth in debt from a government and private perspectives (Growth in public debt needs to be managed by continued growth in GDP). 

How would this effect overall economic growth? Growth in a GDP sense may grow differently, if at all, and might be more effected by population growth rather than changes in how much units of exchange are flowing through the economy due to fluctuations in the supply of money, if that is something that does significantly affect economic growth. Maybe businesses would have better incentive in the long run to run internally more efficient to reduce the expense in between the top and bottom line, rather than relying more so on increases in revenue through price changes. Whether all these thoughts would ultimately have positive outcome on society is unbeknownst to me. 

In theory within a muti-currency individual economic universe, the values of those currencies will compete, leading to short term deflation as prices of goods fall in competing currencies. As short-term miniature adoption flows from one currency to another, price level will rise in the adopted currency, and a short-term adoption of a different currency will ensue. It seems through the idea here that prices of goods and services would stay relatively stable over the long run, especially of supply of currencies is staying consistent.  

Alongside adoption of Bitcoin or other cryptocurrencies, how would the valuation between the dollar and Bitcoin change? The estimate today here is that as Bitcoin rises in level of adoption within the economy as a unit of exchange, the value of the dollar relative to Bitcoin may go up. The cross-currency valuations may be more stable too. The valuation of Bitcoin may resemble something along the lines of a moderate bell curve over the long run from inception against the USD, with valuations rising then falling. 

Does this mean Bitcoin is… socially progressive? It’s all a theory, whether you like that term or not, and the velocity of money formula is a theory within itself, too. But it is an interesting thought experiment none the less. If Bitcoin is socially progressive, is the free market therefore capable of creating socially progressive inflationary (or deflationary) settings that are beneficial for the average consumer? 

The idea of a multiple currencies in one economy is somewhat of the opposite experiment as the Eurozone does, where they have one currency in multiple economies. The direction that could lead into a setting like this to occur is under the influence of how our government views a cryptocurrency like Bitcoin itself, how it becomes regulated, and ultimately, the faith of the consumer in something of this nature too. The world is to be continued. 


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