Economics question

[o hai guyz]

This involves bitcoin but is more a question of economics and finance. There was a small discussion about this on the bitcoin forum but didn't get many replies since many people there are only interested in wild speculation, so I wanted to see if any WF'ers could chime in.

Max Keiser posits that in a couple of years, the BTC/USD exchange rate will be $1,000,000. Let's assume this is true for the purposes of this question. Does that mean that 1 BTC would:

a) Hold the current purchase power of $1,000,000 USD (less a couple percentage points for standard inflation)? or ...

b) Hold the future purchase power of an extremely devalued and useless $1,000,000 USD (ex. significantly less than the current purchase power of $1,000,000 USD)?

Just visualizing an extreme scenario in which the exchange rate goes to infinity, the fact you could change 1 BTC for infinite USD means nothing because USD is useless in this example. So if you were to cash out for a million USD, you may only be able to buy a loaf of bread with that. Many people believe they will become rich as the exchange rate rises, but as demand for BTC increases doesn't the demand for USD also decrease, creating unnatural inflation?

However, other commodities can take on ridiculous prices without significantly affecting the value of the US dollar at all (ex. multimillion dollar diamonds, overvalued gold, etc). So why would a high demand for this specific currency cause any significant increase in inflation of USD?

Also, if option B is correct and it does create additional inflation, is there a way to calculate the added rate of inflation at a specific price point?

Can any of you economics guys explain this?

 

[eliquid]

Shit, another 7 page thread with Luke, Matt and Guerilla coming up

 

[CCarter]

 

[CCarter]

 

[ayzo]

 

[lukep]

Well it kinda depends on where that value comes from, now doesn't it?

If Chinese citizens all buy bitcoins with their renminbi until the price of a bitcoin is $1 million, (which would assume some serious arbitrage happening between exchanges too) then no, the dollar could go without being inflated any more than Yellen wants it to be.

However, if a $Trillion USD went into bitcoin, driving the price up to $1M a coin would obviously inflate the USD a fair percentage, perhaps an eighth or something, whatever percentage that is of M1 plus reserves.

Most likely it's going to steal a bit of USD, a bit of gold, a large bit of renminbi, a bit of Euro, a bit of yen, etc... Spreading the load.

I don't think any one currency will take the effect of a single $Trillion worth that noticably.

Now when bitcoin goes to a BILLION bucks each...

 

[ayzo]

Now when bitcoin goes to a BILLION bucks each...

lol and now we wait to see who takes the bait

 

[Second]

lol and now we wait to see who takes the bait

 

[o hai guyz]

Well it kinda depends on where that value comes from, now doesn't it?

If Chinese citizens all buy bitcoins with their renminbi until the price of a bitcoin is $1 million, (which would assume some serious arbitrage happening between exchanges too) then no, the dollar could go without being inflated any more than Yellen wants it to be.

However, if a $Trillion USD went into bitcoin, driving the price up to $1M a coin would obviously inflate the USD a fair percentage, perhaps an eighth or something, whatever percentage that is of M1 plus reserves.

Most likely it's going to steal a bit of USD, a bit of gold, a large bit of renminbi, a bit of Euro, a bit of yen, etc... Spreading the load.

I don't think any one currency will take the effect of a single $Trillion worth that noticably.

Now when bitcoin goes to a BILLION bucks each...

That makes sense. So the inflation of USD would be divided into the total amount of currency from all countries that goes into it. However, at its current price point demand for BTC has done nothing to the value of USD; is it possible to calculate the BTC/USD rate at which that would start to change?

Shit, another 7 page thread with Luke, Matt and Guerilla coming up

No, please don't use this thread to speculate on bitcoin. I'm only interested in the economics of how one currency affects another. It could be bitcoin, GBP, Euros, NWO dollars, Africonopoly, diamonds, or anything else. I'm mainly just interested in knowing how an increased demand for one currency or commodity negatively affects others.

 

[bauss]

 

[Kiopa_Matt]

For one, not only Americans are putting money into bitcoin. It's coming from all over the world.

Bitcoin isn't going to $1 million. There's a cap of 21 million coins, so for it to goto $1 mil/coin, means bitcoin will be a $21 trillion dollar economy. In comparison, US GDP last year was $16.6 trillion, and the world's GDP was about $85 trillion.

Bitcoin is not going to consume a quarter of the world's economy.

 

[guerilla]

Max Keiser posits that in a couple of years, the BTC/USD exchange rate will be $1,000,000. Let's assume this is true for the purposes of this question.

Bear in mind, Max Keiser is a demagogue and not an economist. He probably also said that gold or silver would go to 1 million dollars sometime during the last 6 years.

a) Hold the current purchase power of $1,000,000 USD (less a couple percentage points for standard inflation)? or ...

b) Hold the future purchase power of an extremely devalued and useless $1,000,000 USD (ex. significantly less than the current purchase power of $1,000,000 USD)?

I am pretty sure Max is just saying stuff for effect, so only he could tell you what he meant, but only scenario B is likely.

Many people believe they will become rich as the exchange rate rises, but as demand for BTC increases doesn't the demand for USD also decrease, creating unnatural inflation?

"Natural" is a loaded word. Let's avoid that.

People may become rich as there is more demand for Bitcoin, and the market size has all these nonsensical, and artificial constraints on it which artificially drive the price up (I said this awhile ago, Bitcoin is designed to be deflationary rather than free floating).

The demand for Bitcoin right now is probably 95% (99%?) speculation. USD does real things like buy oil and pay taxes. Create credit etc. It's a very important distinction.

However, other commodities can take on ridiculous prices without significantly affecting the value of the US dollar at all (ex. multimillion dollar diamonds, overvalued gold, etc). So why would a high demand for this specific currency cause any significant increase in inflation of USD?

Please also do not use the term "overvalued". That implies there is an objective value. There is not. Value is a psychological phenomenon based on intrapersonal ordinal comparisons. If you didn't understand that, tell me.

Anyone who thinks BTC is going to drive USD inflation is probably out to lunch.

Also, if option B is correct and it does create additional inflation, is there a way to calculate the added rate of inflation at a specific price point?

No, there is no way to calculate it. But you've only got it partly right here.

Inflation is baked into the USD just as deflation is baked into BTC. There will be less purchasing power with the USD in the future, however it won't be driven there by Bitcoin, but rather monetary policy at the FED and fiscal policy in Washington.


hth

 

[lukep]

That makes sense. So the inflation of USD would be divided into the total amount of currency from all countries that goes into it. However, at its current price point demand for BTC has done nothing to the value of USD; is it possible to calculate the BTC/USD rate at which that would start to change?

It'd be tough, but all of the wallet data is on the blockchain.

Check this out: fiatleak - watch the world's currencies flow into BTC in realtime

Clearly they can see what currencies were traded for bitcoin in real time, so if you can get your mitts on that historical data you can total it all out (with a reallllly wide calculator) and at least see how much of each local fiat has been spent to date going into bitcoin exchanges.

This doesn't tell us things like how much of the gold market is being displaced though; it's only tracking fiat, which would have been used to buy that gold. So it's not perfect, but it's a start.

Your Bigger problem is finding the stresspoint of the murikan banking system. To calculate the rate at which dollar displacement would "do something" to the dollar, as in start to inflate it noticeably I assume, you'd need to know things that probably only Ben Bernanke knows... Such as how much reserves his banks and the treasury are actually sitting on.

All you can realistically do in that respect is calculate it and compare it to the current $2.1 Trillion QE. Perhaps another $2 Trillion will be too much for the system to bear? It's a guess but it's better than nothing.

...Africonopoly...

Umm... Is that what Qaddafi was trying to print?

 

[lukep]

...for it to goto $1 mil/coin, means bitcoin will be a $21 trillion dollar economy. In comparison, US GDP last year was $16.6 trillion, and the world's GDP was about $85 trillion.

Bitcoin is not going to consume a quarter of the world's economy.

...However, the vast majority of the world's population is unbanked, and almost completely unrepresented in those numbers.

Bitcoin can get money flowing between those people instead of barter or off-the-record cash. All it takes is a circa 1995 cellphone with SMS capabilities to start sending bitcoins around to each other. Africa alone has over a Billion people in that boat right now.

Bitcoin could easily allow the world's GDP to expand quite a bit without any new business taking place; and get far larger if it grows business between the world's unbanked population.

 

[lukep]

Don't be stupid. You have people on WF who spend 12 hours working online every day having trouble buying bitcoins, and you think some villagers in Africa can do 'er up with a $20 Nokia?

Don't be stupid yourself. You think that technology is stuck in time and never, ever gets more user friendly?

 

[jacky8]

Newsflash November 24, 2015

Libyan Ambassador's Daughter Kidnapped, 1 BTC Ransom Demanded

Somalian Pirates Seize Indian Cargo Ship, Demand 0.5 BTC

 

[o hai guyz]

-snip-

Inflation is baked into the USD just as deflation is baked into BTC. There will be less purchasing power with the USD in the future, however it won't be driven there by Bitcoin, but rather monetary policy at the FED and fiscal policy in Washington.

I get what you're saying. Just to clarify - I'm not trying to speculate on Keiser's opinions or even on bitcoin itself in this thread, I'm simply curious as to what WOULD happen if we assume his scenario does occur.

I would probably agree that 1 BTC hitting $1m USD is a little farfetched and outrageous, but IF this were to happen in the fantasy land we're looking at for the purpose of this thread, would it still not be enough to cause any significant USD inflation?

Your Bigger problem is finding the stresspoint of the murikan banking system. To calculate the rate at which dollar displacement would "do something" to the dollar, as in start to inflate it noticeably I assume,

I think this is getting at what I was imagining but didn't know how to phrase. Can you expand on this?

 

[guerilla]

I get what you're saying. Just to clarify - I'm not trying to speculate on Keiser's opinions or even on bitcoin itself in this thread, I'm simply curious as to what WOULD happen if we assume his scenario does occur.

Just bear in mind, this is one of those "What if aliens invaded the earth" scenarios.

I would probably agree that 1 BTC hitting $1m USD is a little farfetched and outrageous, but IF this were to happen in the fantasy land we're looking at for the purpose of this thread, would it still not be enough to cause any significant USD inflation?

I don't think it would. And I don't think it matters because as I already explained, USD is by design, inflationary. That's why they de-linked it from gold. Gold was like Bitcoin, deflationary. It's bad for government.

That's the implicit bet with Bitcoin. That people will choose BTC over government. I have seen people proudly send their sons and daughters across the world to kill strangers for their government.

I just don't see that level of commitment to BTC.

YMMV