let's develop cryptocurrency economic theory

[Q7]

Well in bitcoin you don't have banks, fiscal policy, GDP, debt (there is?), taxes, so at least over here in bitcoin things are easier to understand apart from the supply and demand factor, mining, investment. So it works kind of different as generally you don't have the reserve bank to set the policy and comes with it all the bunch of economic terms.

[virtfund]

POW and POS are pyramids. If you want to develop a new cryptocurrency economic theory, start from there.

While I'll admit they share some characteristics, POW/POS are definitely not pyramid or ponzi schemes.

[V for Varoufakis]

Well in bitcoin you don't have banks, fiscal policy, GDP, debt (there is?), taxes, so at least over here in bitcoin things are easier to understand apart from the supply and demand factor, mining, investment. So it works kind of different as generally you don't have the reserve bank to set the policy and comes with it all the bunch of economic terms.

You don't need the reserve bank to set the policy. There are scientists economists for that.

[dadugan]

Nothing new under the Sun. Only the medium is different, concept is still the same.

[dinofelis]

POW and POS are pyramids. If you want to develop a new cryptocurrency economic theory, start from there.

Every monetary asset is a pyramid.

Money is money because people think that people think that it is money.  So if enough people think that an asset is money, it is money.  If not enough people think that it is money, then it isn't money.

In a pyramid, you hope for a greater fool.  Of course, one ends up not finding a greater fool any more, because you're probably not a greater fool than yourself.

With a monetary asset, you hope for a similar fool.  That can last for a long time, because you are probably just a fool as you are yourself.  So money can go around several times.  Pyramid stuff cannot go around.

[umair01]

It's a great Idea to have more research on cryptocurrency, the fact that BTC works outside the mainstream financial system and that it is not owned  by any body,country or government,it shows no economic trends or adhere to political policy,it seems to serve the purpose of anonymous digital transactions and saving or profiting on the long run 

[V for Varoufakis]

The money should be printed by scientists of the government, not by uneducated bankers.

[Erdogan]

POW and POS are pyramids. If you want to develop a new cryptocurrency economic theory, start from there.

Every monetary asset is a pyramid.

Money is money because people think that people think that it is money.  So if enough people think that an asset is money, it is money.  If not enough people think that it is money, then it isn't money.

In a pyramid, you hope for a greater fool.  Of course, one ends up not finding a greater fool any more, because you're probably not a greater fool than yourself.

With a monetary asset, you hope for a similar fool.  That can last for a long time, because you are probably just a fool as you are yourself.  So money can go around several times.  Pyramid stuff cannot go around.

This is so good.

[V for Varoufakis]

The bankers are uneducated idiots. They don't know how to print money, thats why they create economic crises. Only government can do good job.

[BobK71]

A cryptocurrency based economy would probably be totally different from the modern economy we're used to.

My guess is that money would gradually buy more and more (ie no more monetary policy driven long-term inflation;) people would save rather than spend or lend out most of their money; economic growth would be slower; people would probably be happier; the elites would have to stop getting a free lunch by expanding money and state-backed debt; financial crises would be much rarer and milder.

Will this ever happen?  It's hard to see the entire financial and economic world order change in the near term.  But a currency has some value as long as there are people who agree to use it, for one reason or another.  When Irish bank employees went on strike in the 60s, debt slips became cash.

I'm also afraid you won't get much help from the economics profession, for the following reasons, either to agree that limited-supply money is a good idea or to conduct meaningful research on such an economy:

1. The most legitimate argument is that the economy would take a deep and painful dive into deflation and unemployment if we made any major changes to make money sounder.  In my view, this is the addict's cry that it's too painful to stop.  Since our current path is not sustainable long-term, taking the dive now would be less painful than in future.

2. The best economists, who have the stature to speak on big topics like this, will have ambitions to work with and be on good terms with the political and financial elites, who are the biggest beneficiaries of modern state-managed money.

3. The current system doesn't just take from everyone and give to the elites.  It does the same between rich world populations and the developing world.  Thus every rich world citizen is a major beneficiary, due to the overvaluation of their currency.  (Think of this the next time you vacation in SE Asia or buy something made in Bangladesh.)  And most economists are either rich world citizens or allied with the elites in the developing world who are also facilitators of the system.  People tend to have deep reservations about speaking against a system that benefits themselves and their families in such a fundamental way, perhaps understandably.

4. State-based money adds a lot of complexity to economics due to being "flexible" at the core of the system.  The value of trained economists is in dissecting and understanding this complexity (more or less.)  Consciously or not, people generally don't want to see their hard-earned training go to waste when the system they study becomes a lot simpler.

[mrhelpful]

Everything we do now in fiat form, would be used same way as crypto form.

But in sub sections of micro transactions are split. Theres no way to quanitfy anything of what bitcoin will be, theres the debate on being a commodity, everyday currency, or used for something else.

Its a endless struggle, but in between that time theres always profit.

[dulldog]

Economy theory is always politically related, so the first question is to answer if government allow the mass circulation of alternative currency? So far, most of the countries only allow their domestic currency to circulate, that also has something to do with tax collection

From this perspective, I think bitcoin will only work as a digital asset, serving specific purposes like saving and international transaction, so the demand is not driven by GDP or something in mainstream economics

I guess we're talking a brand new theory here. I agree, any economic theory is in fact a political economy, still I can't recall any well-grounded theory (at least originated in medieval Europe and till today) that has a decentralization at its very heart.

I would also like to mention that I find your opinion towards bitcoin being in future just

a digital asset, serving specific purposes like saving and international transaction, so the demand is not driven by GDP or something in mainstream economics

quite reasonable, but not conflicting with the idea of research and creation of a new Economic theory.

Thanks to the OP author, I'm gonna stay tuned and think of a way to contribute.

[V for Varoufakis]

The economic theories are here, e.g. quantity theory of money, Cambridge cash balance theory etc. but nobody uses them.

[aso118]

Everything we do now in fiat form, would be used same way as crypto form.

Yup. It is only a matter of time before you have banks and fractional reserves.
Shouldn't be too different from the time everything was benchmarked to gold.

[BobK71]

I guess we're talking a brand new theory here. I agree, any economic theory is in fact a political economy, still I can't recall any well-grounded theory (at least originated in medieval Europe and till today) that has a decentralization at its very heart.

The "political" part is true at the current level of public awareness.  When public awareness improves, hopefully, people will want the state out of money, the same as for-profit business.

There actually is precedent for a decentralized system during this period.  China went back to commodity money some time during the 15th or 16th centuries after a few hundred years of paper money (with all the issues of inflation and progressive financial repression.)  The system was so "decentralized" that the sovereign didn't mint coins.  People just used chunks of silver.

This system worked fine until financial pollution (ie proliferation of paper assets) arrived from the Bank of England in the mid-19th century.  But Britain had to use war to force China to open itself for trade, and thus be subject to financial pollution.  Basically, a country with sound (or sounder) money which is not the dominant global power doesn't do well in a free trading system.  It will find itself priced out of markets by its strong currency, and eventually be forced to issue paper assets of its own.  Either that, and/or it's a long-term threat to the current system if it's big enough.  Either by trade or by war, it'll suffer at the hands of the dominant power.  (Just ask late 19th, early 20th century Germany.)  Switzerland held out for a while, but even with a highly skilled workforce, it is giving in to financial pollution now.

[minor-transgression]

I'd made some arguements some time back in "Learning from Imperial Rome" for an improved cryptocurrency.
The thread hasn't reached a conclusion, but sets out historical problems - this link "cuts to the chase"
https://mises.org/library/price-fixing-ancient-rome

Bitcoin has too much in common with gold to be a universal currency, and historically a trimetallic currency
seems close to workable - it "just" needs to have an inbuilt Jubilee to be perfect IMHO.

So I *think* Bitcoin needs one or more alternative cryptocurrencies to form a good monetary system.  

[LazerSMS]

I'm pretty sure someone already did it 

[Erdogan]

In times of distress it is smart to hold on to the real economic theories, those that logically works.

At the dotcom bubble, lots of people were ready to invent new ones, like: A business doesn't need to have a profit, in fact it doesn't even have to sell anything, stock rises anyway. It is impossible to compute a multiple because of the zero, value is infinite! It's magic, it has to be the Internet, the rules of economy have changed!

[aso118]

In times of distress it is smart to hold on to the real economic theories, those that logically works.

At the dotcom bubble, lots of people were ready to invent new ones, like: A business doesn't need to have a profit, in fact it doesn't even have to sell anything, stock rises anyway. It is impossible to compute a multiple because of the zero, value is infinite! It's magic, it has to be the Internet, the rules of economy have changed!

One disclaimer there is you should not try to straitjacket all the rules of the traditional economy to the bitcoin economy.
There are still a lot of people who claim that Bitcoin will fail because it does not have any 'intrinsic value'.

[dinofelis]

There are still a lot of people who claim that Bitcoin will fail because it does not have any 'intrinsic value'.

But the part of value of money, that is monetary, is exactly the absence of "intrinsic value".

Even with traditional commodity money, such as gold, its price comes from two parts, as the price of any commodity: demand (accepting that offer is constant).

The demand has a part which is 'intrinsic', that is, the demand for its usage, consumption, or whatever.  That demand is there, independent of whether gold has any monetary usage (that is, as intermediate asset, or as store-of-value asset).
But the demand, that happens, because it is also a monetary asset (that is, it is used as an intermediate asset in trade, or as a store-of-value) increases the price: that price increase is exactly its monetary value.

So the monetary part of the price of money is exactly what has no intrinsic value.  Gold has maybe some intrinsic value, but most of its value is monetary (most demand for gold is to store it as a store of value, and not to use it).

Bitcoin has no intrinsic part.  It is purely monetary.  But that doesn't mean it is less monetary than gold.  On the contrary.

Of course, on the other hand, the risk is larger the larger is the monetary part of the price, because you could think that there is a floor on the price, which is its intrinsic or usage value.  

I have no idea of the intrinsic value of gold.  It is maybe 5% of its current price.  Maybe 0.1%.  I don't know.  So you can believe that if gold, one day, looses all monetary aspects, you would still hold 5% or 0.1% of its value as usage value.  While for bitcoin, the floor is 0.  Don't know if that matters much...

Probably for real estate, that's different.  Real estate is also partly monetary.  But I would think that its monetary part is at most a factor 2 or so above the usage value.  It is certainly not a factor of 10 or so.  Yes, people buy houses partly with the idea of selling it, as a store of value.  But they also buy houses to live in (consumption), or to rent them to people that live in it (capital).  Apart from during a housing bubble, I think that the speculative (that is monetary) part of the price of a house is still not more that 2 or so times the "intrinsic" usage value.

So the risk in real estate is probably much less to have a drop by a factor 20 or 1000 or so, than in gold.