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Author Topic: Inflation and Deflation of Price and Money Supply  (Read 506263 times)
noone000
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May 14, 2017, 03:11:31 AM

Hey guys, I was kind of curious about the value of the bitcoin. I understand the basics of economics and how the price of money is determined by the supply and demand for it, but I am not completely sure why the price of bitcoins continues to rise. Is it because the demand of bitcoins is continually increasing at a staggering rate? Or perhaps people are trading their bitcoins for other currencies faster than it can be mined, thus reducing the supply? Some clarification would be helpful.

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gregory51gosh
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May 15, 2017, 02:12:34 PM

I wonder how to calculate the 'book' value vs. trading value of 1 BTC.

Book value of BTC's shold be the sum of money put into their production since the start (as calculations made by the computers etc.) minus 20% amortization yearly. So this amount divided into BTC's should be 1 BTC book value. And then we could compare to the trading value (present).

Simplified example with non-real values:

Year 1 - used 20 cents for electricity to produce 1 BTC. Book value of 1 BTC = 20 cents.
Year 2 - used 21 cents for electricity to produce 0.9 BTC. Book value = [(0,8*1*20) + (1*0.9*21)] => 2BTC book value = 16 + 18,9 = 34,9 cents=> 1BTC = 17,45
Year 3 - used 25 cents for electricity to produce 0.5 BTC. Book value = [(0,6*1*20) + (0.8*0.9*21) + (1*0.5*25)]+  => 3BTC book value = 12+15,12+12,5 = 39,62=> 1BTC = 13,20
and so on.. (assuming not selling the BTC's, short period od production etc.).

Thesis:

no. 1. If the difficulty increases over some level, the book value will start to decrease so the disproportion over book and trading value will be increasing, that is the moment, when BTC value should be lower
no. 2. If we see the BTC as gold, this difficulty increases astronomically the value due to exhausting resources.

Also I wonder how it refers to the general market cap.

What do you think? Smiley

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Neoliberalism
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May 18, 2017, 09:22:53 AM

How did you come up with 20% amortization rate?
gregory51gosh
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May 22, 2017, 12:27:47 PM

Mostly IP's amortization is counted in 5 years period. In this case it may be more, because is nearly 8 years. So 100/8 =12.5.

Why?
In accountancy it is assumed that Asset value looses it 100% value in a period of time since the start of initial investment. For example - as an assumption -  a car looses 12.5% its value every year, and after 8 years its book value is 0%. Real value may be more.

In BTC there is an assumption that every year this asset is refurbished or 'updated' so the value is not lost in a full amount. This algorithm would be very complex then. Also there is increase of 'stock' of this asset.

That is why it was made a simplification. One may use the 20% standard or use the value of % that is suitable.

The idea is to input the data of how many coins were produced in 2009 for how much (initial value year one), in 2010 etc..


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Lieldoryn
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May 23, 2017, 10:26:22 PM

Hey guys, I was kind of curious about the value of the bitcoin. I understand the basics of economics and how the price of money is determined by the supply and demand for it, but I am not completely sure why the price of bitcoins continues to rise. Is it because the demand of bitcoins is continually increasing at a staggering rate? Or perhaps people are trading their bitcoins for other currencies faster than it can be mined, thus reducing the supply? Some clarification would be helpful.
It seems to me that the cause of this increase in speculative operations. Maybe some Soros decided to make good money on bitcoins. Now very strong expectations of growth in bitcoin prices and therefore all owners hold bitcoin creating a high demand for it. The miners cannot cope with the growing demand.

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June 01, 2017, 10:58:42 PM

Money gets in due to speculation to pump and dump. Probably that is he main reason.
As you also mention, it is really interesting to predict where the price will go,... you probably also mean that it will increase right Smiley
It is not only me,
an expert in economics believe that there will be a chance that the trading of BTC will go quite big (almost) 10 % of total money trading,
in this case then your prediction is even higher,.... BTC may be 10 000 USD.

I am looking for your next analysis if the BTC go this high, I am just curios to know why and what next
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June 02, 2017, 07:55:05 AM

We'll see how the demand and supply influences the price after the news that Russia wants to open the market for BTC in 2018 (legalize it), as well as some countries are getting into it (like Australia). The demand may be higher, it should get the price higher. On the other side, it may be a good situation for people that speculate to realize income by selling some BTCs.

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chocolah29
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June 07, 2017, 09:15:13 AM

Very informative thread. By reading all those posts I deeply understand the economics of Bitcoin. How the money supply inflation differs to the value of bitcoin.

In my own understanding, there's no effect of the money supply inflation in the value of bitcoin, thus the demand has the effect.

Simply as if there's a high supply in bitcoin the value will not change or it will decrease.

thymeow
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June 09, 2017, 02:48:22 AM

"Why does the price of Bitcoin go up and down? The price of BTC goes up and down based on the exchange rate, or market price, which is set by buyers and sellers, or traders. They directly trade the Bitcoin currency with all sorts of other currency, and even some with gold; the most popular being the USD (US dollar). They set the price when executing orders to buy or sell. I will get into the actual reason of why the price fluctuates in the last section."

This answered the question that's been bugging me for a long time - I always wonder who sets the price and who decide the selling price of the btc.
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June 12, 2017, 05:42:56 AM

The idea was that you print money when economy is not doing so well and then collect it back when times get better again. It seems like governments forgot about the 2nd part
nethan1btc
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June 12, 2017, 12:55:46 PM

The idea was that you print money when economy is not doing so well and then collect it back when times get better again. It seems like governments forgot about the 2nd part

It seems that government has been doing manipulations of money's circulation to economy and yet in asia like philippines loaned to world bank for money to sustain the economy, despite of the power of ordering prints out of money production. That idea of money printing just for economy adjustments can be beneficial to the country if the power of the government system will prevail and prevent those monopoly of businesses who take control of inflation and deflation of price as well as supply of money.

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June 16, 2017, 11:57:32 PM

inflation and deflation of price of bitcoin i think this is the main cause of to attract the investor. because every investor want benefit. i think this is the main reason of uses of bitcoin. this is very effective for economy.

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cram03
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June 21, 2017, 03:36:38 PM

Asset backed currencies have been the ONLY succesful models tried. They stood for centuries, none ever "failed" they were all replaced by fiat systems.
The dollar was removed from gold backing in 1971, but it was weaned from gold onto oil and the "petrodollar" was formed, it was a brilliant plan and when put forth to Saudi "leaders" they realised that if they got in on the ground floor of the pyramid scheme they would greatly benefit.
Fiat moneys have ALWAYS failed. The ability to "print your way out of trouble" is in fact "printing your way into trouble" and will always end bad for the users (good for the bankers).
silverkamote
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June 22, 2017, 10:59:03 PM

is it tru that the Bitcoin Improvement Proposal (BIP) 148, Bitcoin will be undergoing a user activated soft fork on August 1, 2017.
There are three possible outcomes of the soft fork, although the exact outcome is unknown as the outcome will depend on the actions of the nodes on the network.
In a worst case scenario, BIP 148 could cause Bitcoin to chain split into two separate blockchains, one with SegWit activated and one without. what do you think of this?
Boov
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June 25, 2017, 01:50:58 PM

An area dedicated to discussing the differences of these two terms and the theories supporting them.

I'm looking forward to an in-depth discussion on the subject! I've noticed that confusion between the two seems to come up quite a bit on the forum, and thought it may be reasonable to dedicate a thread on the matter.

Pulled from a discussion in Wall Observer



Price-Deflation is what you are used to hearing about in Bitcoin. That term is used to describe the prices of goods/services as they decrease, because the value of Bitcoin goes up.

Price-Inflation is the opposite. When prices of goods/services increase because the value of Bitcoin goes down.

So, when dealing with Price-Inflation or Deflation, there is an inverse relationship of price and value, in regard to goods/services and Bitcoin.

Example: As the Bitcoin price goes from $10 to $20, the prices of goods/services goes down from 20BTC to 10BTC. As the Bitcoin price goes from $20 to $10, the prices of goods/services goes from 10BTC to 20BTC!

Why does the price of Bitcoin go up and down? The price of BTC goes up and down based on the exchange rate, or market price, which is set by buyers and sellers, or traders. They directly trade the Bitcoin currency with all sorts of other currency, and even some with gold; the most popular being the USD (US dollar). They set the price when executing orders to buy or sell. I will get into the actual reason of why the price fluctuates in the last section.



Now that we've gone over PRICE Inflation and Deflation (which honestly, to me, is a term made popular by Keynesian's to hide the real facts, as price inflation/deflation is simply the market exchange rate, reflective of the money supply into a currency from itself and other currencies), let's go over the REAL inflation/deflation of a currency (otherwise known by many as Monetary Inflation).

MoneySupply-Inflation is when the value of Bitcoin decreases when the total supply of Bitcoin increases. In our current state, this is at a generation rate of 25 BTC every 10 minutes.

MoneySupply-Deflation will essentially never occur. It is when the value of Bitcoin increases when the total supply of Bitcoin decreases. This may happen, say, when someone loses their private key and all the BTC associated with it are lost. This effectively "makes the rest of us richer". That being said, there is a SET DECREASE in the generation rate of BTC, so you have sort of a "deflationary effect" in the value, as long as more exchange occurs for BTC at a rate which is faster than that set generation rate.

When all 21 million coins are produced, the MoneySupply will be neutral, and the value will continue to increase (prices will decrease, consequently), as long as people continue to exchange in BTC.

This leads me to the last section.



What determines the PRICE of Bitcoin? The VALUE of Bitcoin at a particular moment.

What determines the VALUE of Bitcoin? The SUPPLY and DEMAND of Bitcoin in the economy.

What determines the SUPPLY of Bitcoin? Currently, the MoneySupply-Inflation rate of 25 BTC every 10 minutes, and traders willing to SELL Bitcoin to BUYERS in exchange for other supplies of money (currencies).

What determines the DEMAND of Bitcoin? Traders willing to BUY Bitcoin from SELLERS in exchange for other currencies.


Therefore: BUYERS, SELLERS, and MONEYSUPPLY-INFLATION (miners) determine the VALUE of Bitcoin, which determines the PRICE of BTC as BUYERS and SELLERS trade based on that VALUE (or supply and demand) of Bitcoin.


We don't exactly know the totality of the supply and demand. Sure, we could try and aggregate data from all the exchanges, but we will never be accurate as there are exchanges which can not be accounted for (OTC). The cool thing is that we DO know the MoneySupply rate, and we DO know the exchange rate. From this, we can determine a real value of Bitcoin when simply multiplying the two factors; a sort of inflation-adjusted view of the currency.

Effectively, the quantitative analysis of supply and demand is really what the currency exchange traders attempt to accurately determine which is conveyed through buying and selling of Bitcoin, setting a VALUE via the PRICED exchange rate of the currency. On a side note, most of the big Market Makers (FX Traders) use this price movement as a way to make a profitable living, as well. Especially when price fluctuations are a consequence of hype or fear (bubbles, cliffs), not factual supply/demand data, and are wildly out of the real price range.

Thus, if you analyze the proper macroeconomic data in an attempt to forecast future DEMAND for more Bitcoin (price increase), you will realize some very interesting things, and have a more accurate picture of where the price is going...

Happy trading! Wink

thank you very much for discussing this topic thread by thread. it made the trading terms and process easier to understand. I was looking anywhere for article that is easier to understand about bitcoins since i want to learn more. Reading this post and also the other replies helped me a lot. My questions has been answered. This forum is really great if you'll meet the right people. i know i still have a lot to learn and is so far in the process. but having people like who are in this forum, i  believe it wont be hard.

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June 26, 2017, 03:20:41 PM

Bitcoin prices continue to rise, perhaps because of the large number of bitcoin demand or more investors believe bitcoin than in conventional currencies

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June 29, 2017, 12:51:24 PM

An area dedicated to discussing the differences of these two terms and the theories supporting them.

I'm looking forward to an in-depth discussion on the subject! I've noticed that confusion between the two seems to come up quite a bit on the forum, and thought it may be reasonable to dedicate a thread on the matter.

Pulled from a discussion in Wall Observer



Price-Deflation is what you are used to hearing about in Bitcoin. That term is used to describe the prices of goods/services as they decrease, because the value of Bitcoin goes up.

Price-Inflation is the opposite. When prices of goods/services increase because the value of Bitcoin goes down.

So, when dealing with Price-Inflation or Deflation, there is an inverse relationship of price and value, in regard to goods/services and Bitcoin.

Example: As the Bitcoin price goes from $10 to $20, the prices of goods/services goes down from 20BTC to 10BTC. As the Bitcoin price goes from $20 to $10, the prices of goods/services goes from 10BTC to 20BTC!

Why does the price of Bitcoin go up and down? The price of BTC goes up and down based on the exchange rate, or market price, which is set by buyers and sellers, or traders. They directly trade the Bitcoin currency with all sorts of other currency, and even some with gold; the most popular being the USD (US dollar). They set the price when executing orders to buy or sell. I will get into the actual reason of why the price fluctuates in the last section.



Now that we've gone over PRICE Inflation and Deflation (which honestly, to me, is a term made popular by Keynesian's to hide the real facts, as price inflation/deflation is simply the market exchange rate, reflective of the money supply into a currency from itself and other currencies), let's go over the REAL inflation/deflation of a currency (otherwise known by many as Monetary Inflation).

MoneySupply-Inflation is when the value of Bitcoin decreases when the total supply of Bitcoin increases. In our current state, this is at a generation rate of 25 BTC every 10 minutes.

MoneySupply-Deflation will essentially never occur. It is when the value of Bitcoin increases when the total supply of Bitcoin decreases. This may happen, say, when someone loses their private key and all the BTC associated with it are lost. This effectively "makes the rest of us richer". That being said, there is a SET DECREASE in the generation rate of BTC, so you have sort of a "deflationary effect" in the value, as long as more exchange occurs for BTC at a rate which is faster than that set generation rate.

When all 21 million coins are produced, the MoneySupply will be neutral, and the value will continue to increase (prices will decrease, consequently), as long as people continue to exchange in BTC.

This leads me to the last section.



What determines the PRICE of Bitcoin? The VALUE of Bitcoin at a particular moment.

What determines the VALUE of Bitcoin? The SUPPLY and DEMAND of Bitcoin in the economy.

What determines the SUPPLY of Bitcoin? Currently, the MoneySupply-Inflation rate of 25 BTC every 10 minutes, and traders willing to SELL Bitcoin to BUYERS in exchange for other supplies of money (currencies).

What determines the DEMAND of Bitcoin? Traders willing to BUY Bitcoin from SELLERS in exchange for other currencies.


Therefore: BUYERS, SELLERS, and MONEYSUPPLY-INFLATION (miners) determine the VALUE of Bitcoin, which determines the PRICE of BTC as BUYERS and SELLERS trade based on that VALUE (or supply and demand) of Bitcoin.


We don't exactly know the totality of the supply and demand. Sure, we could try and aggregate data from all the exchanges, but we will never be accurate as there are exchanges which can not be accounted for (OTC). The cool thing is that we DO know the MoneySupply rate, and we DO know the exchange rate. From this, we can determine a real value of Bitcoin when simply multiplying the two factors; a sort of inflation-adjusted view of the currency.

Effectively, the quantitative analysis of supply and demand is really what the currency exchange traders attempt to accurately determine which is conveyed through buying and selling of Bitcoin, setting a VALUE via the PRICED exchange rate of the currency. On a side note, most of the big Market Makers (FX Traders) use this price movement as a way to make a profitable living, as well. Especially when price fluctuations are a consequence of hype or fear (bubbles, cliffs), not factual supply/demand data, and are wildly out of the real price range.

Thus, if you analyze the proper macroeconomic data in an attempt to forecast future DEMAND for more Bitcoin (price increase), you will realize some very interesting things, and have a more accurate picture of where the price is going...

Happy trading! Wink

Hello @thefiniteidea,

I think that I came up with a solution to your questions in this article. In fact, I was able to discover the price of a monetized currency pair in terms of another without using any market data at all. Only intrinsic variables and rational models based on the praxeological axioms. When I mean I was able to discover such a thing, I mean that with my model anyone can arrive to a number that matches (with some random noise) the price of a monetized currency pair.

https://steemit.com/bitcoin/@pablomp/cryptocurrencies-what-is-the-fair-value-of-a-currency

I hope you enjoy it and appreciate it. I am sure that it will be very useful. You can download a PDF version of it at the bottom of the article.

Regards,

pablomp
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July 01, 2017, 10:31:17 AM

Is that any effect on inflation or defletion on evolve of Bitcoin and other Cryptocurrency? Now what is the total economy of this digital currency?
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July 01, 2017, 02:55:32 PM

Is that any effect on inflation or defletion on evolve of Bitcoin and other Cryptocurrency? Now what is the total economy of this digital currency?

Inflation or deflation affects everyone.  It has something to do with the rise and fall of the interest rate and that is how our economy works.  If people have lots of money the tendency is they spend more and the more they spend the more they need more money and once their money is gone then they will borrow particularly if the interest rate is low. Then the economy moves faster and it will come to an inflation.  When the time comes to pay their loans and interest, they will stop spending and the economy slows down and this is deflation. Then interest rate will be lowered to help the economy.

The effect of this to the bitcoin is not direct but rather related for if people dont have money then they cant afford to buy bitcoin and less bitcoin circulating then economy slows down.

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July 08, 2017, 06:38:45 AM

The idea was that you print money when economy is not doing so well and then collect it back when times get better again. It seems like governments forgot about the 2nd part

Inflation in a country is both beneficial and harmful to the economy but if it is regulated, then it is advantageous. Every country has its own rules about the rate of inflation that they must control. Here in the Philippines, the inflation rate of a country must be around 2-3%. Anything more or less than that will affect the economy. Inflation is really not a bad thing since it increases the money supply in the market. But if you print money due to the economy being low, this will significantly increase the supply of money in the market. By following the law of supply and demand, the tendency is that prices in the general market will increase and this will lead to chaos. Like what happened in Zimbabwe, the prices of goods are so high that even their currency's value is so high. There are many options under our banks to fix the economy but printing money is the last resort that they will do.

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