inflation-corrected value of a bitcoin

[niko]

Since monetary inflation of bitcoins is still significant (compared to the USD, for example), I thought it'd be useful to look at the inflation-corrected exchange rates. Ideally, I should have included the USD inflation, but I am too tired, and it wouldn't change things much anyway.

I sourced the data from bitcoincharts.com, and corrected each daily VWAP for the number of coins generated up to that date, relative to the number of coins generated up to a fixed, arbitrarily chosen, reference date. Number of coins (monetary base) is projected, not actual, but the two are close enough.

There are two reference dates used in these graphs: April 1 2011 (before the first bubble, and when Gox trade volume just started becoming significant), and January 1 2012 (after the first bubble, during the slow recovery).




The same data in log scale, in case you appreciate it as much as I do:


Bitcoin economy (be it based in speculation, savings, trading, gambling, playing - whatever) has obviously been growing stubbornly. If it were not for monetary inflation since January 2012, one bitcoin would be trading today at about USD 42.

It would be interesting to expand this simple analysis by taking into account old coins that never moved after being generated - lots of these back in 2010 - actual monetary inflation has been even higher if we assume these 2010 frozen coins were actually lost due to low perceived value.
  

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[Richy_T]

Inflation makes the dollar worth less. So less inflation would imply fewer dollars per btc, not more.

Edit: Oh wait, nevermind. You meant BTC inflation.

[keystroke]

Since monetary inflation of bitcoins is still significant (compared to the USD, for example), I thought it'd be useful to look at the inflation-corrected exchange rates. Ideally, I should have included the USD inflation, but I am too tired, and it wouldn't change things much anyway.

I sourced the data from bitcoincharts.com, and corrected each daily VWAP for the number of coins generated up to that date, relative to the number of coins generated up to a fixed, arbitrarily chosen, reference date. Number of coins (monetary base) is projected, not actual, but the two are close enough.

There are two reference dates used in these graphs: April 1 2011 (before the first bubble, and when Gox trade volume just started becoming significant), and January 1 2012 (after the first bubble, during the slow recovery).




The same data in log scale, in case you appreciate it as much as I do:


Bitcoin economy (be it based in speculation, savings, trading, gambling, playing - whatever) has obviously been growing stubbornly. If it were not for monetary inflation since January 2012, one bitcoin would be trading today at about USD 42.

It would be interesting to expand this simple analysis by taking into account old coins that never moved after being generated - lots of these back in 2010 - actual monetary inflation has been even higher if we assume these 2010 frozen coins were actually lost due to low perceived value.
  

Thanks, very nice work.

[dree12]

...

Isn't this the same as the market capitalization, but scaled down by the number of bitcoins on whatever date?

When most people talk of "inflation", they usually mean increase in prices, not money supply inflation. That's why we say the US underwent a period of "deflation" even though money supply was drastically increasing. As such, I consider the "inflation-corrected" value of a Bitcoin to be a true CPI index, which would correct it (based on US CPI) to (currently) just below the 2011 high.

[creativex]

When most people talk of "inflation", they usually mean increase in prices, not money supply inflation. That's why we say the US underwent a period of "deflation" even though money supply was drastically increasing.

That's true because J6P has a fundamental misunderstanding of what's happening. The natural tendency is for prices to decrease as productivity increases, but inflation of the monetary supply causes prices to stagnate or rise, so most people think that higher prices over time are natural and they say "damn that inflation", when they should be saying "damn that fed".

A deflationary period in the economy is simply a period of increased debt repayment(or defaults) as these cause a reduction in the monetary supply(debt). Simply pumping out more fiat to combat it(as we are currently doing) doesn't change the velocity of money, and as a result you can have simultaneous inflation and deflation.

There are entirely too few data points to consider the USD/BTC price to be a true indication of CPI, though it's likely more accurate than DC's fairy tale.

[dree12]

When most people talk of "inflation", they usually mean increase in prices, not money supply inflation. That's why we say the US underwent a period of "deflation" even though money supply was drastically increasing.

That's true because J6P has a fundamental misunderstanding of what's happening. The natural tendency is for prices to decrease as productivity increases, but inflation of the monetary supply causes prices to stagnate or rise, so most people think that higher prices over time are natural and they say "damn that inflation", when they should be saying "damn that fed".

A deflationary period in the economy is simply a period of increased debt repayment(or defaults) as these cause a reduction in the monetary supply(debt). Simply pumping out more fiat to combat it(as we are currently doing) doesn't change the velocity of money, and as a result you can have simultaneous inflation and deflation.

There are entirely too few data points to consider the USD/BTC price to be a true indication of CPI, though it's likely more accurate than DC's fairy tale.

Still, using money supply/velocity to estimate CPI is a bad idea. Money velocity is difficult to measure and only roughly correlated with CPI. If you're looking for the true price of one Bitcoin, CPI is the answer, not money supply.

[creativex]

The true price of one bitcoin is whatever someone is willing to pay for it, whether it's chickens, goats, gold, or fiat. I'm not really following your connection to CPI in this context.

It's possible that eventually a stable BTC price could be used to help measure monetary inflation over time, but I think that's way off into the future when more data points have been observed. Meanwhile commodity prices are a great indicator of monetary inflation. Sugar prices in particular tend to react quickly to inflation spikes.

The BLS' numbers are so far astray from reality at this point that they shouldn't be used for anything save to provide a butt for jokes. If you mean that some of the independently calculated and corrected CPI numbers could be used to justify a BTC price move then I could go along with that. 

[dree12]

The true price of one bitcoin is whatever someone is willing to pay for it, whether it's chickens, goats, gold, or fiat. I'm not really following your connection to CPI in this context.

It's possible that eventually a stable BTC price could be used to help measure monetary inflation over time, but I think that's way off into the future when more data points have been observed. Meanwhile commodity prices are a great indicator of monetary inflation. Sugar prices in particular tend to react quickly to inflation spikes.

The BLS' numbers are so far astray from reality at this point that they shouldn't be used for anything save to provide a butt for jokes. If you mean that some of the independently calculated and corrected CPI numbers could be used to justify a BTC price move then I could go along with that. 

That's what CPI measures: true price, in chickens, goats, gold, etc. (i.e. what consumers buy). Although I don't believe the BLS's numbers are exact, they probably aren't too far off. At this point, the price of a BTC is similar to that at the June 2011 peak—not far over and not far under. That's all I'm saying.

[niko]

At this point, the price of a BTC is similar to that at the June 2011 peak—not far over and not far under. That's all I'm saying.

True. It is important to see this statement in the light of the fact  that currently there are twice as many bitcoins as there were in June 2011.

[justusranvier]

Although I don't believe the BLS's numbers are exact, they probably aren't too far off.[/url]Look into the details sometime about how they calculate their inflation numbers.

[dree12]

Although I don't believe the BLS's numbers are exact, they probably aren't too far off.[/url]Look into the details sometime about how they calculate their inflation numbers.

If they're off, it's in the direction that strengthens my argument. I highly doubt we've been having negative true CPIs recently.