In a steady-state system, the price of a monetary asset is given by the "quantity theory of money", which states that:
P x Q = M x V, where
P is the price of the goods, Q is the amount of goods bought by the monetary asset, M is the amount of monetary asset in circulation, and V is the average velocity (the number of times per year that a given bitcoin is used to buy something).
Dump the velocity. and you are good to go. It has to be liquid, the owner needs to know that he can easily get rid of the bitcoins, actual trades are not needed.
You cannot ignore the velocity. If everybody would pay their bills the same day they get the money, instead of waiting to the end of the month, the same amount of trading would require 1/30 as much currency in circulation. If the currency it bitcoin, the smaller demand would imply a lower value per BTC.
I absolutely agree with that, and it is my personal main worry for "to the moon". If bitcoin is just used as an intermediate asset to buy something overseas, and a typical "bitcoin" buy would be fiat -> bitcoin on one or other exchange -> buying, and the seller receives bitcoin and trades them immediately for fiat (eventually another fiat), then the "holding time" of bitcoins would be very very short. The velocity would be very very high. And only a small market cap would be sufficient to do all the buying in the world. Bitcoin would then just be a sort of international transmission means of value.
It is only when people keep coins for storage of value, for a week, a month or longer (like most of us keep a monthly salary for on average half a month when spending it), that the bitcoin velocity would be grossly comparable to fiat velocity. It could also be much lower, if people start having faith in the long term value store of bitcoin (against fiat motions). However, with current volatility I don't think anyone in his right mind would put all of his savings for the long term in bitcoin.
This is right now compensated by people who are betting on "to the moon" - me too, btw. The holding times for bitcoins are very very long right now I would think. In fact, they have to, given the price and the still small amount of goods that is actually bought with it (essentially on black markets I suppose). It is a reasonable bet to gamble a few coins with a huge potential benefit. But not a life saving. That would be madness.
The gamble is now (or was in the past). It is a once-in-a-lifetime opportunity.
Moreover, the creation of virtual forms of the currency is inevitable. I could pay a merchant with a signed paper "I owe you 10 bitcoins, payable in 10 days", and the merchant can pay his supplier with that paper, if they trust me. We could deposit all our bitcoins in a "bitcoin bank", and pay each other with checks from those accounts. Such virtual bitcoins would reduce the demand for actual bitcoins.
The point with M2 money is that M2 money is indistinguishable from M0 money in fiat. You don't know if the 200 dollars you spend from a bank account are "the original" ones, or are "on credit" (in the fractional reserve system). They all look the same.
However, I wouldn't value a piece of paper "I owe you 10 bitcoin" as much, as 10 real bitcoins in my wallet !
It is like paper gold and physical gold, except for the problems of actual physical gold (securing it and so on).
I would rather think that bitcoin is especially suited NOT to do fractional banking with. There's no difference between a bank account and a bitcoin address. So nobody can mess with your coins and lend them out multiple times.
There is indeed an initial "free" transfer of value from the whole economy using bitcoin in the end steady state towards two classes of people:
- those who give out the first time a bitcoin (the miners). This is called seigniorage. It is what central banks are good at: printing new money and cashing in on first distribution of it.
- the "early adopters" who stored value in bitcoin before its market value reached B. This last thing is something that has probably not been witnessed since gold became money in the early days of history.
The second case has happened with many private currencies in the past, such as Platinum Pieces of the World of Warcraft game (is that right?), Second Life's Linden Dollars, and, presumably, the Liberty Dollar.
That didn't turn out to be a monetary asset, right ? It was at most a valued collectable. I have no knowledge of people paying their grocery shoppings with Second Life Dollars. And as long as we can't with bitcoin, it will not be money either. But the idea is that one day, we will. If not, then bitcoin Q will be very low.
In the first case, the central banks are supposed to use the wealth that they take from the people through seignorage for the benefit of the people. That makes the practice acceptable to the majority of the population. (Whether the governments actually use that wealth for the people's benefit is a separate issue.) With private money like bitcoin, seignorage transfers wealth from the general population to the private individuals who created the currency. In the case of bitcoin, some seigneurs expected to suck in trillions of dollars that way.
I don't believe that it is "for the common good" but rather to pump a lot of production in the hands of a few that central banks print money. But as you say, that's another discussion. Although not entirely. Because in order to try to escape inflating fiat money, things like gold and bitcoin could be a potential long-time store of value. Because they are collectables.
We are those potential seigneurs. There's nothing wrong with that, I' d think.
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