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.
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If you have money, change your mind to having a car instead; someone else having a car, but prefers holding money, then the two switched roles, and no change in demand for money or cars happened. So it depends on the seller, does he have the same wish to hold money as the buyer before he decided to buy?
One has to use consistent quantities Q, V, M and P of course.
So in your example, if you include the car in Q, then you have to include the money transfer in V. Of course, if two people exchange something, you might think that that doesn't influence anything. That would be correct if they were going to exchange,
no matter what happens. If I'm going to exchange my car with my father, who gives me money he has under his matrass instead, then this might not influence the price of cars on the car market.
However, that is not the case in general.
I will make a decision to buy a car, or to buy something else, or to hold my money, based upon several criteria, like the price of the car, my projections of getting money in the future and so on. And it are these decisions which determine demand and offer, and settle prices. If I think I will get money next month, I might consider buying a car. If I think I will not get much money next month, I might reconsider buying that car. The person supposed to give me some money next month (my employer) will have to get that money from somewhere. Maybe by selling goods. The price he will get from his goods will depend on how much money people are willing to give. And so on.
So, exchanges, or better, the arbitration between different possible exchanges (or not), determine offer and demand, and hence price. So they are not "neutral to price" except if there is no choice and they are going to happen no matter what.
It is neutral, in my case when everything that happened was a change of roles. If the seller turns around and uses his money, and also everyone down the road, then there will be a cascade of exchanges. If down the road, some seller should just keep the money, the situation is restored.
The point is that if we use the quantity theory of money, we use also the amount of goods bought with the money, Q. Because after all, money serves in the end to buy goods. Money that doesn't buy goods isn't any good. It can be a "store of value" for a long time, but in the end, you want to get something for your money. Money is by definition an intermediate asset, which is no good if it doesn't serve in the end to "complete the transaction".
If I exchange two apples for an egg, the transaction is completed.
If I sell two apples today, put the money aside for 3 months, and then I buy an egg, it is only at that point that the transaction is completed. In the mean time, the money served as "store of value" for that transaction that took 3 months.
But there's no use in acquiring money that doesn't end up buying goods. This is why Q is important.
In the end it means that it is the aggregate demand to hold money (and the aggregate demand to hold anything else, which is just the inverse), that decides what the money is worth. Not the transactions.
I agree with you. However, what is the drive of that aggregate demand ? The storage of value in order to bridge the two parts of a trade. In our example, part of the aggregate demand to hold money was 3 months, and the worth of 2 apples.
And we're back to Q (2 apples) and V (4 times 3 months in a year).
The velocity does not include financial transactions.
You can choose. In that case, you have to put the other financial asset into Q. But I agree with you that that is not usual. However, as long as V and Q are consistent, there is no problem. The sum must always match, because the left and the right side of the equation P x Q = M x V count the same thing, namely the amount of money (the flux) that went over the counter.
Money is never produced or never consumed (sound money, that is), so the velocity is a number that tries to express the trade in the production chain. That is, it is fundamenentally expressing the same as GDP. It is never measured, it is computed. It is basically useless for thinking about the value of bitcoin.
I wouldn't say so. I think it is fundamental. The formula also works with exchanges of money.
Consider an asset like gold, which is only exchanged for "other money".
You can still write P x Q where Q stands for "all the other money bought with gold and P the price of that money in gold". I
We then *still* have: P x Q = M x V
Here M is the total amount of gold, and V is the velocity of gold (namely the number of times it has been traded for other money). P x Q is the amount of "other money" that has been traded for gold, at the money's price in gold.
So it still works. The only problem is, that there is nothing fundamental in it in this case. It is essentially just the two sides of the bookkeeping of "all the exchanges in the world". The traded volume increases just as well Q as it increases V.
But you are dealing with another aspect, that is, the market share of the demand for "store of value" that will be taken by bitcoin, in competition with all other "stores of value". This is indeed the thing I have no idea for how to estimate , and honestly, I don't believe that it can be the principal driver for the bitcoin price.
If bitcoin were just the "replacement for gold" in store of value, but without any stuff you could buy with it directly, then this price could be just anything. The current price is no indication. The current price is purely speculative "to the moon".
This "ponzi" side of bitcoin, which is an essential part in becoming a monetary asset, has of course to stop sooner or later.
You want to buy bitcoin at $100,- because you think people will want to buy it at $1000,- one day. But people will buy it at $1000,- one day because they think people will want to buy it at $10 000, - one day. And so on. This will stop of course.
Because NOBODY is ever going to pay $1000 trillion for a bitcoin. So nobody is going want to buy it at $100 trillion. All the way down.
So one has to consider that in order for bitcoin to have a value X, it means that people will be willing to buy it at X without expecting to resell it at more than X. Then it would stop being a speculative item, and become a "store of value". Like gold or the like.
What is that value X ? It will indeed depend on the share bitcoin has in the general aggregate demand for store of value. But in my opinion, that could just as well be a very tiny fraction, as well as a large fraction. Moreover, bitcoin is made especially to do transactions with. To buy stuff. I think it is much safer to look at bitcoin as a monetary asset which serves to buy goods and services, and which has hence an inherent store of value in between earning it and spending it, rather than a competition with other stores of value. This last aspect will probably only become important if bitcoin is already a monetary asset with which you can buy stuff.
You are saying a lot of sensible things, except that horrible formula, which is irrelevant for everything and specially for the value of bitcoins. I believe I have supported that view in my earlier comments.
The store of value means that what value you put in, you can get out, either when you turn around and do another trade directly, or you hold the value in money for months, years or even generations. I talk about value, not a number of dollars. And you are never guaranteed the value to be constant over time, that is impossible. Bitcoins are designed to not lose value, and the main aspect is the max number of coins in the system.
The speculative aspect is real, but that is only temporary, until the balance between demand to hold and the demand to not hold stabilizes. What we see currently, is that even while the liquidity of bitcoin is far below the liquidity of the respective local fiat currencies, bitcoin is still winning terrain, and since that means higher liquidity for bitcoin, there is no reason for that to stop, until that crucial balance is achieved. So in the end, it will be the best store of value, now you have the possibility to earn something, if you have knowledge and take action.
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