Bitcoin and Velocity of Money

[Melbustus]

I've seen a number of back-of-the-napkin calculations estimating how many dollars 1 BTC would be worth if bitcoin took 1% of internet transactions, or what have you. But these estimates always seem to hold velocity of money constant; ie, they assume that the velocity of bitcoin in these situations would be the same as dollars or whatever they're comparing to. Is that true? Or could you argue that the velocity of money in a BTC economy would be greater because the transactions are easier and cheaper?

[notme]

I've seen a number of back-of-the-napkin calculations estimating how many dollars 1 BTC would be worth if bitcoin took 1% of internet transactions, or what have you. But these estimates always seem to hold velocity of money constant; ie, they assume that the velocity of bitcoin in these situations would be the same as dollars or whatever they're comparing to. Is that true? Or could you argue that the velocity of money in a BTC economy would be greater because the transactions are easier and cheaper?

It definitely has less drag, but does it have as much thrust?

[GeniuSxBoY]

How would you define velocity of money?


Speed and Direction of the value of money?

Speed and Direction of inflation?

Speed and Direction of Money Transfers/Transactions?

[cunicula]

I've seen a number of back-of-the-napkin calculations estimating how many dollars 1 BTC would be worth if bitcoin took 1% of internet transactions, or what have you. But these estimates always seem to hold velocity of money constant; ie, they assume that the velocity of bitcoin in these situations would be the same as dollars or whatever they're comparing to. Is that true? Or could you argue that the velocity of money in a BTC economy would be greater because the transactions are easier and cheaper?

Based on the current situation, i would expect low velocity. Hoarding of btc as a store of inflation protected value decreases velocity. I don't think this situation is sustainable, however. Though it could persist for years just not decades.

[Stephen Gornick]

But these estimates always seem to hold velocity of money constant; ie, they assume that the velocity of bitcoin in these situations would be the same as dollars or whatever they're comparing to. Is that true?

On the last day of the month, starting about an hour before midnight the parking lot at Walmart begins to fill.  That is because when the clock strikes twelve, the customer's funds become available for spending and the cashiers become very busy.

If those funds were to be tracked, they would likely turn over several times over a couple of days and thus have a high velocity for that short period of time.

Then take the example of me sending in a payment.  Before writing the check I had to deposit adequate funds.  These funds took several days before the amounts I deposited were available to me for spending.  I then write the check and mail it to my creditor.  Several days will pass before the amount of that check is drawn from my account.

It might seem that there was a low velocity there, because there was maybe 10 days from when I received the money to when it was drawn from my bank account.  But while those funds were in the bank, they were loaned out, and with fractional reserve ... maybe 9 times as much as I had on deposit was loaned out.

So the payment network being slow didn't really hurt the velocity -- those funds could still have been responsible for turnover that occurred.

With bitcoin though, we have no fractional reserve yet (that we know of).  So every day that a bitcoin isn't "in play" velocity of the money supply is reduced.    Countering that is the fact that transactions received are available for spending within minutes.  That will cause velocity to be able to increase -- assuming the recipient wants to spend.  Consider that Walmart example above.   Spending by those without access to credit will often occur as soon as those funds are available.  So the faster payments clear, the higher the velocity potential.

I just made the concusion that for those without access to credit there is an advantage to receiving bitcoin funds (wages or trade revenues) over receiving funds through the legacy banking networks.  But I'm not an economist.  Most economists refuse to believe that bitcoin has any use in this world and thus, I suspect, they won't be considering what effect faster clearing times has on Bitcoin's velocity of money.

Here's a little more from those who, umm ... aren't big fans of bitcoin: http://forum.bitcoin.org/index.php?topic=11627.msg167838#msg167838 and https://forum.bitcoin.org/index.php?topic=57.msg169414#msg169414

[joulesbeef]

How would you define velocity of money?

how many times the same bitcoin is spent in a year.


Its on the wiki

If, for example, in a very small economy, a farmer and a mechanic, with just $50 between them, buy goods and services from each other in just three transactions over the course of a year

Farmer spends $50 on tractor repair from mechanic.
Mechanic buys $40 of corn from farmer.
Mechanic spends $10 on barn cats from farmer
then $100 changed hands in course of a year, even though there is only $50 in this little economy. That $100 level is possible because each dollar was spent an average of twice a year, which is to say that the velocity was 2 / yr.

replace $ with BTC

[ercolinux]

Velocity of bitcoin will remain low for long time: you can achieve a high velocity when the whole system uses the same currency but when, as for BTC, you've only a small subset of the economy using that you probably reach a maximum of 5-10/yr. As now we are probably near 1.2-1.5/yr.

[TraderTimm]

I'd keep an eye on Dwolla and Liberty Reserve. These transaction processors are key in observing overall exchange velocity. As for bitcoin-to-bitcoin transactions, you can only ballpark from sites like bitcoinmonitor.com - as most users have more than one wallet that they are sending coins to and from. (And you have to account for people doing their own 'remixing' as they bounce funds from one address they control to another.)

Dwolla reaching large transaction volumes speaks to the bitcoin story. Like most, I didn't hear about them until I learned about bitcoin.

[Stephen Gornick]

(And you have to account for people doing their own 'remixing' as they bounce funds from one address they control to another.)

Velocity of money really should relate to coins changing hands, not just transactions that end up in the block chain.

One metric that might correlate to the velocity of money figure is BitcoinDays Destroyed:
 - http://en.bitcoin.it/wiki/Bitcoin_Days_Destroyed

It recently has been trending down a little (down as %).  

While velocity of money doesn't care if the source of funds for a spend was from a recent payment or from savings socked away long ago, the BitcoinDays Destroyed will differentiate between the two.  

The older the source of the funds, the higher the BitcoinDays Destroyed will be.  

Without knowing if the transaction is for spending, just a rejuggling of funds, or the result the "change transactions", using raw transfer numbers will overstate by a huge margin the velocity of money.

Hopefully the BDD help fill the gap for that metric to some degree.

[GeniuSxBoY]

How would you define velocity of money?

how many times the same bitcoin is spent in a year.


Its on the wiki

If, for example, in a very small economy, a farmer and a mechanic, with just $50 between them, buy goods and services from each other in just three transactions over the course of a year

Farmer spends $50 on tractor repair from mechanic.
Mechanic buys $40 of corn from farmer.
Mechanic spends $10 on barn cats from farmer
then $100 changed hands in course of a year, even though there is only $50 in this little economy. That $100 level is possible because each dollar was spent an average of twice a year, which is to say that the velocity was 2 / yr.

replace $ with BTC

That was a really helpful post. Thank you