When there is a liquidity crisis, how could bitcoin help?

[johnyj]

Until 2014, bitcoin has been in an environment with extremely lose monetary policy, where fresh dollars are printed around 3 billions per day to support the high price in every commodity, and bitcoin is the last beneficiary

Since QE ended, all the commodities' price crashed one after another. If you consider the size of those markets, the drop in bitcoin's  market value is nothing

An interesting thing: When there is a liquidity problem in USD, how could bitcoin help as a liquidity provider?


In a traditional liquidity crisis, when fiat money is not enough, banks and institutions run out of money, they can not finance the new investment, and this will cause large scale of layoff and bring down the economy

If people regard bitcoin as a commodity, then its price will drop together with other commodities due to less and less available dollar, then it can not give much help, people still desperately need more dollar, they sell the last piece of their bitcoin for even a tiny amount of dollar

However, bitcoin can act as a liquidity provider, you just need to use it as money, when there is no dollar income, get some bitcoin income. In theory, bitcoin can provide any kind of liquidity, since its exchange rate can be anything

For example, the economy is lacking 3.6 billion dollars per day, if one bitcoin worth 1 million dollar, you just need 3600 new coins to make it working

But the challenge is, when dollar is becoming more difficult to get, the exchange rate of bitcoin will get lower and lower, in no way to reach an exchange rate of 1 million dollar per coin. How could a bitcoin with that low exchange rate provide enough liquidity?

I think that something must happen to make most of the people believe that 1 bitcoin worth 1 million dollar, then it can act as a strong liquidity provider. But in a market where dollar is becoming less and less, this change will not happen on exchanges, it might come from the goods/services trading

For example, a housing company desperately sell new house but get no dollar income and facing a bankrupt. But he labeled his house price for 1 bitcoin, then there will be lots of sales and bitcoin's value will jump to approximately 1 million dollar, no fiat money exchange is needed in this case, thus no dollar is needed to raise the exchange rate

[alamanjani]

Until 2014, bitcoin has been in an environment with extremely lose monetary policy, where fresh dollars are printed around 3 billions per day to support the high price in every commodity, and bitcoin is the last beneficiary

Since QE ended, all the commodities' price crashed one after another. If you consider the size of those markets, the drop in bitcoin's  market value is nothing

An interesting thing: When there is a liquidity problem in USD, how could bitcoin help as a liquidity provider?


In a traditional liquidity crisis, when fiat money is not enough, banks and institutions run out of money, they can not finance the new investment, and this will cause large scale of layoff and bring down the economy

If people regard bitcoin as a commodity, then its price will drop together with other commodities due to less and less available dollar, then it can not give much help, people still desperately need more dollar, they sell the last piece of their bitcoin for even a tiny amount of dollar

However, bitcoin can act as a liquidity provider, you just need to use it as money, when there is no dollar income, get some bitcoin income. In theory, bitcoin can provide any kind of liquidity, since its exchange rate can be anything

For example, the economy is lacking 3.6 billion dollars per day, if one bitcoin worth 1 million dollar, you just need 3600 new coins to make it working

But the challenge is, when dollar is becoming more difficult to get, the exchange rate of bitcoin will get lower and lower, in no way to reach an exchange rate of 1 million dollar per coin. How could a bitcoin with that low exchange rate provide enough liquidity?

I think that something must happen to make most of the people believe that 1 bitcoin worth 1 million dollar, then it can act as a strong liquidity provider. But in a market where dollar is becoming less and less, this change will not happen on exchanges, it might come from the goods/services trading

For example, a housing company desperately sell new house but get no dollar income and facing a bankrupt. But he labeled his house price for 1 bitcoin, then there will be lots of sales and bitcoin's value will jump to approximately 1 million dollar, no fiat money exchange is needed in this case, thus no dollar is needed to raise the exchange rate

I personally don't believe that endless printing stopped.
I don't believe it ever will. They will first crash the world finance before they will stop printing.
IMHO

[GrandmaJean]

For example, the economy is lacking 3.6 billion dollars per day, if one bitcoin worth 1 million dollar, you just need 3600 new coins to make it working

The miners are not necessarily going to sell all the bitcoin they mine as soon as their coins mature.

There is no reason why a central bank could not print additional fiat money at a rate that would solve a liquidity crisis in a similar way that it has done over the past several years.

[Possum577]

Lending is always possible in different forms of currency.

[Q7]

I think bitcoin can easily overcome that because it is divisible whereas fiat can't do that. Whether bitcoin is 1 million or a dollar, it's a matter whether we want to take the last eight digit into account. For fiat have to make up the shortage they will simply printing more money.

[panju1]

I doubt if this change would happen quickly. It has to be a gradual process, with more and more people accepting Bitcoin.

Technically, even if the dollar appreciates quickly (i.e. if there is deflation), it could solve the liquidity crisis. 

[jonald_fyookball]

If people regard bitcoin as a commodity, then its price will drop together with other commodities due to less and less available dollar, then it can not give much help, people still desperately need more dollar, they sell the last piece of their bitcoin for even a tiny amount of dollar

I have no idea how you arrived at this conclusion.

If Bitcoin became regarded widely as a commodity, it's price would soar, liquidity crisis or not.
Displacing 5% of the gold market would make one bitcoin worth about $20,000.

[jbreher]

In a traditional liquidity crisis, when fiat money is not enough, banks and institutions run out of money, they can not finance the new investment, and this will cause large scale of layoff and bring down the economy

What you term a 'liquidity crisis' is nothing but the universe's infallible determination that the financing is sought for malinvestment. Malinvestment leads to improper resource allocation. At some time, the bill for this must be paid.

If the investment is for things that consumers are actually demanding, then finance will by definition be available.

Or do you really feel that society benefits from many brand-new uninhabited ghost cities in China, destined to decay into dust having never been inhabited?

[GrandmaJean]

If people regard bitcoin as a commodity, then its price will drop together with other commodities due to less and less available dollar, then it can not give much help, people still desperately need more dollar, they sell the last piece of their bitcoin for even a tiny amount of dollar

I have no idea how you arrived at this conclusion.

If Bitcoin became regarded widely as a commodity, it's price would soar, liquidity crisis or not.
Displacing 5% of the gold market would make one bitcoin worth about $20,000.

I would say that he probably wanted to make the "famous" $1 million per bitcoin calculation. It was no mistake that you chose the $3.6 billion figure.

During even a modest liquidity crisis, this would not be enough excess liquidity

[jonald_fyookball]

If people regard bitcoin as a commodity, then its price will drop together with other commodities due to less and less available dollar, then it can not give much help, people still desperately need more dollar, they sell the last piece of their bitcoin for even a tiny amount of dollar

I have no idea how you arrived at this conclusion.

If Bitcoin became regarded widely as a commodity, it's price would soar, liquidity crisis or not.
Displacing 5% of the gold market would make one bitcoin worth about $20,000.

I would say that he probably wanted to make the "famous" $1 million per bitcoin calculation. It was no mistake that you chose the $3.6 billion figure.

During even a modest liquidity crisis, this would not be enough excess liquidity

I'm no economist...but seems to me that any so-called liquidity crisis would
only have a certain severity... They would never be so dire as to cause
massive deflation or hyper devaluation of commodities.

[johnyj]

I doubt if this change would happen quickly. It has to be a gradual process, with more and more people accepting Bitcoin.

Technically, even if the dollar appreciates quickly (i.e. if there is deflation), it could solve the liquidity crisis.  

It is not that easy, because the liquidity crisis will directly impact banks. Normally banks have only a little bit money in their account, most of the money are just checkbook numbers in their database (just like your bitcoin in MTGOX, the coins are gone long time ago, but your bitcoin in their database are still there and can be traded)

So, no amount of deflation can help with that, banks will just become insolvent and all the client deposit destroyed

And you are right, the change for bitcoin will not come in one day, but slowly. The merchants who accept bitcoin will just direct use it to order products from other merchants when it is widely accepted as a payment medium. Then the sell pressure on exchanges will reduce and eventually those merchants become the biggest support for bitcoin's value

[johnyj]

For example, the economy is lacking 3.6 billion dollars per day, if one bitcoin worth 1 million dollar, you just need 3600 new coins to make it working

The miners are not necessarily going to sell all the bitcoin they mine as soon as their coins mature.

There is no reason why a central bank could not print additional fiat money at a rate that would solve a liquidity crisis in a similar way that it has done over the past several years.

They can, but for every dollar they issue, they must have something valuable to back it. Now they have already bought everything they can buy: House, National debt, Gold, Oil... is there anything else valuable they can use as a collateral to issue money? Maybe only bitcoin

And, miners don't sell more than half of the coins, but you should also include the small amount of cash out from previous investors, so the net result should be several thousand coins per day, see my signature for a mathematical model

[jonald_fyookball]

They can, but for every dollar they issue, they must have something valuable to back it.

well certainly not the us being the wrc.  but even other countries....

why can't they just issue bonds.

[jbreher]

They can, but for every dollar they issue, they must have something valuable to back it.

No they don't. What backs the Federal Reserve Note (i.e. USD)? Nothing tangible nor of value.

[jonald_fyookball]

  What backs the Federal Reserve Note (i.e. USD)? 

"the full faith and credit of the united states government" 

[leopard2]

a Cyprus like scenario in Europe is more likely; or maybe capital controls for example CHF-EUR.

should the EUR crisis accelerate, and we see some bank holidays, that is when people wake up. They will be pissed because some balances on their accounts are frozen, ATMs are not operating, and then they will read in the media how this BTC thing is still working

that is the turning point ... after that ordinary people will buy BTC because they don't want to get burned again

[jbreher]

  What backs the Federal Reserve Note (i.e. USD)? 

"the full faith and credit of the united states government" 

'zackly. Nothing tangible nor of value. Just a meaningless slogan.