Economist 1, "Look, there's a $ 20 bill on the field! "
Economist 2, "can not be. If there was a $ 20 bill on the ground, someone would have already picked up ".
It's an old joke, not exactly funny, but it illustrates the way economists think. Economists have the luxury of making assumptions. If the government cuts taxes, all other things being equal, people will spend more money. Economists also create economic models. These models are to make complex ideas easier to understand. The following is a simple business model and the output cryptocurrency computer services. There are a lot of assumptions here and it's not supposed to be taken literally. But he can give us an understanding of the Bitcoin relationship in a complex, Crypto-world.
The exchange equation
Previously, I wrote about the exchange equation here: https://www.ccn.com/bitcoin-quantity-theory-money-bitcoin-undervalued/
Essentially, the exchange equation is an economic equation that emphasizes the relationship between money supply, money velocity, price level, and actual output. The equation was derived by John Stuart Mill 150 years ago and is a staple in all macro classes or monetary theory.
MV = PQ
M = the money supply
V = speed of money
P = the general price level
Q = actual production.
We can first apply to the US economy and apply some real numbers to this equation.
PQ = fourth quarter, nominal GDP of the United States in 2017 was 19.73. This is the 2017 price of goods and services produced in the country during 2017.
Then, how much money is needed for service as GDP?
M = According to the St. Louis Fred database, https://fred.stlouisfed.org/series/M2, we use $ 13.82 trillion to serve the $ 19.7 trillion in production. They use M2. Go back to your college days and remember M1 is more or less cash and checking accounts and M2 is more or less your savings accounts.
Since we have these numbers, it's easy to find the speed of money. Remember the speed is how money changes hands fast. We divide nominal GDP, 19.7 by the stock of money, 13.82. This comes out at 1.42. This is exactly what the Saint-Louis Feds speed number is as good. https://fred.stlouisfed.org/series/M2V
It was easy. Our exchange dollar equation looks like this:
M (13.82) V (1.42) = PQ (19.7)
Apply to Bitcoin
Ok, since we have plugged in all the numbers with the dollar, we will do the same thing with Bitcoin. Now, we need to define PQ in the Bitcoin ecosystem. Q is the real world exit that people buy using Bitcoin. There are 2 identifiable groups of people who would benefit from Bitcoin help: those who want to get off the grid and those who want to get on the grid. Internet gamblers, people try to send money abroad economically and unfree a multiple of other people who use it for illegal activities.
In addition, there are people who do not have access to the global financial system. They are people from war-torn countries like Afghanistan, Syria or Iraq or people in countries where the monetary and financial authorities have let them down, like Zimbabwe or Venezuela. They will be allowed to get on the grid with use and access to Bitcoin.
PQ = Umm? Oops. There is not a reliable number that can give us a PQ. The dark web and Zimbabwe are not exactly transparent with their financial numbers. Economists being, we have to make assumptions here. With all the hype and advertising of recent cryptocurrency, it is not absurd to assume that Crypto could serve 1% of global GDP in the next 3 years.
According to Statista, world https://www.statista.com/statistics/268750/global-gross-domestic-product-gdp/ Nominal GDP was $ 79.28 trillion in 2017. Now we have a number for our PQ, which is our global nominal GDP that Crypto would serve. 1% of $ 79.28 trillion or $ 792 billion.
So, our equation now looks like this: MV = 792 billion dollars. Again, the PQ (792.000.000.000) represents goods and services produced that are purchased with cryptocurrency.
V. is next This number is quite dark and because we can not easily divide PQ by M. According to Woodbull tables, the bitcoin speed is 1.2. http://charts.woobull.com/bitcoin-velocity/
This does not sound too absurd. Bitcoin's speed would be significantly lower than the dollar because it is used as a store of value (M2) more than one medium of exchange (M1).
M * V (1.2) = 792 billion
Resolution M, we divide PQ by V. PQ / V, or in towel mathematics, 792 / 1.2 = 660 billion. With this speed and the ratio, the world would need a $ 660 billion Crypto stock serving 1% of global GDP.
We will switch the M for C. C representing the Crypto money supply of the world. CV = PQ
C (660 billion) V (1,2) = 792 billion
The next step on our briefcase would be to isolate Bitcoin's share of the stock M. According to Crypto coinmarketcap.com's market share, https://coinmarketcap.com/charts/#dominance-percentage bitcoin is 40.8 percent . This corresponds to a $ 269 billion Bitcoin money stock.
The Bitcoin exchange equation
Our final Bitcoin exchange equation looks like this:
B (269 billion) V (1,2) = PQ (322,8 billion)
$ 269 billion spent 1.2 times will serve a global nominal GDP of $ 322.8 billion.
The last step on the towel is to know what each Bitcoin is worth. At present, there are 17 million Bitcoin out there (up to 4 million can be lost forever) with a cap of 21 million. Let's use the 17 million. 269 billion / 17 million bitcoins. This comes to $ 15,882 for each bitcoin. This is not at all from the range we have been in the last 6 months.
Conclusion
Economists make assumptions and create models to simplify complex concepts and ideas. According to this simple model, each Bitcoin is worth $ 15,882, which is about 46% higher than the current valuation. It was not at all a literal take on the exact price of Bitcoin, but it can help us understand the relationship between Crypto, Bitcoin and the output it serves. V numbers and more accurate PQs in the future will help us become more accurate in determining the price of Bitcoin and help us digest the complexity of this new stock asset class and money.
What assumptions were right? What assumptions were wrong? Comment below.
Disclosure: I spend, invest and save with cryptocurrencies.
All prices and ratios were based on March 2, 2018.
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