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Crypto - Additional Currency Supply


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As the market capitalizations of crypto appreciate, I was wondering if this means that additional currency is getting brought online. If merchants become indifferent between accepting a dollar or accepting a cryptocurrency, does this mean that the amount of currency chasing goods and services is increasing? Am I missing something?  

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On 11/4/2021 at 3:54 PM, spartansaver said:

As the market capitalizations of crypto appreciate, I was wondering if this means that additional currency is getting brought online. If merchants become indifferent between accepting a dollar or accepting a cryptocurrency, does this mean that the amount of currency chasing goods and services is increasing? Am I missing something?  

Well, what about the fiat currency needed to buy the crypto…? Remember every piece of base money created is held by someone at all times until it is retired. What adjusts are prices, I. This case btc et al. Just because that price went up doesn’t mean there’s any more base money, and so unless someone is willing to accept crypto in a ratio which after looking through to base money is different from just using base money itself, I would think there’s no difference. It’s the same as thinking in CAD vs USD, the basis changes, the purchasing power doesn’t.

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Crypto currency produces network inflation, which is somehat different.

As Sunrider explains. I give you 60,000 USD, you give me 1 BTC. Simplified; if you got your 1 BTC via a 40,000 USD purchase from someone else - we're just exchanging USD with no impact on inflation. You're up 20,000 USD, but there is no change in the total 60,000 USD in circulation. However there were 2 transactions, and each of them generated a small new release of BTC to pay the miners who verified them. Until BTC hits the 21M cap, there is now more spendable BTC than there was, and inflation. The more activity the bigger the cummulative release of new BTC, and the more inflation. New token release/transaction is controlled, network volume is not.

 

Most developers will immediatly spend any USD raised on development, raising the velocity of those USD in circulation. The more endemic/popular crypto becomes, the more USD raised,  the more higher velocity money in circulation, and the faster the speed (spend it as fast as you can, before it stops). Network effect.  It is uncertain as to what happens around stable coin where one leg is pegged to USD, other than its a developing grey rhino. If everything works as advertised there should be no effect, if there's a bad actor ......

 

Replace the stable coin with a US CBDC derisks the grey rhino.

Not a popular view in the US, but a largely minority one.

 

SD

Edited by SharperDingaan
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In a simplified way this is how my logic works..

 

10 people on an island have $100 of currency (USD). That currency is used to purchase all goods and services.

One day a guy with a computer invents 10 new currency (BTC)

The people on the island start to accept BTC for goods and services, and an exchange rate of 5 BTC per USD is established 

The amount of USD equivalent currency on the island competing for the same amount of goods and services is higher. So the dollar is losing purchasing power to a new currency because the goods and services remain the same.

 

What's wrong with this logic?

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4 minutes ago, spartansaver said:

In a simplified way this is how my logic works..

 

10 people on an island have $100 of currency (USD). That currency is used to purchase all goods and services.

One day a guy with a computer invents 10 new currency (BTC)

The people on the island start to accept BTC for goods and services, and an exchange rate of 5 BTC per USD is established 

The amount of USD equivalent currency on the island competing for the same amount of goods and services is higher. So the dollar is losing purchasing power to a new currency because the goods and services remain the same.

 

What's wrong with this logic?

 

 

10 people on an island.  One produces dollars on his printer and keeps printing more and more and more of them every day.  Every day he gets to spend the new dollars at what people value them at on the day he prints them, but once they go into circulation the other 9 people start valuing them less.  Another guy invents a digital currency which can't be inflated beyond a certain point.  People start valuing Bitcoin more than dollar-guy's paper dollars, while the dollar guy is still printing away every day, making people value the dollars less still.   Eventually people won't exchange their Bitcoin for any amount of that guy's paper money, unless they are out of toilet paper, in which case they will value them only for the paper not for the printing on it.

 

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23 minutes ago, rkbabang said:

 

 

10 people on an island.  One produces dollars on his printer and keeps printing more and more and more of them every day.  Every day he gets to spend the new dollars at what people value them at on the day he prints them, but once they go into circulation the other 9 people start valuing them less.  Another guy invents a digital currency which can't be inflated beyond a certain point.  People start valuing Bitcoin more than dollar-guy's paper dollars, while the dollar guy is still printing away every day, making people value the dollars less still.   Eventually people won't exchange their Bitcoin for any amount of that guy's paper money, unless they are out of toilet paper, in which case they will value them only for the paper not for the printing on it.

 

This scenario sounds like its agreeing with my logic, it's just slightly more gloomy. Unless I'm missing something. 

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On 11/4/2021 at 10:54 AM, spartansaver said:

As the market capitalizations of crypto appreciate, I was wondering if this means that additional currency is getting brought online. If merchants become indifferent between accepting a dollar or accepting a cryptocurrency, does this mean that the amount of currency chasing goods and services is increasing? Am I missing something?  

 

If merchant become indifferent between BTC and USD then I think you're right. 

 

Whatever fraction of the BTC market cap that is circulating via spending would basically be equivalent to new dollars printed and circulated. 

 

But given that BTCs market cap is still small, and only a small fraction of those coins move/get spent in the US, I doubt it has much impact on current inflation statistics - were likely talking tens of millions on a monetary base of trillions. 

 

That being said, as more merchants accept it and as the prices rises to, say 1 million a coin, we could be in a scenarios where BTC spend does dramatically impact inflation statistics by having a huge impact on supply of currency in circulation - particularly if inflation is still calculated in $ (would be different if BTC was the new unit of account). 

 

There's also the factor of reducing demand for dollars. As of right now, in most cases, if I want to buy a house I have to sell my BTC and demand dollars because the seller demands dollars. So I sell the BTC and put in a bid for $. In the future, if the seller just accepts BTC directly, there's no need for the dollar bid and that demand for dollars decreases. 

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8 minutes ago, spartansaver said:

This scenario sounds like its agreeing with my logic, it's just slightly more gloomy. Unless I'm missing something. 

 

Gloomy is a judgement call based on your perspective.  I would have said "the same but more hopeful".  I guess a neutral way of putting it is "The same, but more so".  As TwoCities mentioned above, your scenario assumes people are indifferent between BTC and USD, I don't think that is the case now and it will become less and less the case over time.

 

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2 hours ago, spartansaver said:

In a simplified way this is how my logic works..

 

10 people on an island have $100 of currency (USD). That currency is used to purchase all goods and services.

One day a guy with a computer invents 10 new currency (BTC)

The people on the island start to accept BTC for goods and services, and an exchange rate of 5 BTC per USD is established 

The amount of USD equivalent currency on the island competing for the same amount of goods and services is higher. So the dollar is losing purchasing power to a new currency because the goods and services remain the same.

 

What's wrong with this logic?

 

Nothing wrong with the logic. Change the island to El Savaldor, change the USD to Colon, and you have real life as it is today.

Those without access to BTC use ever greater denominations of Colon to buy goods, against a supply of goods that continually gets cut back as nobody wants the toilet paper, pushing the Island into hyper inflation. Islanders need someone to blame, leadership gets permanently replaced, the currency resets to parity, and the process repeats itself.

 

Those with BTC get whatever goods they want and at ever discounted prices - as too many sellers are competing for a declining demand paying in BTC. 

The result being that you get to live a very nice life, at the top of the social pyramid.

 

SD

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