Should the very likely event occur that Bitcoin usurps the monetary rule, we need an adequate economic school: the block economics. After the first part of the introduction to this economic discipline, which does not yet exist, has devoted itself to the nature of deflation, the second part is now about the value or price of money. In this case, you should always be aware of the events, all news is published here . A topic that is only relevant in the medium term, but is of great importance among investors, speculators and traders.

It sounds paradoxical at first to ask about the price of money. After all, this is the unit in which the price of everything else – bread, oil, diamonds – is given.

Since it makes no sense to put the value of money in bread or coffee – this would make bread or coffee itself a money – we need another currency to determine how much money is worth. For example, you can specify the value of the euro in dollars, francs and more.

This is the reason why the topic “price of money” has only medium-term relevance for block economics: a singular one World currency – and Bitcoin can be expected to become one – cannot have a price in the absence of another medium, since it is so much the measure of all things that it is above measurability.

 {{{ 1}} For now, however, the price of money is of enormous importance to block economists. So the big question is: how does it come about? We will first talk about the mechanisms that create the price and then ask what price of money is a realistic price.

In the exchanges, controlled supply meets unpredictable demand

“That was supposed to be going up, wasn’t it?” by Rafael Matsunaga via License: Creative Commons

Almost always, when you ask about the price of a thing, you get a trivial but correct answer: The price is a product of supply and demand. When more people buy bitcoins than they sell, the price rises, and when things work the other way round, it falls. So supply and demand decide in which direction the price moves. Here are a few key points:

  • The stock exchanges: There are 60 to 70 global Bitcoin trading venues for trading against more than 30 currencies. However, only the 10 trading venues with the highest trading volume are likely to be really price-deciding, while the others tend to “move up”.
  • However, the stock exchanges are only a kind of tip of the iceberg on which the other price-forming forces are bundled. There are numerous “exchange offices” around the world where Bitcoins are bought or sold at predefined prices, which are mostly based on the major stock exchanges. These exchange offices make a decisive contribution to creating volume on the major exchanges.

All of this is not really special. So far, block economics does not differ one bit from conventional economic disciplines. However, if we turn to the supply of money, we encounter a special feature: While this is flexibly adapted to the desired development in traditional economics by central banks, in Bitcoin it is fixed by the protocol.Approximately every ten minutes, 25 new Bitcoins are currently being created. A central bank would presumably, to counteract the current decline in the price of Bitcoin, throttle the supply and expand it during deflationary periods in order to keep the course stable.

In block economics, pricing is a must rigid supply opposed to flexible demand. This is a very crucial point. Regardless of whether the demand for virtual money rises or falls, the supply grows at the same rate. Block by block, 25 new Bitcoins will be born, starting sometime in 2016 only 12.5. The fact that this rate falls over time, as already explained in the first part, leads to a long-term deflationary character of the cryptocurrency.

Some block economists are of the opinion that this unequal mechanism behind supply and demand the dog is already buried. It is impossible that Bitcoin will ever develop a stable price. As long as the supply of money cannot be adjusted to the demand for money, the virtual currency is condemned to high volatility.

Research areas of block economics

At this point I would like to take a short break to get out to derive some research areas of block economics from what has been said so far:

  • The price-forming market mechanisms: This important, but rather classic economic diligence researches on the basis of traditional price models and empirical data from the Bitcoin economy, such as the price in the interplay of Stock exchanges arise.Various studies should address a wide variety of factors – such as trading fees, the ability to trade short or long with leverage, the availability of exchange offices, and much more.
  • Due to the largely unregulated nature of Bitcoin trading, block economics is discontinued An exciting field of experimentation. It should be clarified to what extent proprietary trading on the stock exchanges or manipulative price agreements affect pricing. Block economics can also be viewed as a laboratory experiment on the rapid emergence of markets. While the classic markets have evolved over decades at the speed of the pre-digital economy, many trading instruments such as bot or margin trading have established themselves “overnight” in Bitcoin trading. It would be exciting to research what effect these have on pricing.
  • A very big topic in block economics is volatility. In particular, theoretical assumptions should be used to create a model as to whether an inflexible offer can lead to stable prices and which mechanisms and tools contribute to this.
  • Another exciting question is likely to be the role of so-called altcoins – alternative virtual currencies. What influence does it have on the price of Bitcoin if it can be exchanged not only for classic fiat currencies, but also for other virtual currencies?

Everything that has been said so far has been about the mechanisms of price formation. But this is only part of the question about the price of money.

A formula for the “true price” of Bitcoin

Is there a theory that determines which Bitcoin- Price is reasonable and realistic? Yes there is. It is found in conventional economics and it is called the velocity of money. This value is the most important factor in determining how much a Bitcoin should be worth or how the price is made up by the economy surrounding it. The velocity of circulation says how often a year a unit of money is used to acquire something economically relevant. The formula is:

High speed leads to a crash – both in the car and on Bitcoin exchanges. Image: Ludicrous Speed ​​by Dan DeChiaro via License: Creative Commons

A few examples should clarify what the speed of circulation says about the price of Bitcoin. As block economists, we are in the fortunate position of knowing exactly one of the three variables – the amount of money. At the time of writing it is 13,824,700 BTC.

If we assume that 1 BTC is worth 200 euros and is used once a day, we can determine the market (B) that the Bitcoin can serve:

V (365) = B / 13.824.700 * 200

So: B = 13.824.700 * 200 * 365 = { {1}}

This would be a 1 trillion euro market. Quite a lot, right?

On the other hand, if the velocity of Bitcoin were only 1, this would result in a 2.7 billion euro market. The example shows that the demand for money decreases as the speed of circulation increases. It is important to understand that money that is used more often is worth less, not more. The more often a unit of money is used to pay for something, the lower the demand for money. Think of it this way: If we were all ruminants and I spit out the pizza I ordered for my family to eat, the demand for pizza would decrease.

More important to But our question is: Two values ​​- the speed of circulation of money and the market that Bitcoin serves – are sufficient to define its realistic price.Or, the other way around: With a given price you can see whether this is realistic.

Two questions remain:

What is the speed of circulation (1) and how big is the market that Bitcoin serves (2)?

Both questions are difficult to answer, but we have some clues.

  Because of Studies of classical economics, we know how high the velocity of classical currencies such as the euro or dollar is. Wikipedia gives us 3 values ​​for the dollar: One for the money stock M1, consisting of cash and dollar sight deposits, one for the money stock M2, which also includes checking account balances, money market stocks and certificates of deposit such as government bonds, and finally one for the money stock MZ, which also takes into account the institutional fixed-term deposit and money market accounts. The results are:

  • For M1 the orbital velocity has moved between 6 and 10 over the past ten years
  • for M2 between 1.5 and 2.1
  • For MZ between 1.5 and 2.5

This shows that the dollar could get by on a quarter of its value if it were entirely available in cash or on demand. 75 percent of the dollar value is based on the fact that it is not used as a means of payment, but is “frozen” in money market and fixed-term accounts.

For the Bitcoin we can say: At a circulation speed like M1 (on average 8) and a price of 200 euros, it serves a market with an annual volume of around 22 billion. At a speed of circulation like MZ, on the other hand, this volume sinks to almost 5 billion euros in sales.

Is there any information about the actual speed of Bitcoin? After all, as digital cash, this has the very negative advantage in terms of price formation that it flips from A to B and from B to C, D and E in a jiffy. There is no concrete information in the least. However, has a statistic that shows the daily transaction volume and tries to subtract the change. This can at least give an indication of how often an existing bitcoin moves in a year. Roughly speaking, the daily transaction volume in the past twelve months was between 70,000 and 250,000 Bitcoins, if you ignore the absolute peaks and troughs. A rough average should be around 110,000 BTC. So if we calculate

 (110,000 * 365) / 13,000,000 (average stock of Bitcoins in the past twelve months)

we get a value around the 3 around.With such miserable sources there is no need for excessive accuracy in the figures. The goal is to get approximate clues. Each result should therefore be understood more as a probability range of +/- 25%.

If one now assumes that every Bitcoin has moved three times a year, this does not mean that it has Movement has represented an economic transaction that counts as part of the gross national product. After all, a transaction can also mean that I move my Bitcoin to another account or that I throw my Bitcoin into a mixer that “privatizes” the Bitcoin through many, many more transactions. Seen in this way, the actual speed of circulation is likely to be a bit lower. Speculating wildly, we can assume values ​​like M2 or MZ – 1.5 to 2.1 – or even lower. So we have several very rough points of reference for the speed of circulation of bitcoins: 3 (V1), 1.8 (V2) and 1.2 (V3)

 (2) based on the roughly determined circulation speed of the bitcoin and the price we can calculate which market the Bitcoin can serve. Now it’s getting exciting. For V1 this is

13,824,700 * 3 * 200 = 8.294 billion euros. For V2 4.96 billion euros and for V3 3.041 billion euros.

The big question, however, is: What is the gross national product served by the currency Bitcoin? In the long term, this question is banal as it will coincide with the entire world gross national product. This is 62.3 trillion dollars, with which a Bitcoin, viewed pessimistically with V1, has a value of

62,300,000,000,000 / 3 / 21,000.000 (total of all Bitcoin) = $ 988,888,888.

But first we have to estimate what gross national product the Bitcoin serves. Roughly speaking, this represents all products and services that are paid for with Bitcoin. These would be

  • services (IT, design, journalism, advertising, stock exchanges, exchange offices, payment service providers)
  • goods (all merchants who accept bitcoins)
  • altcoins {{ 1}} the black market (drugs, hackers, extortion)
  • fiat money

I cannot say how high the respective market volumes are. All that can be said is that the current price for a market of EUR 3-10 billion is realistic. Finding out more details is an empirical task for block economics – along with many others that record what percentage of the daily transaction volume is actually devoted to the purchase of goods and how much is not.

Another interesting one Note on the speed of circulation must be devoted to the practice of payment service providers to immediately exchange the bitcoins for euros, dollars or other fiat currencies, whether this happens when someone purchases a virtual product, or when someone orders a pizza and is it when someone sends money to their relatives in the Philippines. In this case, one transaction – money from me to the pizza delivery guy – becomes two transactions – bitcoins for pizza, bitcoins for euros. This practice thus has two disadvantageous effects on the price: on the one hand, it affects the supply and demand mechanisms described above, and on the other hand, it doubles the speed of circulation of a bitcoin per transaction. This is also a topic about which one or the other research work will have to be written in the area of ​​block economics. In addition to many others.

Whatever may be the block economics, but you always until now have a chance to invest in bitcoin.