Topic: Bitcoins effect on the money supply? (Read 2760 times)

Yup. But imagine what happens if a tiny bit of that ocean flows into the BTC bottle, that is why China is not needed for 4 digit prices. 

1. Is it like currency held by the non-bank public? and therefore increases both the money suply and money base.
Bitcoin increases the money base (it can be included on the concept M1), therefore increases also the money supply (M3). But since the banking multiplier doesn't apply (yet) to bitcoin and its numbers and capitalization are very small, doesn't affect the money supply in any relevant way. Therefore, also doesn't affect interest rates.

2. Is it like deposits? therefore only increasing the money supply
No, since it can be used as a mean of payment/exchange and therefore is in circulation.

3. Is it like a bank reserve therefore only increases the money base
See 2.

4. As it has aspects that make it like a monetary asset and aspects that make it like a non-monetary asset how does bitcoin adoption affect money and non-money demand?
It has all the characteristics of money. Germany qualify bitcoin as private money. It has been qualified as a commodity for political reasons and in incongruet terms, since on the USA they consider transmitters of bitcoin as money transmitters.

5. How does bitcoin adoption affect the LM curve and consequently the interest rate?
See 1.

Bitcoin adoption affects none of the things you asked about, it is deflationary and only has 21 Million coins that will ever be in existence, there's a very slim possibility that the devs could decide on a whim to change it but it doesn't look like that will happen any time soon, the only thing I could say that would be affected by mass Bitcoin adoption would be the price of one and that is already swinging between $400 - $500.

Firstly,  There is alliteration present in ""Baby I got cha Money"    it's the EE in baby and money.
How does this sound "Bitchez I gotcho Bitcoinz"?

1. Not like this as Bitcoin is currently not used in a fractional reserve manner. Bitcoins supply is increasing in a decelerating fashion. The money base is growing however not in a fractional reserve manner so I would argue it is not similar to currency (Federal Reserve Bank notes which are used in a fractional reserve manner, as I assume you are from the US.)
#2 same answer as number one.   Bitcoin is growing in supply, but not because of fractional reserve functions.

#3-#5 I can't answer those.  They are complex questions that have been answered by volumes of books. I can't begin to repeat what they said.

of course in a free market arbitrage opportunities will quickly be taken and so goods will require the same purchasing power to buy no matter if you pay with USD or bitcoin.
my point is that the introduction of bitcoin does not inflate the money supply in the sense that it could cause price inflation, it simply adds another price to goods and services.

I can see it maybe causing some kind of inflation of some sort due to the fact, like said above, that money is printable so it can be generated But it's just the value of this money being generated.

Bitcoin creates wealth as well

The sum of the value of all money together is what value all actors in aggregate wants to have in reserve. So when bitcoin aquires money value, other monies will lose value.

It is not possible to count the effective money supply, not even the bitcoins. Money is the fiat money notes and coins, debt, gold, silver or anything that aquires exchange value, currently stocks, bonds and houses. Thus a bubble is a price rise in something that is not normally not regarded as money, but aquires exchange value.

My guess is that bitcoin, when it rises to a more substancial level of aggregate value, will displace the worst money first, that is badly regulated fiat money in fringe economies, and houses.

The US becomes 2.4 billion dollars per DAY more in debt with a total debt of about 17.5 trillion. Bitcoin market cap is about 5 billion. If that helps put it in perspective.

http://www.brillig.com/debt_clock/

In theory Bitcoin does expand the global money supply.  It doesn't increase the USD money supply any more than Euros increase the USD money supply but it does increase the overall global money supply.   However it is currently a rounding error.   Global M2 is on the order of $50 trillion.   At ~$5B Bitcoin represents 0.01% of the world's money supply so even if it increased by a factor of 10x in one year it would be essentially nothing.  Maybe someday it would have a meaningful effect but right now it is like pouring a bottle of water into the ocean and asking if it increases the amount of water in the ocean.

Most of the money in the global money supply is not printed, it exists digitally. 

I take your point Robert but won't the prices for goods in USD and the prices for goods in Bitcoin be connected by the Bitcoin/USD exchange rate. If not and the goods have actually different prices in Bitcoin and USD then people will be able to buy at whichever price is lower and sell at whatever price is higher for a profit until the two prices equalise. Therefore surely Bitcoin adoption does increase the USD money supply by the mechanism that Yenom has suggested. Now Yenom is suggesting that the USD goes into a kind of death spiral and is replaced. I think that actually USD interest rates will increase in response to people selling their dollars in order to hold Bitcoins. Basically I will say I don't want to buy bonds I would prefer Bitcoins unless the bond rate goes up high enough to make holding bonds or any other debt security as attractive as holding bitcoins.

bitcoin does not increase the USD money supply.
if all businesses accept both bitcoin and USD then every product has two different prices for every product, one in USD and one in bitcoin.

The fiat money supply will increase amongst those that don't hold bitcoin, thereby diluting it's purchasing power.

Let's go on a thought journey. Just say hypothetically 10% of the population adopts bitcoin. It is acquired through salary, conversion from fiat to bitcoin, and these people never use fiat again. All goods and services are paid for with bitcoin. You have effectively increased the money supply to the other 90% of the population by ~10% because that fiat currency is no longer circulating among the bitcoin users. This means that the 90% will experience 10% inflation of prices because their currency value has been diluted by the bitcoin users.

The more that people adopt bitcoin, the exchange rate to BTC will go up because the fiat currency is being diluted with over-supply from the people that no longer want to use it. This rising exchange rate will entice more people to abandon their fiat currency. It will encourage more merchants to use bitcoin as they see adoption rapidly growing and they don't want to lose their competitive advantage.

At this point you might see government trying to fight bitcoin. But if the critical mass is large enough, there won't be anything the government can do about it, and will have to give up. bitcoin price will skyrocket at this time, as will other tangible assets like gold and silver.

It will be an interesting time, and I think we will see it before 2020.

All the above could be complete bullshit, of course.

It is only fixed in terms of the rate of new bit coins and the eventual number of bit coins. However Bitcoin's fraction of the money supply is not fixed. If Bitcoin's value and use increases then it becomes a larger fraction of the money supply and vice versa. This is important because in the future we will have to pay attention to the value of Bitcoin as it will effect other things to do with money like inflation and interest rates.

Btc money supply fixed at a decreasing rate
That's what the 25 (and halving) new coins every 10 mins does

I guess I am not so much interested in Bitcoin as an asset but what effect Bitcoin will have on other assets and money. For instance if Bitcoin is an alternative to money then we can just make it part of the money supply (money supply = fiat money + Bitcoin money). However if Bitcoin is really only an asset then it is part of the non-monetary asset portfolio. However is almost money but not quite, then what?   

The way I see it is that fiat currency, ie the USD or any other central banking system, to be sustainable is in an inflationary state constantly. On the other hand bitcoin has a set number of bitcoins that be generated per 10 minutes and this number is never surpassed, up to a maximum of about 21 million. At this point bitcoin will deflate as bitcoins wallets are lost (which may be very small, but still deflation).

In the end if bitcoin does play a major role in the economy as a leading (or "the" leading) currency then you should expect its value and price to increase greatly.

I wouldn't put all your eggs in any one basket, keep some fiat currency, store some of your wealth in bitcoin and see where it goes.

I was thinking that if Bitcoin becomes an alternative to money then as it is adopted it actually displaces money. For instance if I have $100 in savings I can choose to hold that in dollars or in Bitcoins. If I hold my savings in Bitcoins then I have effectively increased the money supply.

So if the total value of all Bitcoins is the same as the total value of all money then adoption of Bitcoin has doubled the money supply.

Another way of looking at it is that Bitcoins must effect the interest rate. So as you say Bitcoins are not printable. If I have to make a decision to hold Bitcoins or hold money then I know that Bitcoins are better because there value will increase by the growth rate. In order to hold dollars I must be compensated with an interest rate that is equal to the growth rate times the inflation rate. If I am not compensated with a high enough interest rate then I will sell dollars and buy Bitcoins and the value of dollars will go down (which is the same as an increase in the money supply).

If anyone disagrees with this analysis let me know because I am just guessing 

Well, money is printable, bitcoin is not, then btc cannot really hurt the money supply, but maybe the prices and the economy, like others investings like gold.
If bitcoin thrives and gets its own rich economy, wealth will be generated in that world, and for monetary purposes BTC will be in some points like another country, able to generate more supply for money and to decrease to demand for money, maybe even both at the same time, in different places.