Topic: [Economic discovery] What is the fair value of a currency? (see first post) - page 2. (Read 1950 times)

It is a vicious circle. Without control of the currency does not have a stable exchange rate and is not credible, and if the government controls the currency, it is not credible because of distrust of the control.

Here is the real value in my opinion : Government involvement { Full or partial } The government reflect the people ...right? If the government

was elected by the majority of the people, then their involvement will decide it's future... right? What is a currency, if it is not wildly accepted?

The US does not class Bitcoin as a Currency, but rather a commodity. {Why, because they cannot manipulate and control it} Most Crypto

currencies will stay undefined, until Governments can own/regulate or control it. Ethereum {the technology, not the currency} are the first

step towards that evil path. 

Exactly @Kprawn. Fiat uses an exponential supply curve with an average rate of 6.7% annually. Higher rates are very dangerous, because as you've seen, if the natural interest rate threshold is surpassed, the currency enters the hyperinflation scenario. Also, currencies whose supply is not very predictable are very dangerous.

I don't like inflating currencies because while in the process of injection, some individuals get richer at the expense of the rest of the currency users. Also, such currencies discourage saving. And saving is the most powerful tool for prospering as human beings.

After currency was no longer tied to gold and foreign currency reserves of the state, they ceased to have any value. Now it's just the paper that costs nothing. Only from the position of the Central banks depends on how much these bills will cost, but before that it depended on the economy.

Ok, that was a mouth full...  I can see your angle on this now and spot the difference. In essence Ethereum is looking a lot like Fiat cash at

the moment. " .....government/central bank prints money at a sustained rate " .... and Ethereum has no cap, and are controlled by Vitalik and

his Foundation members. 

Thank you @Kprawn Smiley I think that one is a key phrase.

With regard to currencies whose supply does not converge to a limit, I am going to show you two interesting solutions for the TDSTM. I have to say in advance that, because of my newbie account in bitcointalk, the images I post show only as a link. Therefore, I will not post formulas as images, but in text format. Let the first case be the one of a currency with a linear supply function such as this one, which starts with an initial supply of 0 units:

S = r*(t-ts) => dS/dt = r

If you integrate the equation for the total discounted supply:

M = r*(t-ts )+ r/i

The result for the total discounted supply has two parts. The first one represents the money in circulation (M0) and, as you can see only gets bigger and bigger with time. The other one is the part that accounts for the money not yet created, and it is a constant term. As time goes by, the second constant term becomes negligible when compared to the first term; which means that with time, the money in circulation becomes the heavy part compared to the money yet to be printed.

Let the second case be the one of a currency with an exponential supply function such as this one, which starts with an initial supply of 1 unit:

S = exp(r*t) => dS/dt = r*exp(r*t)

If you integrate the equation for the total discounted supply, you get two solutions:

M = exp(r*t)*(1 + r/(i-r)), r
M = inf, r>=i

The first solution is similar to the one I showed you for the linear supply function, but with the difference that M0 is exponential and the constant term is a bit different. As you can see, the first solution originates when the inflation rate (r) is smaller than the natural interest rate (not the manipulated interest rate, manipulated by the central banks). The second solution is the one that shows up in hyperinflation scenarios. When the government/central bank prints money at a sustained rate (r) higher than the natural interest rate, the total discounted supply get enormous.

In both cases, as opposing to limited supply currencies, M increases with time. Now if you plugged this M in the CFV model, you would see the effect in price. As you've read in my article, prices are relative, so I you were to use CFV, you'd need to compare two currencies. Depending on the properties of the currencies you chose, you would get a different fair value along time curve (ceteris paribus, of course).

I hope I've been able to answer your question.

Regards,

pablompa

VERY interesting read... thank you for that. I like this part : " currencies do not have an intrinsic fair value. They get their value because

humans use them as a tool to be able to trade every good or service with every other human being. " I am quite interested to hear your

opinion on Crypto currencies with no coin cap, like Ethereum and how that would influence it's value. { I say it is crucial to have a coin cap, like

we have with Bitcoin } 

The fair value of a currency (any currency) doesn't have absolutely anything to do with the cost of keeping the ledgers, neither with the cost of creating the money, nor with the cost of transferring the money. It just doesn't have anything to do with that.

I recommend you to read the article.

Of course, the crypto/fiat speculation component of the price seems to be ruled by speculation on bitcoin right now. Answering to your question... the speculation component of the price doesn't obey the rules that I set in the article if one uses the current value of the intrinsic variables. The rules apply only to the non-speculation component. When a currency pair monetizes, its speculation component diminishes and the price of the currency pair follow the rules that I stated in the paper.

i have a different opinion on this one, for me a fair value is the one that allow miners to have their profit, any value that is below this threshold is not a fair value for the currency

also the one that say that the fair value is the one that the investors are willing to pay, could be true but it doesn't take into account the heavy fluctuations

the average that investors are willing to pay could be considered better as a fair value

Thanks for the explanation, this is very interesting that your take on fair value looks a lot closer to what I would have guessed is "reality", which is still below $500 after all these years. I might add to extra caution on currency pairs of crypto/fiat as I find that the majority of alts actually fall and rise in tandem with BTC/fiat, even if they could be expressed as crypto/fiat - or does this not matter at all when taking those values into account?

Thank you d5000, much better now

What I wanted to show in these charts is how large is at this time the speculative component of the currency pair BTC/{fiat}. Within the article, it can be learned that cryptocurrency pairs {crypto}/{crypto} are already monetized (their speculative trades have no weight) and/or their speculative trades average out.

I quote your post with the images so they can be seen until you're out of the newbie category:

Ok, I see. Thank you for your answer

Interesting approach. I must re-read it because I don't fully understand it still - but I interpret that you compare the transaction number and the (present and future) supply of two currencies to get their fair exchange rate.

So basically: if comparing currencies A and B, the more often the users transact on A with respect to B (and the higher the amounts are), and the less the supply in A (and the higher in B), the higher the "fair price" of currency A measured in B?


I think that is because you are still in the "newbie" category - images cannot be inserted until you get "junior member" status. That will happen when you accumulate 30 posts.

Ok, I see you haven't read my article

All value is based on faith and expectations. There is no model that will describe the value of a currency or anything else for that matter. Supply and demand create the current price.
Anything else is just speculation and bad modeling. Since the financial sector is not based on anything objectively real it cannot be modeled. It's just based on the irrationality of the people.
Would be great if all of this would be more predictable.

Of course, nonetheless, if you understand the dynamics of a currency, you can understand what the markets are doing. For instance, you can understand that when a currency is monetized, its prices gets locked to its transactions and other intrinsic variables. So if you wanted to speculate with future changes in price, you'd need to speculate on the transactions and other intrinsic variables. Read the article and it will be clear to you.

Buyers and sellers on the exchanges do a fair market valuation for you all day, every day.

In my opinion I think it depends if the value of the currency can afford the basic necessities of a person. For example you have a salary ranging 30 $ per day. It doesn't matter how much $ you have but it matters how much can you buy with 30 dollars with an excess for future needs. If you have some degree and have a decent job but can't afford your needs for a month then I think the economy of your country is low, meaning the value of your currency is not enough.