Topic: How to value a currency - page 3. (Read 5241 times)

I believe you have misunderstood something... These trillions of dollars are not traded in BTCs.

I like this assessment, but still think $50 is too generous. Not by much, but still generous.

What about USD?  There are about a trillion dollars in circulation, and you can buy them with bitcoins, so it seems like your Q is off by several orders of magnitude.

A currency derives its value from the objects that you can buy with it. The total amount of tangible objects, services and charitable donations being handled in a currency within a year must be equal to the value of the currency (coins) being used for this trade. But each currency denomination can change hands more than once within a year so we must take account for this. If a currency on average changes hands two times a year, the currency needs only be half as much worth as it would have to be if it changed hands once a year to be able to handle the same kind of assets being traded in this currency. Also, if the amount of a currency increases, this would reduce the value of a currency unit since you have more units following the same amount of goods. These relationships are expressed in the equation of exchange which states

nT=M*V (1)

Where nT is the value of goods being traded in this currency, M is the amount of currency units and V is the velocity of the money - i.e., how fast each currency unit on average changes hand.

nT can be further divided into nT=P*Q where P is the price index (inflation is the derivative of P) and Q is the real value (something that is constant despite of inflation/deflation (CPI defined)).

P is inversely proportional to the value of a currency since when inflation rises, the value falls. So P=1/val. We are then left with:

(1) =>

Q/val = M*V (2)

Let's apply this theory to bitcoins! We will measure nT in Bitcoins traded per year, M in number of bitcoins and V in number of times each coin is traded per year. Q, we will value in dollars per year since the dollar can be considered stable compared to BTCs (bare with me Austrians).

So the unit of val becomes $/BTC as we would like.

(2) =>

val=Q/(M*V) (3)

Now, we should estimate these different values: Q, M and V.

M is the easiest factor to evaluate since we know that there are about 11m BTC in circulation but that only 4m of these are currently being traded - the rest are placed in "savings accounts" or may be lost, so we will, for the time being, exclude these from our calculation. M=4m BTC

V is around 1/year for fiat currencies so we will also guess that that is the case here. V=1/year

Q is the dollar value of goods being traded in BTCs. Silk Road has an overturn on about USD 1m per month I have heard, and Bitcoinstore has a revenue of 400k-500k dollars per month, I believe. This is 1.5m dollars per month. Let us assume that these two constitute a tenth of the total bitcoin trade. So the total BTC trade is worth 15m dollars per month that is 180m dollars per year, let us round that up to Q=200m $ per year.

Plugging these numbers into (3) yields:

val=2*10^8$/year / (4*10^6 BTC * 1/year) = 50 $/BTC

which to me sounds reasonable.

Now, the way to increase val is to increase Q since this is the factor in Equation (3) that can span the most order of magnitudes. V will probably be between 10 and 1/2 no matter what you do and M is also hard to change significantly (by destroying BTCs). So the way to increase the value of bitcoins is to increase the amount of goods traded in bitcoins. Only this way can the current and any future hopes of stratospheric prices be sustained.

I would love to see your own estimates on Q, M and V for bitcoins. I definitely believe that Q can become very large in the future since bitcoin is the optimal internet currency and could make many other payment systems obsolete. Maybe Q=USD 300bn/year in the future? USD 300bn is the size size of Denmark's GDP. I see no reason that Q cannot reach this value or a higher value.