Topic: monetary base and velocity in Bitcoin valuation (Read 1398 times)
This information about velocity in Bitcoin valuation was very interesting for me but I'm not sure that we can talk about "velocity of valuation" right now. But we can get back to this topic after the next year.
BTC is very simple to understand as to valuation, it keys off two things user base and trust factor.
This was proven in the Book Bitcoin Algorithm.
Every past peak and valley was a simple valuation factoring of users into gwp.
The book used the data of My Wallets from Block Chain and it's historical graph of BTC value to prove the first five bubbles all followed the algorithm and the next 5 bubbles will if bitcoin gets that far.
Trust factor of BTC is determined by one thing the percentage of users as a whole to the population of the world and that percentage is the market cap value of bitcoin as has been evidenced in the past 5 bubbles, IT IS THAT SIMPLE.
7 Billion is the key number to divide the user base with and 85 Trillion is the market value of the GWP
With 7 Billion Users BTC would have a market value of 85 Trillion and if it moved into derivatives 1200 Trillion, since both are the top economic numbers today, it would mean complete acceptance of the world as the first global currency at which point all fiat currencies except btc would be zero. Will it reach that? Who knows, maybe we are seeing the emergence of the first GWC (Global World Currency) in which case 1200 Trillion and 85 Trillion are the numbers.
At complete acceptance 85 Trillion means 5M bitcoin USD and at 1200 Trillion derivatives that means 100M BTC USD
Here is the USER ACCEPTANCE OR TRUST VALUE PEAKS AND VALLEYS that prove this may happen
High is Peak and Low is natural floor or valley
Users % Pop High Low GWP %
7Bil 100% pop 10M 5M 85 Tril
700M 10% pop 1M 500K 8.5 Tr
70M 1% pop 100K 50K 850 Bil
7M .1% pop 10K 5K 85 Bil (Next BTC Bubble is high of 10K and floor of 5K and .1% of the world population as the trust factor)
700K .01% pop 1K 500 8 Bil WHERE WE ARE NOW but Block Chain My Wallets have grown to 2M
70K .001% pop 100 50 800 M
7K .0001% pop 10 5 80 M
BTC is at a critical stage, it is growing in TRUST FACtOR from .01% to .1% of the population which is still a tiny percentage of the world's Pop
At 7M Users the market cap will be 85Bil or tenfold from the last floor which manifest at 700K users or .01% of the pop
So the past history of growth is feeding off the percentage of users as a fraction of the overall world pop and that fractions value of the GWP, very simple math and a real algorithm and THE NICE THING ABOUT ALGORITHMS is no government can stop or legislate a true algorithm.
TRUST FACTOR is making BTC a global currency and now with Dell, Overstock, Expedia and 800 Flower and more an more merchants accepting it, it can easily grow the next few bubbles at least
.1% of pop is 5K btc
1% of pop is 50K btc
10% of pop is 500K bitc
IT IS THAT SIMPLE
Everything else is not a mathematical algorithm and not fueling the exponential growth curve of btc.
THIS MATCHES THE CHARTS
This was proven in the Book Bitcoin Algorithm.
Every past peak and valley was a simple valuation factoring of users into gwp.
The book used the data of My Wallets from Block Chain and it's historical graph of BTC value to prove the first five bubbles all followed the algorithm and the next 5 bubbles will if bitcoin gets that far.
Trust factor of BTC is determined by one thing the percentage of users as a whole to the population of the world and that percentage is the market cap value of bitcoin as has been evidenced in the past 5 bubbles, IT IS THAT SIMPLE.
7 Billion is the key number to divide the user base with and 85 Trillion is the market value of the GWP
With 7 Billion Users BTC would have a market value of 85 Trillion and if it moved into derivatives 1200 Trillion, since both are the top economic numbers today, it would mean complete acceptance of the world as the first global currency at which point all fiat currencies except btc would be zero. Will it reach that? Who knows, maybe we are seeing the emergence of the first GWC (Global World Currency) in which case 1200 Trillion and 85 Trillion are the numbers.
At complete acceptance 85 Trillion means 5M bitcoin USD and at 1200 Trillion derivatives that means 100M BTC USD
Here is the USER ACCEPTANCE OR TRUST VALUE PEAKS AND VALLEYS that prove this may happen
High is Peak and Low is natural floor or valley
Users % Pop High Low GWP %
7Bil 100% pop 10M 5M 85 Tril
700M 10% pop 1M 500K 8.5 Tr
70M 1% pop 100K 50K 850 Bil
7M .1% pop 10K 5K 85 Bil (Next BTC Bubble is high of 10K and floor of 5K and .1% of the world population as the trust factor)
700K .01% pop 1K 500 8 Bil WHERE WE ARE NOW but Block Chain My Wallets have grown to 2M
70K .001% pop 100 50 800 M
7K .0001% pop 10 5 80 M
BTC is at a critical stage, it is growing in TRUST FACtOR from .01% to .1% of the population which is still a tiny percentage of the world's Pop
At 7M Users the market cap will be 85Bil or tenfold from the last floor which manifest at 700K users or .01% of the pop
So the past history of growth is feeding off the percentage of users as a fraction of the overall world pop and that fractions value of the GWP, very simple math and a real algorithm and THE NICE THING ABOUT ALGORITHMS is no government can stop or legislate a true algorithm.
TRUST FACTOR is making BTC a global currency and now with Dell, Overstock, Expedia and 800 Flower and more an more merchants accepting it, it can easily grow the next few bubbles at least
.1% of pop is 5K btc
1% of pop is 50K btc
10% of pop is 500K bitc
IT IS THAT SIMPLE
Everything else is not a mathematical algorithm and not fueling the exponential growth curve of btc.
THIS MATCHES THE CHARTS
I think you are right
I agree with you here. Any attempts at calculating the valuation of bitcoin at some point in the future that do not take into account the velocity of money are immediately suspect in my mind. Most of the early estimations that I saw did not take velocity into account, although I am seeing it mentioned more and more. I am hoping this means that the community is getting more sophisticated on this issue.
What would be the velocity of money in bit-Topia? Hard to know. My initial thoughts are that the technology will allow the velocity to be much higher, in principle, than it is now, given that so many transactions today can take days to clear. So the next question in my mind is whether there will be forces that will push the velocity to the limit, or will the actual velocity stay much lower? If it's pushed to the limit, then yes, the value of bitcoin will (paradoxically, one might think) decrease. (Higher velocity of bitcoin can kinda be thought of as having the same effect as an increased supply of bitcoin [which is to reduce the value stored per bitcoin]: the faster any given bitcoin transaction clears, the faster it is available for the next transaction.) But I'm thinking that as long as bitcoin remains an effective store of value, then the actual velocity will probably remain much lower. If bitcoin is involved in a transaction from entity A to entity B, and entity B considers bitcoin an effective store of value, then entity B may sit on bitcoin for a long time before using it. This would have the effect of reducing the velocity, and hence increasing its ultimate valuation (yay!!
)
A related question in my mind is whether the ultimate valuation will reach a stable equilibrium or an unstable equilibrium. It may be that the answer depends on whether the velocity of bitcoin will remain fixed (desirable) or will vary rapidly (undesirable).
I wrote this after trawling through every Bitcoin valuation model I could find on the internet. There is what I consider one really important factor that most of them have not considered, or at best have only brushed over. That is; the velocity of money and how it has the potential to seriously increase with cryptocurrency.
I agree with you here. Any attempts at calculating the valuation of bitcoin at some point in the future that do not take into account the velocity of money are immediately suspect in my mind. Most of the early estimations that I saw did not take velocity into account, although I am seeing it mentioned more and more. I am hoping this means that the community is getting more sophisticated on this issue.
What would be the velocity of money in bit-Topia? Hard to know. My initial thoughts are that the technology will allow the velocity to be much higher, in principle, than it is now, given that so many transactions today can take days to clear. So the next question in my mind is whether there will be forces that will push the velocity to the limit, or will the actual velocity stay much lower? If it's pushed to the limit, then yes, the value of bitcoin will (paradoxically, one might think) decrease. (Higher velocity of bitcoin can kinda be thought of as having the same effect as an increased supply of bitcoin [which is to reduce the value stored per bitcoin]: the faster any given bitcoin transaction clears, the faster it is available for the next transaction.) But I'm thinking that as long as bitcoin remains an effective store of value, then the actual velocity will probably remain much lower. If bitcoin is involved in a transaction from entity A to entity B, and entity B considers bitcoin an effective store of value, then entity B may sit on bitcoin for a long time before using it. This would have the effect of reducing the velocity, and hence increasing its ultimate valuation (yay!!
)A related question in my mind is whether the ultimate valuation will reach a stable equilibrium or an unstable equilibrium. It may be that the answer depends on whether the velocity of bitcoin will remain fixed (desirable) or will vary rapidly (undesirable).
They would become more a service (showroom/drop point) provider for producers and buyers than resellers.
I like your thinking there. I've thought something similar before about the role of a shopfront in a world where everything can be ordered online. I can by sneakers for much cheaper online and have access to a much bigger range than going into a store. The downside is that I have to take a gamble they will still look good once I've tried them on and that they will fit. I feel guilty going into a store just to try them on then order from someone else on the web and I wouldn't mind paying them a fee for their service.
Bitcoin will cause a reduction of M3 compared to M1 and BS (Base Money).
Isn't M3 > M1 only possible with fractional reserve banking? Because it allows there to exist more 'money' than there is actually money. A bitcoin can only be owned by one person and lending someone a bitcoin doesn't create a new bitcoin just as lending them your car does not create a new car. So with bitcoin M1=M2=M3. Or better yet, just call it MB.
Supposing we keep the 10 minutes/block rate, a transaction need around 10 minutes to clear. If you are very cautious, 6 blocks are needed to confirm a transaction.
This imply a just-in-time system of payment would pay back a good sold in hours and not in weeks.
Big malls and small shops could pay back the goods they sell as they are sold and the transactions confirmed and reorder them on the fly.
They would become more a service (showroom/drop point) provider for producers and buyers than resellers.
What would be severely reduced would be the credit, not the money.
Instead of waiting days or weeks or months for a bill to clear, we would wait some hours.
The waiting time of a bill to clear for every intermediary force a large amount of credit to be extended from a stage to another of the production chain.
E.G. I order stuff; the goods can be delivered in a week but must be paid in advance. The time for the wire to clear is days or weeks.
Electronic Wire Transfer Slower Than Mailing Cash
https://www.techdirt.com/articles/20060405/0939226.shtml
Bitcoin will cause a reduction of M3 compared to M1 and BS (Base Money).
As you do not need banks, checking/savings accounts would not be available to the banks to extend loans using fractional reserve banking.
And without a Central Bank to print out of thin air new currency units it is not possible to extend more loans than the existing savings.
This imply a just-in-time system of payment would pay back a good sold in hours and not in weeks.
Big malls and small shops could pay back the goods they sell as they are sold and the transactions confirmed and reorder them on the fly.
They would become more a service (showroom/drop point) provider for producers and buyers than resellers.
What would be severely reduced would be the credit, not the money.
Instead of waiting days or weeks or months for a bill to clear, we would wait some hours.
The waiting time of a bill to clear for every intermediary force a large amount of credit to be extended from a stage to another of the production chain.
E.G. I order stuff; the goods can be delivered in a week but must be paid in advance. The time for the wire to clear is days or weeks.
Electronic Wire Transfer Slower Than Mailing Cash
https://www.techdirt.com/articles/20060405/0939226.shtml
Quote
The financial industry should take a warning from the entertainment industry about what happens when you fail to appreciate technological changes. Barriers to entry, which seem so high, have a way of disappearing quite rapidly.
Bitcoin will cause a reduction of M3 compared to M1 and BS (Base Money).
As you do not need banks, checking/savings accounts would not be available to the banks to extend loans using fractional reserve banking.
And without a Central Bank to print out of thin air new currency units it is not possible to extend more loans than the existing savings.
Hi all 
first post
I wrote this after trawling through every Bitcoin valuation model I could find on the internet. There is what I consider one really important factor that most of them have not considered, or at best have only brushed over. That is; the velocity of money and how it has the potential to seriously increase with cryptocurrency.
The most common way I have seen to calculate a valuation for Bitcoin typically looks something like this; estimate the future market cap of Bitcoin then divide this by the number of Bitcoins we know will have been mined at that time to arrive at a figure of what one BTC is worth in dollars. The term ‘market cap’ is commonly used but this term relates Bitcoin to listed companies. As we are valuing a currency not a company I prefer to use the term ‘money supply’ or ‘monetary base’. But ‘money supply’ in this context can also be potentially confusing as the ‘supply’ of Bitcoins is mathematically predetermined, what is not yet determined is the total value of those coins. So to avoid this confusion I will use the term ‘monetary base’ instead. The tricky part of such a valuation comes in all the assumptions that need to be made to determine the size of Bitcoin’s potential monetary base. What proportion of ecommerce will Bitcoin take over? Will it take a share of the Gold market as a long term store of value and by how much? What if it takes over just the credit card industry or PayPal? Assumptions also need to be made on the supply side. We know exactly how many coins have been mined into existence but how many coins have been lost and what ever happened to Satoshi Nakamoto’s 1 million coins.
For the purpose of simplifying my argument lets fast forward to some future Bit-topia. Where all of our most optimistic predictions have come true and Bitcoin has been adopted by every person, business and government in the world, a bunch of altcoins have come and gone leaving Bitcoin the sole survivor, we know the exact total number of mined coins and some genius has worked out an algorithm to estimate the number of lost coins. So valuing Bitcoin in this scenario should be fairly easy right? Add together the monetary bases of every currency in the world (leaving aside for a moment that every country has a different method for measuring this), convert them a base fiat currency then divide by the total number of coins in circulation. I don’t have the time or resources to do this accurately but plenty of other people have done just this and made it available on the internet if you care have a look. The figures I have seen range from impressive to staggering. But before we get too excited I think there is one important factor that has been forgotten.
We can break down the demand for a currency into two parts; demand for use in transactions and demand for use as a store of value. Compared to fiat as we currently know it Bitcoin has the potential to be a far superior store of value. That’s obvious to anyone and offers a massive potential to increase the price of Bitcoin. My argument only relates to money’s use as a tool for facilitating the transfer of one asset to another between two parties. Take the monetary base of any economy and divide it by the total wealth of the economy. What proportion of that wealth needs to (or should be) represented as currency? Wealth that is held as currency is not being utilised in its most productive way. To achieve maximum efficiency an economy needs to keep the fraction of wealth held in currency as low as possible. Consider the concept of frictional unemployment, where even in an economy running at full output there is still some unemployment due to people in transit between jobs being technically unemployed. Fiat money as we know it today is frictional in the same sense; it is ‘unemployed’ wealth. So if Bitcoin is a frictionless currency, how much currency do we really need?
Imagine you got paid your entire salary in one lump sum at the beginning of each year. Overall you wouldn’t be any richer or poorer, your expenses would be no different but you would have a much larger proportion of your total wealth held as currency. Now compare this to sometime in the not too distant future where bitcoin allows you to be paid in real time as you work. Your car insurance, mortgage, etc. can also be paid in tiny increments as soon as you have been paid for your work. How high will your bank balance ever get to now? A well run company only keeps as much cash as is necessary for day to day expenses. Any extra cash that is not used to pay down debt or equity holders or to invest in new projects is not being used optimally. Soon a retail store can receive payment from a customer paying with Bitcoin and receive that payment almost immediately instead of waiting maybe 3 days for it to clear. The store might have an automated inventory system which can then order more stock from the wholesaler but instead of using some other cash they had set aside they can use the exact same cash they received from the customer minutes earlier. The wholesaler can then receive that order and immediately pay their suppliers for their next order and so on.
What is occurring in my examples is an increase in the velocity of money. Velocity being the number of times a unit of a currency turns over within a given time period. Although it might seem counterintuitive to you at first a higher velocity of currency actually brings its price down. Because the currency is able to be used so many more times over within the time period we don’t need (or demand) as much of it as we do with slower currencies.
Trying to estimate Bitcoin’s future monetary base by using a measurement of our current system is like someone 20 years ago trying to calculate how much internet bandwidth will be needed once everybody has an email address by looking at data from the post office. The invention of frictionless mail allowed us to send more mail but the invention of frictionless money will allow us to use less money.
first postI wrote this after trawling through every Bitcoin valuation model I could find on the internet. There is what I consider one really important factor that most of them have not considered, or at best have only brushed over. That is; the velocity of money and how it has the potential to seriously increase with cryptocurrency.
The most common way I have seen to calculate a valuation for Bitcoin typically looks something like this; estimate the future market cap of Bitcoin then divide this by the number of Bitcoins we know will have been mined at that time to arrive at a figure of what one BTC is worth in dollars. The term ‘market cap’ is commonly used but this term relates Bitcoin to listed companies. As we are valuing a currency not a company I prefer to use the term ‘money supply’ or ‘monetary base’. But ‘money supply’ in this context can also be potentially confusing as the ‘supply’ of Bitcoins is mathematically predetermined, what is not yet determined is the total value of those coins. So to avoid this confusion I will use the term ‘monetary base’ instead. The tricky part of such a valuation comes in all the assumptions that need to be made to determine the size of Bitcoin’s potential monetary base. What proportion of ecommerce will Bitcoin take over? Will it take a share of the Gold market as a long term store of value and by how much? What if it takes over just the credit card industry or PayPal? Assumptions also need to be made on the supply side. We know exactly how many coins have been mined into existence but how many coins have been lost and what ever happened to Satoshi Nakamoto’s 1 million coins.
For the purpose of simplifying my argument lets fast forward to some future Bit-topia. Where all of our most optimistic predictions have come true and Bitcoin has been adopted by every person, business and government in the world, a bunch of altcoins have come and gone leaving Bitcoin the sole survivor, we know the exact total number of mined coins and some genius has worked out an algorithm to estimate the number of lost coins. So valuing Bitcoin in this scenario should be fairly easy right? Add together the monetary bases of every currency in the world (leaving aside for a moment that every country has a different method for measuring this), convert them a base fiat currency then divide by the total number of coins in circulation. I don’t have the time or resources to do this accurately but plenty of other people have done just this and made it available on the internet if you care have a look. The figures I have seen range from impressive to staggering. But before we get too excited I think there is one important factor that has been forgotten.
We can break down the demand for a currency into two parts; demand for use in transactions and demand for use as a store of value. Compared to fiat as we currently know it Bitcoin has the potential to be a far superior store of value. That’s obvious to anyone and offers a massive potential to increase the price of Bitcoin. My argument only relates to money’s use as a tool for facilitating the transfer of one asset to another between two parties. Take the monetary base of any economy and divide it by the total wealth of the economy. What proportion of that wealth needs to (or should be) represented as currency? Wealth that is held as currency is not being utilised in its most productive way. To achieve maximum efficiency an economy needs to keep the fraction of wealth held in currency as low as possible. Consider the concept of frictional unemployment, where even in an economy running at full output there is still some unemployment due to people in transit between jobs being technically unemployed. Fiat money as we know it today is frictional in the same sense; it is ‘unemployed’ wealth. So if Bitcoin is a frictionless currency, how much currency do we really need?
Imagine you got paid your entire salary in one lump sum at the beginning of each year. Overall you wouldn’t be any richer or poorer, your expenses would be no different but you would have a much larger proportion of your total wealth held as currency. Now compare this to sometime in the not too distant future where bitcoin allows you to be paid in real time as you work. Your car insurance, mortgage, etc. can also be paid in tiny increments as soon as you have been paid for your work. How high will your bank balance ever get to now? A well run company only keeps as much cash as is necessary for day to day expenses. Any extra cash that is not used to pay down debt or equity holders or to invest in new projects is not being used optimally. Soon a retail store can receive payment from a customer paying with Bitcoin and receive that payment almost immediately instead of waiting maybe 3 days for it to clear. The store might have an automated inventory system which can then order more stock from the wholesaler but instead of using some other cash they had set aside they can use the exact same cash they received from the customer minutes earlier. The wholesaler can then receive that order and immediately pay their suppliers for their next order and so on.
What is occurring in my examples is an increase in the velocity of money. Velocity being the number of times a unit of a currency turns over within a given time period. Although it might seem counterintuitive to you at first a higher velocity of currency actually brings its price down. Because the currency is able to be used so many more times over within the time period we don’t need (or demand) as much of it as we do with slower currencies.
Trying to estimate Bitcoin’s future monetary base by using a measurement of our current system is like someone 20 years ago trying to calculate how much internet bandwidth will be needed once everybody has an email address by looking at data from the post office. The invention of frictionless mail allowed us to send more mail but the invention of frictionless money will allow us to use less money.
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