Topic: The Economic Analysis of Demand for Bitcoin - page 2. (Read 396 times)

But the fact that everyone wants to hold bitcoins will create a big hole. You should know that all the value of bitcoin is now manipulated and its price is very high. Think about it, for those who hold several thousand bitcoins, they always expect people to increase the demand to buy bitcoins to sell at high prices.
In fact, bitcoin has no value but it is manipulated. Everyone knows this, so it is not right that many people want to buy bitcoin.

   The thing about Bitcoin is this, If the price ever reaches a certain height, chances are that the altcoin market will also follow the move. What then will happen to the worlds economies if everyone decided it was a good time to cash out? Do you think the banks will allow people to suddenly withdraw all of their Bitcoin and altcoins? Surely it would crash the planet. Bitcoin and crypto-currency in its current state is unable to reach the mass everyday consumer. All these statistics are great, but the only way for the  real mass demand for crypto-currencies will be if for some reason people suddenly started to abandon their government based fiat system. Even then, I don't see that happening, especially not any time soon.
   How crypto-currencies appease the Luddites of today's society, and those who are tech illiterate or impoverished? What can crypto do for them that wouldn't be more of a staple convenience than fiat? The only way I truly believe that the common folk of society will demand Bitcoin/crypto-currency is if it makes fiat obsolete, and not just act as a digital store of value.

Just my two cents  

It's been a while since I had a reasonable discussion in Economics section. Hence, I decided to create my own thread. In this thread, I am using the Keynesian Theory of Demand for Money to highlight the similarities as well as differences between the demand for Money and demand for Bitcoin. This thread will be little longer as I am going in full-depths but this is not copy/paste material so don't ignore it on that grounds. This is my personal analysis and every bit of it is my original work except obviously the contents from Keynesian Theory:

According to Keynesian theory of demand for money, also known as Liquidity Preference Theory, people prefer holding money for three motives:

1. Transactions Motive

The transaction motive for holding cash relates to the need for cash for current transactions for personal and business exchange. Such need arises because there is lack of synchronization between receipts and expenditure. You may receive money at different point but spend it at different point. The transaction demand for money is directly related to the level of income. Higher the income, higher the transaction demand for money. The equation could be written as:



where L_r is the transaction demand for money, k is ratio of income kept as money for transactions purpose and Y is total income.

Now coming to Bitcoin. Since we are talking about transaction motive, it is very short-term utility of money so we have to assume return on Bitcoin as constant. But the difference between buying price and selling price surely effects the transaction motive for holding Bitcoins. For example, I receive my income in Bitcoin on 1st of every month and I visit my grocery store on 10th of every month. But the price on 1st was $8K which drops to $6K on 10th, I may postpone my expenditure for few days expecting bitcoin to rise again. Thus difference in buy-sell price has manipulative effect on transaction motive of Bitcoin. Hence, I reached to following equation for demand for Bitcoin for transaction motive:



where L_r, k and Y are same as above equation and S is the btc price when bitcoin was used for expenditure whereas B is price when bitcoin was received as income. According to my analysis, higher the value of X, longer the person will hold bitcoin.


2. The Precautionary Motive

Many unforeseen and unpredictable contingencies involving money payments occur in our day to day life. Thus people keep a portion of their income to meet such unanticipated expenditures. The portion of money kept by individual depends upon various factor such as income, political and economical conditions, personal characteristics of individual, etc. Keynes wasn't much clear on the factors, hence didn't give any equation.
Now coming to Bitcoin. In precautionary demand for money, income was the biggest determinant but in case of Bitcoin, personal characteristics and market condition are the more prominent ones. Since Bitcoin is High-Risk, High-Yielding investment, conservative person is less keen to hold bitcoins for precautionary motive than the radical one. Also, person will be more inclined to hold Bitcoins for precautionary motive if the market condition is favorable and bitcoin is in green zone for long.

3. Speculative Demand for Money

To analyse the Speculative demand for money, Keynes has taken two factors into consideration:

• Interest rate on market securities
• The expected rate of capital gain

According to Keynes, people have notion regarding the interest rate of securities which they consider to be normal. Such interest rate is known as critical interest rate. When the current interest rate is more than the critical interest rate, people convert all their money into securities because:

• 1. They can earn more due to high rate of interest.
• 2. Interest rate and the market value of security have an inverse relationship. So when the current rate of interest fall below critical rate, people will make capital gain as the market value of security will rise as compared to the price at which they bought the security.

On the contrary, if the current rate of interest is lower than the critical rate, people will convert all their securities into cash.
Now coming to Bitcoin. Bitcoin does not follow the principle of speculative demand as laid down by Keynes because its characteristics are very much similar to the securities considered by Keynes for this analysis. Hence speculation demand for bitcoin has different approach. Its speculation demand depends upon the relative rate of return. If the anticipated return on Bitcoin is higher than other securities, people will hold Bitcoins for speculation motive and vice-versa.

Any suggestions, questions, different approaches, views, doubts are welcome.