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Bitcoin and the Quantity Theory of Money – Why Bitcoin is Undervalued

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If you were conscious of in your college economics class you might recall Milton Friedman’s excellent theory: The quantity theory of money.  Essentially, Friedman argued that the indefinite price level is directly proportional to the amount of money in circulation  We can put to use Friedmans logic to bitcoin and use it as a starting point for valuation. The root of intellect the quantity theory of money is the equation of exchange,  MV=PQ.

Ok, what does the modus operandi mean again? MV=PQ.

M= The stock of money.  How much money is out there in occasion.

V= The velocity of money. How fast does money change hands?

P=The total price level.

Q=The economy’s output.

Then we can say that PQ is nominal GDP or total number expenditures. The price of every good and service produced within an curtness in a year.

So, Friedman’s logic was this: The velocity of money was stable and Q began minimally. The real output of an economy usually only increases or decreased a few part points a year.

So the formula now looks this:  MV =PQ.  Because V and Q are relatively unswerving, an increase in the money supply, by a central bank, will lead to a compatible increase in the price level.  In the long run, increasing the money supply faster than the legal growth of the economy will always lead to inflation.   Actual wealth cannot be created by the printing press.

How can we take Friedman’s suggestions and apply it to the bitcoin ecosystem?  First M is constant.  No central bank, monarch, politician or bureaucrat can increase the supply of bitcoin.  The current market cap of there 250 billion dollars proves the code is good and the underlying end that counterfeiting bitcoin can’t be done.  We will also assume, along the same lines as Friedman, that the velocity of bitcoin is relatively constant.  So the bitcoin ecosystem looks get pleasure from this:  MV= PQ.  Now, M and V are held constant.

So now we need to define PQ in the bitcoin ecosystem.  Q is the cosmos utility that is created by using bitcoin.  There are 2 identifiable associations of people who would derive utility out of using bitcoin:  those who hunger to get off the grid and those who want to get on the grid. Internet gamblers, people distressing to send money abroad from economically unfree societies and a multiple of other man who use it for illegal activities.  

In addition, there are people that have no access to the humanity financial system. These are people from war-torn countries equal Afghanistan, Syria or Iraq or people in countries where the monetary and fiscal authorities have let them down, like Zimbabwe or Venezuela.  They discretion be allowed to get on the grid with use and access to bitcoin.

Q is the real-output transactions the unmixed world needs to get on and off the grid.  With M and V constant, the market cap change of bitcoin is the speedily proportional to change in the world’s use and need for this type of payment group.

The total, world-value of the utility of bitcoin, in fiat currency price (P), disaffected by the velocity determines the market cap of bitcoin. M= PQ/V.  Friedman argued the general fee level is directly proportional to the amount of money in circulation.   Strengthening the money supply pulled up prices. Applying it to bitcoin, we can say that interchanges to the Q of the world bitcoin ecosystem will have proportional changes in the bazaar cap of bitcoin.  The roles are reversed now. The Q is pulling up the M, instead of the M pulling up PQ!

Next, if we can put hundreds on the Q and V we can have a starting point for bitcoin valuation.  Simple napkin math votes that it should be a lot higher than 250 billion dollars.

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