The value of cryptocurrencies including Bitcoin has gone on a spiral showdown over the past year. The price of one bitcoin once went from $900 to $20,000 in 2017 and then in the next 12 months spiralled down to less than $4,000. And this fact has created a whole lot of speculation of the currency not being really sustainable.
Ecole Polytechnique’s Linda Schilling and Herald Uhlig of the University of Chicago have sought to address some of these vital economic questions about cryptocurrencies as a whole. In a theory, the two scholars describe at lengths how cryptocurrencies could become less speculative just like its inventor Satoshi Nakamoto intended them to be.
The two imagine a future with cryptocurrency being a widely accepted means of payment. A world where technical issues involving security and safety in the payment systems have been resolved.
A Decade Of Bitcoin
It’s already 10 years since Bitcoin first came to the scene. A pseudonymous inventor going by the name of Satoshi Nakamoto first published online a white paper comprising the designs of the Blockchain system in 2008.
Bitcoin trading operates on the basis of the distributed ledger technology that is the Blockchain system. Nakamoto, whose is still underground came up with the idea of Bitcoin as a reward system that the software would generate for users who win the competition to verify transactions on the network by using computing power to resolve complicated equations.
Ever since thousands of cryptocurrencies have copied the idea and attracted billions of investment not just in the US but the world over. Academics studying the phenomenon have similarly multiplied.
Cryptocurrency To Compete With Fiat Money
Schilling and Uhlig went ahead to further pose a mathematical formula similar to one that exists in real life where digital currency competes with traditional money in usage.
The academics use a construct which involves a central bank (the Fed) that manages inflation. The supply of bitcoin increases till it reaches a limit that was imposed by Nakamoto. Since Bitcoin has no central authority, no one would be there to stop it from inflating.
However, this hypothesis doesn’t match today’s cryptocurrency environment in different ways. Current cryptocurrencies face serious challenges from hackers who break into digital exchange platform and transfer currencies to their accounts. Holders of currencies also often prefer speculating their investments rather than spending them on regular buys.
The Fundamental Price For Bitcoin
What would be the fundamental price for bitcoin if people were to choose between bitcoins and dollars? According to Schilling and Uhlig, the bitcoin price follows a martingale sequence where its expected future price equals its present price. People would be willing to spend a bitcoin as much as they would a dollar and none would appreciate against the other.
The academics also derived an equation to explain the speculation in bitcoin and what would control it. The scholars further point out that if people expect bitcoin’s price to rise, then they would hang onto the bitcoins rather than spend it.
The two also demonstrated a sequence of calculations that demonstrate that it possible for bitcoins movements to affect feds inflation target for the dollar. Similarly, fed’s monetary policy action could also affect bitcoin prices.