Lecture 3 Cryptocurrencies Flashcards
What are the three functions of money?
- Unit of account
- Medium of exchange
- Store of value
What are the 6 typical characteristics of many cryptocurrencies such as Bitcoin?
- Money growth path is more or less fixed
* At least… when the code doesn’t change - Peer-to-peer payment system
* Need a private cryptographic key to pay with a balance - Transactions are recorded in a distributed ledger (“blockchain”)
- Potential benefits for users (pseudonymity, cross-border)
* Benefits differ across users - Speculation/investment is important motive for cryptocurrency holdings
- How many crypto coins you must pay usually depends on the price in
fiat money and the latest exchange rate
What is the quantity equation?
𝑃𝑇 = 𝑀𝑉
P = “Price.” How many
bitcoins were paid on
average?
T = “Trade.” How many
goods/services were
paid for with bitcoin?
M = “Money.” How many
bitcoins did exist?
V = “Velocity.” How often
was the average
bitcoin used to make
a payment for
goods/services?
Formula price bitcoin
𝑃 = 𝑃^€/𝑆^€/B
𝑃€ = prijs euros
𝑆€/B = exchange rate euro/Bitcoin
Velocity
Velocity is the average number of times each bitcoin is used to make
a payment for goods/services
Formula of Average velocity of all coins
𝑉 = (𝑀 − 𝑍 /𝑀)* 𝑉∗
V = Average
velocity of all
coins
M= Fraction of coins that are
used to make payments
during the period
Z = Coins that do not move
V* = Average velocity of coins
that are used to make
payments during the period
EQUATION FOR THE EQUILIBRIUM EXCHANGE RATE
𝑆^€/B = (𝑇€/𝑉*) / (𝑀 − 𝑍)
𝑇€ = the value of goods/services bought with a coin
What are the two assumptions of EQUATION FOR THE EQUILIBRIUM EXCHANGE RATE?
Assumption 1: Price in fiat money and latest available exchange
rate determines how many bitcoins to pay
Assumption 2: The 𝑀, 𝑇€ and 𝑉∗ are exogenous in equilibrium.
In general, transactional usage increases with:
- Consumer adoption
- Merchant acceptance
What happens if Z goes up with the graph?
There is a move along the line upwards
What happens if T€ goes up with the graph?
Than de line itsself moves upwards
𝑉∗
Speed of circulation of coins used for payments
𝑇€
the value of goods/services bought with a coin
𝑍
Coins that do not move
What happens if 𝑉∗ goes up with the graph?
Than de line itsself moves downwards
