10 sats \ 4 replies \ @Undisciplined 19 Apr \ parent \ on: Velocity of Money: Definition, Formula, and Examples econ
Someone asked me a while ago for a ballpark estimate of what Bitcoin would ultimately be worth. I had just gotten into Bitcoin, so I hadn't thought about the question.
My answer was that you could get a rough approximation by just dividing the current global money supply by 21 million. However, I mentioned that if you wanted to refine that estimate you would want to account for how the velocity of money might be different on a bitcoin standard.
I haven't really thought it through beyond just raising the question. I'll hypothesize that money velocity would be reduced on a bitcoin standard, since it encourages savings. That should mean a lower price level, which means Bitcoin's purchasing power would end up higher than that initial estimate.
In fiat world, inflation discourages saving. So, as inflation expectations rise, I'd expect the velocity of money to increase, which exacerbates price inflation.
Velocity is inverse to money supply
Velocity = GDP/M
If M increase then V should decrease?
I am discussing USD not BTC
reply
That's nominal GDP, which is not constant for an inflating currency.
All models are wrong. Some models are useful.
One of the problems with this model is that it's static. People make decisions based on expectations. If you expect your money to be worth less in the future, you are more likely to trade it for valuable stuff.
If GDP were to stay constant during a monetary expansion, the explanation would be that velocity decreased. This is what seems to have happened during the QE's. We didn't see rapid price increases, like many expected, because banks didn't loan that money out into the economy.
reply
George Box
reply
I associate it with one of my professors who said it whenever one of us had a really valid criticism of one of the theoretical models we were learning.
reply