Cryptocurrency velocity

Although I love this use case for blockchains, there is no reason that I, as a full-time crypto investor speculator , want to actually hold Aventus , Ticketchain or Blocktix tokens all three are blockchain-based ticket issuance platforms. Even if these platforms become widely used and process tens of billions of dollars of transactions, their underlying token mechanics are not structured so that the price of the underlying token will materially appreciate.

Consider a hypothetical platform that we'll call Karn, in honor of the show that never ends. Consumers want to pay for tickets denominated in dollars. They may purchase Karn tokens as part of the ticket acquisition process, but they won't hold the tokens for more than a few minutes at a time.

There's simply no incentive to hold them and incur price risk relative to the dollar. Venues also don't have an incentive to hold Karn tokens because they, too, want to avoid price risk. After consumers trade their tokens for concert tickets, venue hosts will trade Karn tokens for their preferred currency.

Note that this cycle can be completed in seconds by leveraging decentralized exchanges such as 0x. No one actually wants to hold Karn tokens. The presence of a proprietary token actually creates a worse UX for consumers by introducing an unnecessary layer of friction into the ticket purchasing process. The moment anyone receives Karn tokens, they exchange them for something else — either a ticket consumer or dollars venue. Even if Karn becomes the global standard for ticket issuance, no one will want to hold it.

Broader measures of money have components which yield higher returns and so are impacted differently than a narrow measure like M1. The velocity of M2-M1 is inversely related to interest rates as a result. Figure 5: Effect of Interest Rates on M1 and M2 Velocity source: econstor The general level of wealth in the economy also has a large impact on money velocity, with higher levels of wealth resulting in lower velocities.

Figure 8: Effect of Government Credit Rating on Money Velocity source: Created by author using data from The World Bank For most people it is their desire to engage in an economic transaction that is the limit, not technology. Research has shown that technology that increases productivity, increases output and lowers prices but has an ambiguous impact on velocity. Technology that assists the matching of buyers with sellers, enabling more frequent transactions, increases velocity effect is marginal though and output but has little impact on price.

Technology that lowers transaction costs increases velocity but the impact on output and prices is uncertain. Despite the introduction of technologies like ATMs, credit cards, EFTPOS, internet banking and ecommerce in the second half of the 20th century, money velocity was largely unchanged over this period. The velocity of money is impacted by a number of factors and a reduction in friction through payments technology, liquid markets and low transaction fees do not appear to be primary factors.

This is an important consideration for cryptocurrencies, as it has been argued that the nature of blockchains will result in velocities several orders of magnitude greater than fiat currencies, rendering cryptocurrencies worthless. Inflation Over the past 12 months broad money supply in the U. These concerns largely ignore the impact of money velocity and the weak relationship between money supply growth and inflation though.

Money supply growth and inflation are often closely related but it is generally not clear which is causal. A temporary burst in inflation is likely as the economy reopens due to base effects from shutdowns in and ongoing disruptions to supply chains. Longer term inflation is likely to remain weak though due to structural factors like demographics and technology.

If foreign exchange volumes were included in the calculation of money velocity for fiat currencies in a similar manner, their calculated velocity would be significantly higher. Figure 12 and Figure 13 show cryptocurrency velocities calculated from exchange data and hence are significantly overestimated.

Figure Bitcoin Velocity source: Created by author using data from coingecko Figure Comparison of Cryptocurrency and Fiat Currency Velocities source: Created by author using data from coingecko and The World Bank A comparable velocity estimate for a cryptocurrency would be based on an estimate of the economic activity of a cryptocurrency ecosystem and the token supply.

Velocity cryptocurrency ethereum full screen chart

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Figure 5: Effect of Interest Rates on M1 and M2 Velocity source: econstor The general level of wealth in the economy also has a large impact on money velocity, with higher levels of wealth resulting in lower velocities. Figure 8: Effect of Government Credit Rating on Money Velocity source: Created by author using data from The World Bank For most people it is their desire to engage in an economic transaction that is the limit, not technology.

Research has shown that technology that increases productivity, increases output and lowers prices but has an ambiguous impact on velocity. Technology that assists the matching of buyers with sellers, enabling more frequent transactions, increases velocity effect is marginal though and output but has little impact on price. Technology that lowers transaction costs increases velocity but the impact on output and prices is uncertain. Despite the introduction of technologies like ATMs, credit cards, EFTPOS, internet banking and ecommerce in the second half of the 20th century, money velocity was largely unchanged over this period.

The velocity of money is impacted by a number of factors and a reduction in friction through payments technology, liquid markets and low transaction fees do not appear to be primary factors. This is an important consideration for cryptocurrencies, as it has been argued that the nature of blockchains will result in velocities several orders of magnitude greater than fiat currencies, rendering cryptocurrencies worthless.

Inflation Over the past 12 months broad money supply in the U. These concerns largely ignore the impact of money velocity and the weak relationship between money supply growth and inflation though. Money supply growth and inflation are often closely related but it is generally not clear which is causal.

A temporary burst in inflation is likely as the economy reopens due to base effects from shutdowns in and ongoing disruptions to supply chains. Longer term inflation is likely to remain weak though due to structural factors like demographics and technology. If foreign exchange volumes were included in the calculation of money velocity for fiat currencies in a similar manner, their calculated velocity would be significantly higher. Figure 12 and Figure 13 show cryptocurrency velocities calculated from exchange data and hence are significantly overestimated.

Figure Bitcoin Velocity source: Created by author using data from coingecko Figure Comparison of Cryptocurrency and Fiat Currency Velocities source: Created by author using data from coingecko and The World Bank A comparable velocity estimate for a cryptocurrency would be based on an estimate of the economic activity of a cryptocurrency ecosystem and the token supply.

Most cryptocurrencies currently have little if any real use though, and as such the money velocity for cryptocurrencies is generally extremely low. This is probably also reflective of the fact that most people view cryptocurrencies as assets and not currencies. It is possible to lose all your capital.

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