The Federal Reserve Bank of St. Louis has released an article today about Bitcoin. In it, the bank notes that the price of Bitcoin has three potential futures: indefinite, infinite appreciation; zero; or somewhere in between. They believe it will be somewhere in between.

The authors, David Andolfatto and Andrew Spewak, conclude that one of the factors dragging down the price of Bitcoin is an ever-expanding supply of alternatives. Bitcoin is an inherently speculative and volatile asset. A fixed supply doesn’t mean an ever-increasing value. Demand determines value, after all. Other tokens are frequently launched which have properties attractive to a portion of the market. If Bitcoin was still the only cryptocurrency, something which was only the case for a very brief time in its history, this money would probably go into Bitcoin.

Bitcoin Maximalists Ignore Important Realities

However, the Bitcoin maximalist argument that Bitcoin will simply usurp any improvements by other tokens has never come to fruition. There are even fewer dApps and users of dApps via Bitcoin’s blockchain than much later entrants like Tron.

The Federal Reserve economists write:

Consider the following thought experiment. A restaurant selling meals for $10 will happily accept payment in the form of one Hamilton bill ($10) or two Lincoln bills ($5). That is, the nominal exchange rate between Hamilton and Lincoln bills is 2:1. Now, suppose that the supply of Lincoln bills is increased but the supply of Hamilton bills remains the same. The exchange rate remains unaffected […] That is, the increase in the supply of Lincoln bills has led to a decline in the purchasing power of both Lincoln bills and Hamilton bills, even though the supply of Hamilton bills has remained fixed. Might an expansion in the supply of Altcoin have a similar depressing effect on the price of Bitcoin?

There are other complicating factors to the price of Bitcoin. On the one hand, it is the cryptocurrency with superior liquidity. This makes it the on-ramp and off-ramp for many other cryptocurrencies. Does anyone remember when ICOs were primarily conducted for Bitcoin? Nowadays Ethereum performs that function. Importantly, ICOs fueled demand for Ethereum through 2017 and 2018. Ethereum has a large supply and may never stop producing new units. Therefore, its lower values make sense: the more available something is, the less value it is.

Federal Reserve on the Intrinsic Value of Cryptocurrencies

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