This document has been posted here:
http://www.reddit.com/r/CryptoMarkets/comments/1y755t/understanding_cryptocurrency_market_dynamics_and/ and here:
http://np.reddit.com/r/CryptogenicBullion/comments/1y74jl/understanding_cryptocurrency_market_dynamics_and/. Please make comments on reddit and if you wish to quote this post please trim the bulk of it away.
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Understanding Crypto-Currency Market Dynamics and the Role of BTC, DOGE, and CGB (draft - requestig constructive criticism)papersheepdog
A special note to the
Bitcoin community: All that we have done here would not be possible without your innovation. This trailblazing has left you in a unique position as a highly liquid market gateway which we all rely so heavily on. There will always be a top place for you so long as you maintain this distinction.
Bitcoin TL;DR: Your community must focus on bridging the divide between government issued fiat currencies and the new realm of digital currencies. You are the gatekeeper that allows us all to prosper and to reach the next level, we need a system of exchanges that can handle a tsunami of fleeing capital which we are likely to soon witness. Government regulations, restrictions and FUD will stand in your way but you must accept this challenge and restore free market principals to the peoples' selection of their currency.
A special note to the
Dogecoin community: We appreciate what you have done for all crypto-currencies by bringing us mainstream excitement. You are lifting us all higher but you cannot do it alone. A healthy ecosystem requires that one currency cannot fulfil all roles. Hopefully this document will help you to understand your bright future within it.
Dogecoin TL;DR: The value of your currency is derived from the size of the community that trades and accepts Dogecoin. You must work tirelessly to spread the word and get people excited to be using Dogecoin and to accept it at their businesses. When merchants can operate by spending their earned Dogecoin instead of converting it to government issued fiat, you will have established lunar orbit. To say this another way, your ultimate goal is to create a diverse Dogecoin ecosystem that no longer relies on government issued fiat.
A special note to the
Cryptogenic Bullion community: Visionary conception has created a cryptographic asset that is designed with the properties of money, modelled after the gold supply, and whose purpose is to store wealth. This currency could not have come to maturity at a better time as we are seeing a loss of confidence in the financial industry and a rising demand for Gold and Silver across the globe.
Cryptogenic Bullion TL;DR: Your community must focus on enhancing the ability of CGB to act as a store of wealth. This includes developing safer ways to store CGB, and safer ways to utilize one's private wallet keys in a secure, offline manner. This focus on safety must include initiatives to make it easier and simpler for curious new community members to participate. The CGB community must also focus on investor education to help smoothly guide capital from the old economy to the new.
A special note to the
general crypto-currency community: You are all an integral part of the true free market capitalism that is occurring in this new digital space. Although I highlight three currencies as prime examples of filling a certain role, the vibrant community that you are all a part of is what has allowed these examples to exist. There is plenty of room along side these examples for others to try to fill a similar role. So long as new and innovative crypto-currencies are launched and given a fair chance to compete, we should all be willing to adapt and change to accept them in order to brighten our collective future.
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This document is intended to be used by our collective communities as a guide to come together and provide this new digital space with the services and functions required to support capital and commerce. The crypto-currency FX (foreign exchange) market is very new, and confusion about the fundamentals is currently the most dominant force underlying it. As more professional and seasoned investors begin to take notice of these markets, logic will begin to manifest itself more predominantly in the price action of the various options available. This is the reason that it is necessary for us all to do our homework if we wish to be not only on the profitable side of a trade, but on the side that allocates capital to deserving innovations.
The cryptographic currency market can naturally be seen as part of the greater foreign exchange market which includes all government issued fiat currencies. Many parallels can be drawn and it can get very technical. For the purposes of this document I have left out some distinctions which are not relevant to the overall understanding of the concept and would likely cause confusion. I may also update the document as discussion develops these ideas. We will begin by defining some basic elements found in these markets, the forces that are at play, and details on the roles to be fulfilled in this new economy.
The
monetary base of a currency is the total number of units of a currency that are in existence. The monetary base can expand or contract. Expansion happens through mining and minting, while contraction occurs if a wallet is permanently lost. Although the monetary base may expand, if the new units are being held and not put on to the market, they may not cause a loss in relative value known as
inflation. Correspondingly, if a large amount of the currency is lost forever or simply held by the population, an apparent shortage of the currency eventually forces the market to realize a higher exchange rate, identified as
deflation. These forces act to stabilize the market as low relative prices encourage spending, and high relative prices encourage saving, thus maintaining a steady exchange rate and flow (ie. velocity of money).
Unit price is the cost per unit currently found on the open market for a particular crypto-currency. In a currency with a very low expansion rate, this would be primarily affected by the flow of capital. Currencies experiencing a high expansion rate of the monetary base will require a supply of capital inflow to balance against the base expansion, called the
maintenance cost. As the unit price doubles, so does the capital inflow rate requirement (ie. maintenance cost). This dynamic becomes readily apparent when the unit price rises too quickly for the capital inflow rate to maintain the new price and a correction must occur. In addition to capital inflow, the maintenance cost can also be countered by members of the community who choose to hold and save their currency.
Market capitalization can simply be seen as the total amount of capital that has been invested into a currency. For these markets, normally it is measured in USD, but it could be measured in BTC or any other currency. Usually we would measure this in the currency that we are more familiar with or the one which we perceive to be the most useful. From an investment point of view, market capitalization is a measure of popularity but not necessarily profitability. Market capitalization is calculated by multiplying the unit price by the number of units. Investors are primarily concerned with the unit price because this is the direct value of what they hold. If the capital inflow is directly balancing against the expansion of the monetary base (paying the maintenance cost) we will see an increase in market capitalization over time, without an increase in unit price.
There are many different ways a currency can be used and they have different
effects on the market capitalization depending on how long the capital is held in it. They can be used for their
market access with capital flowing in to one trade pair (eg. USD/BTC) and exiting out of another (eg. BTC/CGB). These are the most market neutral transactions as the currency is not held for long.
Moving funds from one location or person to another can be accomplished by buying into the market and selling back out the same trade pair at the other location. (eg. BTC/USD). This transaction also represents no intention to hold and will become neutral once completed.
Buying to spend does immediately imply a boost to market capitalization like all other actions, but when it is spent, the recipient may convert it to another currency, causing the action to be market capitalization neutral overall.
Buying to invest has the very same effect, yet the duration of the hold can often be much longer meaning a greater benefit to the market capitalization.
Buying to save is the most market capitalization positive action because savings are usually intended to be held long-term.
Different crypto-currencies have different properties depending on their programming and life-cycle which can make them better suited to a certain task than another. The three primary duties which a crypto-currency can fulfil are market gateway, adopted currency, and store of wealth. A
market gateway is a currency whose popularity has granted it high volume market access to many other currencies both government issued fiat and digital. This allows fast (liquid) and fair market access to serve a wide population base composed of all of the supported markets. An
adopted currency is one which is used for daily transactions among a population (group of users). The ideal adopted currency is one which expands its monetary base at the same rate of growth as the user base. This maintains stable prices even as capital flows in to the currency. A
store of wealth is an asset that has the properties of money and should maintain its value over time. It should have a low inflation rate and/or a return on investment to maintain the incentive to hold it.
It is helpful to use real world examples to explain the concepts covered within this document. For this I will be exploring three crypto-currencies which I believe serve as a good example of each use case.
Bitcoin (BTC) serves as an excellent market gateway,
Dogecoin (DOGE) has been widely adopted as a currency, and
Cryptogenic Bullion (CGB) serves as a store of wealth. I will explain how each one of these fits within its own role and the moderating role of investors in each.
Bitcoin was the first crypto-currency to market and has achieved the greatest exposure to markets than any other. Hundreds of trade pairs exist on many exchanges between BTC and both government issued fiat and digital currencies. Its market capitalization is best tied to its use as a
market gateway and for moving funds from one location or person to another. These activities cause volatility which is smoothed out by investors. If it is believed that the volume of market transactions will go up, or capital will need to flow between locations at a higher rate, investors will buy in anticipation and take profit by providing liquidity as the demand arrives. This should be the main dynamic at play in Bitcoin but since it is one of the first to market, it has also attempted to serve as currency and store of wealth but we can see that it does not perform these tasks as well as others.
Dogecoin is the first crypto-currency to sustain a growth trajectory through the fun and excitement of using cryptographic currency, and the socially viral aspect of a meme. Through its wide and quickly spreading adoption it is beginning to properly serve its role as an
adopted currency. With enough places accepting Dogecoin in exchange for products and services, it will achieve a sustainable velocity as merchants and businesses are able to spend the Dogecoin in their community, as opposed to converting back to government issued fiat currency. This should be seen as the ultimate goal of any newly adopted currency. If it is believed that Dogecoin will be held and used at an expanding rate beyond its maintenance cost, investors should bid up the price, and then take profit by providing liquidity as this increased demand is realized.
Cryptogenic Bullion is the first crypto-currency to display all of the properties of money, while providing the bearer with interest for holding it. It is portable, divisible, fungible, scarce, low inflation, durable, non-consumable, and a
store of wealth. Unlike most other crypto-currencies, CGB has already completed its volatile monetary base expansion stage and is settling in to its maximum target of 2% expansion per year. As capital finally flees the economic bubbles created by the parabolic increase in the global fiat monetary base, it will find its way into both traditional stores of wealth such as Gold and Silver, but also into new opportunities like low inflation crypto-currencies. This will greatly benefit all crypto-currencies as the rising tide lifts all boats, but in this case, not all boats are created equal.
It is important as market participants that we understand the bigger picture of what is happening to cause interest and investment in this uncharted territory. We can look back to 1971 when Nixon removed the US dollar, and therefore the rest of the world which had its currencies pegged to it, from the price of gold. With US Dollars now having value derived only from their military imposed monopoly on the export of oil known as the petrodollar system, the manipulation and corruption of the world economy that ensued is now coming to a climax. The system that serves to wiped out the middle class and concentrate the worlds wealth into the hands of those most able to corrupt the political process is finally being replaced by digital currencies which give special favour to no one. We are witnessing the death throes of the old guard as it tries to frame digital currencies as money laundering, terrorist financing, untrustworthy, failures. One needs only to look at what the fiat US Dollar has brought us to know that we could not possibly do worse than this corrupted system we seek to replace.
TL;DR: A TL;DR is available at the top for each community. The general idea here is that one crypto-currency cannot do all and we must work together to realize our common goals.
