As Its Velocity Declines, Bitcoin May Be Looking More Like a Reserve Currency
According to a new analysis from Nodar Janashia, bitcoin’s transactional velocity in 2018 is projected to be half of what it was in 2017. Placeholder’s Chris Burniske thinks that dynamic may be because bitcoin is actualizing a reserve currency status.
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Velocity Down, Reserve Status Up?
One of Hal Finney’s most legendary comments came in his spelling out what it might look like for bitcoin to become a world reserve currency. I recently opined on what could happen if the U.S. went about taking that possibility seriously.
Now, bitcoiners may be starting to see the first signal of that transformation, albeit for now in the more modest realm of the cryptoeconomy.
That’s per Chris Burniske of crypto venture firm Placeholder, who, in pointing out Nodar Janashia’s Q3 2018 Bitcoin Velocity Analysis, argued that bitcoin’s slowing velocity is a sign that it’s probably taking on the role of a “reserve asset.”
For his part, Nodar Janashia’s own analysis of bitcoin’s velocity decline led him to a few possible conclusions, namely that a large majority of bitcoin users are speculators now as compared to years’ past and that bitcoin may be facing “market overcapitalization.” Janashia calculated velocity by “summing up all the transactions processed on-chain throughout the year and dividing by the network’s average asset base.” Accordingly, he estimated that bitcoin’s transactional velocity in 2018 will be down nearly 100 percent on-the-year and that the stats don’t necessarily “paint a good scenario” for the OG cryptocurrency.
Conversely, and through a slightly more optimistic lens, Burniske’s now argued on Twitter that bitcoin is seemingly starting to strut its stuff as a reserve currency.
‘What You’d Expect,’ Says Burniske
In his thread on Janashia’s analysis, Burniske outlined why he thought a drop in transactional velocity might actually be a sign of BTC’s maturation as a reserve asset.
2/ While a drop in velocity may seem problematic, it’s actually what you’d expect from a *reserve currency.*
— Chris Burniske (@cburniske) September 7, 2018
Burniske went on to say the possibility wasn’t all peaches and cream, but that it was a dynamic worthy of consideration in light of market psychology and bitcoin’s evolution:
“With a reserve currency, as confidence falls market wide more people will hold onto the reserve asset (in this case,
#bitcoin), dropping its velocity […] Non-reserve currencies tend to be the opposite: as confidence falls, velocity accelerates as people try to get rid of the asset before it loses more value […] As I’ve mentioned many times before, a drop in transactional velocity over the long term may be problematic for miners as the coinbase subsidy subsides, but for now #bitcoin is behaving well as the reserve currency of #crypto.”
In other words, BTC has been acting as a redoubt within the cryptoeconomy as hodlers of other coins have sought to hunker down amid 2018’s bearish chop.
It’s a thread worth keeping an eye on in the future as BTC and its second-layer solutions continue to grow.
In Light of the Possibility, a Quick Finney Refresher
In talking about BTC as a reserve asset, it’s simply too ripe of an opportunity to pass up plugging Finney’s now-famous BitcoinTalk post from December 10th, 2010.
For anyone interested in the promise of cryptocurrency, it’s a must-read. I quote it here in its entirety for those who haven’t read it before:
“Actually there is a very good reason for Bitcoin-backed banks to exist, issuing their own digital cash currency, redeemable for bitcoins. Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the block chain. There needs to be a secondary level of payment systems which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purchases.
Bitcoin backed banks will solve these problems. They can work like banks did before nationalization of currency. Different banks can have different policies, some more aggressive, some more conservative. Some would be fractional reserve while others may be 100% Bitcoin backed. Interest rates may vary. Cash from some banks may trade at a discount to that from others.
George Selgin has worked out the theory of competitive free banking in detail, and he argues that such a system would be stable, inflation resistant and self-regulating.
I believe this will be the ultimate fate of Bitcoin, to be the ‘high-powered money’ that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks, to settle net transfers. Bitcoin transactions by private individuals will be as rare as… well, as Bitcoin based purchases are today.”
Maybe what Finney envisioned herein is starting to steadily materialize, then. The journey of 10,000 miles starts with a single step, as the old proverb goes.
What’s your take? Beyond the cryptoeconomy, do you think BTC can be the ideal reserve currency in the wider world monetary system? Let us know in the comments below.
Images via Nodar Janashia, Pixabay