Federal Reserve: Altcoin Flood Places Downward Pressure on BTC Purchasing Power

Federal Reserve: Altcoin Flood Places Downward Pressure on BTC Purchasing Power

St. Louis Federal Reserve Senior Vice President and Economist David Andolfatto, and Senior Research Associate Andrew Spewak, released the first bitcoin core (BTC) price analysis of 2019. In it, they argue the “flood” of altcoins will ultimately have a negative impact on BTC’s purchasing power going forward. 

More Spice: Bitcoin White Paper Webcomic by Comics Legend Scott McCloud

Federal Reserve Asks, Whither the Price of Bitcoin?

“What are the long-run prospects of Bitcoin as an investment?,” David Andolfatto and Andrew Spewak of the St. Louis Federal Reserve ask. “The bullish case is that Bitcoin will appreciate indefinitely due to its capped supply and an ever-growing demand. The bearish case is that Bitcoin’s price will fall to zero, as it’s an intrinsically worthless asset. We think the future price path is more likely to remain bounded between these two extremes.”

Federal Reserve: Altcoin Flood Places Downward Pressure on BTC Purchasing Power

Calling the bullish case for bitcoin “too optimistic” due to how “its exchange rate relative to other cryptocurrencies evolves over time in the face of an ever-expanding supply of alternative cryptocurrencies,” alternative coins (altcoins), they attempt to explain there is a middle ground.

Bulls argue “the nominal exchange rate between Bitcoin vis-à-vis other cryptocurrencies will adjust in proportion to their relative supplies. That is, Bitcoin is expected to appreciate relative to its competitors or, equivalently, its market-capitalization share will stay constant over time,” Fed researchers note. That does not, of course, have to be the case.

Thought Experiment

They use the example of a selling a good for a set price of which merchants will accept payment in a variety of fiat bill combinations. However should the supply of one denomination of those bills increases while another stays the same, the exchange rate remains the same, but “the total nominal money supply is increased. If the demand for money remains unchanged, then the price level must rise,” they reason.

Federal Reserve: Altcoin Flood Places Downward Pressure on BTC Purchasing Power
David Andolfatto

As a result, no single bill nor previous combination is able to purchase the good as the price for it has increased. An increase in the supply of one bill has carried over into the other, and both decline in purchasing power … even if one remained fixed. Andolfatto and Spewak believe something like this is happening with the supply of altcoins relative to depressing the price of BTC.

Acknowledging the “analogy is not perfect, because the exchange rates between competing cryptocurrencies are not fixed in the way the exchange rate is” for fiat bill denominations, they ask what would would happen if denominations on such bills were eliminated. “According to economic theory, any exchange rate is possible—including an exchange rate that does not vary with the relative supplies of” different denominated bills. And since “no fundamental economic factors determining the exchange rate between two intrinsically worthless objects,” and so something like that might be happening between BTC and altcoins.

No Intrinsic Value

“The total value of Bitcoin has declined as a share of all cryptocurrencies, as its value with respect to other cryptocurrencies shows no particular trend,” they explain further. Bears have long insisted BTC has no intrinsic value, and at some point investors will wake up and realize as much, the Fed continues.

Federal Reserve: Altcoin Flood Places Downward Pressure on BTC Purchasing Power

BTC won’t have to reach zero in order to prove the above. “In fact, many securities trade above what might be considered their fundamental value. Gold, for example, trades above its value as measured by its industrial applications. The U.S. dollar trades above its fundamental value in discharging U.S. tax obligations. The premium some people are willing to pay for gold and the U.S. dollar reflects the value these objects possess as exchange media. The market value of these objects would decline, but not fall to zero, should this premium suddenly vanish,” the Fed suggests.

Relegating Bitcoin to database management software, still it “can have a fundamental value if they are tailored to meet the needs of a given constituency.” BTC might offer something like easy access to onboarding and decentralization, which users might value highly. But really all that means is its value isn’t zero in the eyes of the Fed, and little more.

Federal Reserve: Altcoin Flood Places Downward Pressure on BTC Purchasing PowerCONTINUE THE SPICE and check out our piping hot VIDEOS. Our podcast, Milk, might help sooth that crypto burn. Follow CoinSpice on Twitter. Join our Telegram feed to make sure you never miss a post. Drop some BCH at the merch shop — we’ve got some spicy shirts for men and women. Don’t forget to help spread the word about CoinSpice on social media.