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I'm very newbie at economics, so the question may does not sound a good question.

I define value, any type of goods and services I can acquire in an economic deal. If I assume whole amount of value existing in an economy to be S, then there's no relation between amount of money in circulation and S. I mean by printing money or introducing a new currency the amount of money in circulation is increasing but the S is assumably fixed. If my assumptions are true, can we conclude that emerging of cryptocurrencies cause inflation?

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Cryptocurrencies are extremely unlikely to have any significant effect on inflation.

First, you can't just add two different currencies into money in circulation because every currency is its own unit of measurement. For example, if you look at FRED data for currency in circulation you will see unit of measurement is US dollars. Hence, adding bitcoins and USD to amount of money in circulation is like adding meters and miles to some 'length' because USD is not the same money as bitcoin is. Moreover, 1 unit of currency can be used multiple times, and the number of times it is used can change in response to various factors. Finally, the supply of dollars is elastic because not all dollars are just high powered money, there are dollars that are created in process of lending.

This being said, theoretically if we would just fix all other possible factors that could adjust, if there is a parallel economy in US that sells products only or primarily for bitcoin, it could lead to increase in price level. That would translate to only temporary inflation spell, more inflation could occur only if use of the parallel currency becomes more prominent than initially.

However, cryptocurrencies are not really used for purchases of goods and services. Data from various countries show that virtually no goods and services are bought with cryptocurrencies. For example, research done by Australian Federal Bank shows that only less than 2% of Australians ever use cryptocurrencies to buy goods and services despite that almost 70% of them are aware that cryptocurrencies can be used for that (Nguyen and Watson 2023). For example, even Bitcoin which is the most popular cryptocurrency has such a low acceptance that some economists do not even consider it money (e.g. see Yermack 2015).

Consequently, there is no need for going further. Cryptocurrencies have so little acceptance it is even economically somewhat controversial to call them money as opposed to just financial asset. It is extremely unlikely there is any significant effect on inflation just because how rare purchases of goods and services with cryptocurrencies are.

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  • $\begingroup$ Why I can't add two different currencies into money in circulation? It's not like adding meter to mile. If two decades ago there was a house, people could buy it using dollar. Now, there are worth 540 billions dollars of bitcoin in circulation, plus old dollars that existed before. Those who own bitcoin today can afford for the same house plus who were able to afford the house before. So more people now can buy the house, thus the price should raise. Is this wrong? $\endgroup$ Nov 2, 2023 at 20:31
  • $\begingroup$ @AmirrezaRiahi 1. it is like adding meter and mile because by definition money in circulation has the unit of the currency, you can’t add 2 dollars to 2 pounds and say money in circulation is 4. That’s not how it works. 2. As I explain in the answer parallel currency could lead to short inflation spell, but Bitcoin is simply not used as a parallel currency in US. Virtually everyone uses Bitcoin as a speculative asset and there are few exceptions where it’s actually used as a currency. Consequently the point is moot. $\endgroup$
    – 1muflon1
    Nov 2, 2023 at 22:33
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Current values of various currencies in circulation, in trillions of dollars:

  • USD: 2.32
  • Euro: 1.64
  • Chinese Yuan: 1.44
  • Japanese Yen: 0.86
  • Bitcoin: 0.71
  • Ethereum: 0.25

The cryptocurrencies constitute a small, but non-negligible portion.

The vast majority of crypto mining is currently happening in China. This provides a method of transferring wealth out of China (which might be difficult otherwise). Likewise, drug traffickers, say, could use crypto to move money around the world, whereas in the past they would have to resort to suitcases filled with cash.

By being used in these large (and sometimes illegal) transactions, crypto frees up the traditional cash, and therefore it does contribute to inflation, although I'd hate to have to say how much.

On the other hand, central banks attempt to control the inflation rate by regulating the money supply. I would think that without cryptocurrencies, they'd just print more dollars and euros and the inflation rate would be about the same.

In summary, I think the immediate effect of crypto is to increase inflation, but it gets offset by central banks (fully or partially).

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