Federal Reserve economists put the blame on altcoins for BTC’s price drop

12 Jan, 2019 | Updated: 12 Jan, 2019
by Fifi Arisandi
Federal Reserve economists put the blame on altcoins for BTC’s price drop

Two economists from the US Federal Reserve of St. Louis analyzed the recent market crash to find out the possible cause as well as what to expect moving forward.

According to David Andolfatto and Andrew Spewak, the ever-expanding supply of alternatives may well be the cause to the drop of the largest cryptocurrency by market cap.

Despite the bullish opinion that believes that Bitcoin has the capability to reach an indefinite value due to its capped supply and growing demand, the economists argue that demand determines value, thus a fixed supply doesn’t mean an ever-increasing value.

With the ever-increasing number of alternatives (altcoins), there are many options for people to spend their money on, which otherwise can go into Bitcoin had it be the only crypto around.

The economists made the below analogy to make it simpler and more understandable:

“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?”

While it’s not a perfect analogy, the economists try to give an idea how altcoins could be the cause of Bitcoin’s price depreciation, defying the argument of Bitcoin maximalists.

Image from Gyazo

On the other side is the bearish opinion that believes Bitcoin will at some point reach the zero value, specifically when the market eventually realizes the fact that Bitcoin has “no fundamental value”.

On this opinion, both economists argue that, “One can accept that Bitcoin trades above its fundamental value without claiming that its fundamental value is zero.”

“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,” they continued.

According to them, Bitcoin’s key properties of permissionless access and decentralized database management have given them the fundamental demand, which in turn provides a “non-zero lower bound” of its price.

To summarize, based on economic theory, Andolfatto and Spewak predict that Bitcoin’s price is dragged down by the overwhelming choices of altcoins in the market, which in parallel, also affects the price of existing altcoins.

Nonetheless, both agree that Bitcoin’s value is very unlikely to fall to zero, no matter what happens moving forward.

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Read more: US Federal Reserve not interested in launching its own cryptocurrency

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Read more about: Bitcoin (BTC)


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