Tag: Price Floors

What is the Equation of Exchange?

Posted By under Cryptocurrency Valuation, Equation of Exchange ,

The equation of exchange is as old as economics itself.

First derived by John Stuart Mill, then referenced by Adam Smith, the equation of exchange has gained popularity more recently through Milton Friedman and other monetary theorists.

The equation of exchange is the foundation of cryptocurrency valuation in the ESC framework.

The Equation of Exchange, MV = PQ

The equation of exchange, MV = PQ is an algebraic equation used to solve for various components of a currency’s value.

It is typically used by economists to find the necessary supply of a currency – or, the minimum value of the monetary base needed for commerce.

When not enough fiat currency circulates, notes trade above their face value.

Cryptocurrencies experience the same demand pressure, but since cryptocurrency prices are floating, their prices appreciate to meet demand for purchases.

Increasing demand pressure and decreasing circulating supply causes a cryptocurrency’s price floor to increase.

If a cryptocurrency’s price on exchanges is close to its price floor – the price below which it cannot sustainably trade – the traded price must also increase to meet demand for value to be transferred through it.

The cryptocurrency valuation framework uses the equation of exchange to identify price floors and design tokens which hold their value.

Equation of Exchange articles:

Valuation Methods: Calculating M, Monetary Base

Posted By under Cryptocurrency Valuation, Valuation Framework ,

The equation of exchange is used in the Eat Sleep Crypto valuation framework, and in tokenomic architecture, analysis, and design.

To do this, the Equation of Exchange is reordered to solve for monetary base, M.

This gives us, M = PQ/V

We define M, the monetary base as including all circulating coins – not those on exchanges, lost, or burned.

M divided by circulating supply to find the price floor of a coin.

Other inputs are required to value cryptocurrencies with the equation of exchange.

First, circulating supply – the actual number of coins still accessible and in “hot wallets,” ready to be spent or sold, must be estimated.

Second, irrelevant transactions (e.g. speculative transactions, self-transfers) must be excluded from calculations.

Third, distinct uses for tokens must be identified and evaluated separately before combining them to find a price floor.

You’ll learn how in Valuation Methods: Identifying Circulating Supply and Valuation Methods: Estimating Velocity and using off-chain data in Valuation Methods; Finding PQ.

Price Floors In Cryptocurrencies, Part Five

Posted By under Blog, Cryptocurrency Valuation

Over the past week, Eat Sleep Crypto subscribers received the first four parts of the Cryptocurrency Price Floors series.

Price floors can be used to predict what technical analysis experts call “support.”

In part three of the series, I described how I used price floors to predict Bitcoin’s fall from $5600 to $3170 almost to the dollar.

You can access the full article by signing up. It’s less than $5 a month, and the insights you’ll get will more than pay for themselves.

This is part five, on the price floor created by denomination of goods and services in a currency.

Price Denomination

The denomination of goods and services in a currency provides the sturdiest price floor for a currency.

We haven’t seen this yet in cryptocurrencies on large scale, but it’s starting to happen in Venezuela through sites like Freelance For Coins.

Denomination of goods and services in a currency inevitably follows the adoption of cryptocurrencies as payments in a local, closed-loop economy, or in economies with no imports and exports. Without products priced in other currencies on either end of a supply chain, the relative price of a currency becomes irrelevant.

Native denomination of goods and services has a ripple effect. Through social pressure, this ripple effect might extend outward, but through economic forces it extends downward in a supply chain.

For example, a merchant pricing sandwiches at ₿.001 might see his competitors adopt a similar rate, but a farmer selling chickens at a fixed ₿0.001 enables his whole supply chain downstream to start pricing products in Bitcoin with an absolute reference to their costs.

This relative valuation of goods and services is the principle behind the Big Mac Index, which values goods and services of a country relative to the price of a McDonald’s hamburger in its currency.

In the same way, we can start to value a cryptocurrency with reference to what it buys.

Cryptocurrency Adoption In Venezuela

This hasn’t happened on a large scale yet, but it may be the next step for third world countries using cryptocurrency.

I’ll be discussing the ways this might play out in Venezuela and modeling the Venezuelan economy with Dash and Bitcoin Cash to show the effect this would have on these currencies in the Eat Sleep Crypto newsletter later this month.

In the Dash and BCH articles this month, we will discuss the practical application of this framework as well.

Dash and BCH models will be available exclusively for subscribers of Eat Sleep Crypto.

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