Brokers Need to Know that Bitcoin has an Economic Flaw

by Victor Lund on January 10, 2018

But the biggest gains may be ahead. If you took economics class in college, you understand that currencies of any type have a relationship between four very important metrics: MV=PQ. M is the total amount of money supply in circulation. V is the velocity of money and the frequency that it is being circulated. P is the price level Q is the inflation adjusted index of goods and services. The economic flaw with Bitcoin is that you cannot buy much with it. Sure – we hear these isolated discussions about people buying houses with Bitcoin, but those are isolated one-offs. There are companies like Filecoin that pay people in coin for hosting files, another called Steam that allows bloggers to earn coin by writing. Many more are emerging every day, but generally speaking, Bitcoin is investors investing in a currency that nobody uses for goods or services. This is a major problem for cryptocurrencies like Bitcoin and others. Investors Caused the Bitcoin Bubble Here is where the speculation comes in. There is no government involved in cryptocurrencies like Bitcoin. It is a truly free market economy. Sovereign currencies are managed. The United States and other nations use the equation of MV=PQ to keep the economy balanced with artificial stimulation – government spending, putting money into circulation, setting interest rates, issuing or buying bonds or treasury bills, etc. The ability to tax the economy is a big control lever. There is no doubt that the money pouring into Bitcoin and other cryptocurrencies is outpacing the economic output. The value run up in Bitcoin value after an 8 year trend of about $1000 that has been caused by the capital markets buying Bitcoin. The buy side demand is outpacing the sell side. We believe that Bitcoin and many other crypto currencies are being driven by hedge funds and electronic traders. They have electronic buy and sell points that are executing. When a few major investors follow the same trading pattern, the currency gets erratic. If a bunch of people sell, then the currency will fall to the bottom. As long as speculators continue to buy and hold – it will go up. In the case of Bitcoin, the traditional value that lasted from 2008 to 2016 was $1000. Investors poured a lot of money into the currency in 2017, driving the price up as high as 19,000 before a year end correction […]



As a real estate broker or MLS executive who is reading headlines like “Man Buys Texas Estate with Bitcoin,” you may be scratching your head to understand what this stuff is all about. Here is a primer that may help you to understand it. First of all, a cryptocurrency is a digital currency. It is not a coin or a bill. It is not backed by any nation’s treasury. It has a theoretical value that can be used for the exchange of goods and services. Bitcoin is only one of the digital currencies. There are many. In fact, anyone can create a digital currency in a few hours. Bitcoin is the largest and most widely known currency. Ethereum and Litecoin are gaining in popularity. Cryptocurrencies are a form of money that can be used for payment. It is nothing more, and nothing less. Funny thing is, we do not read headlines like “Woman Buys New York Penthouse with Pesos.” However, to all extents and purposes, the Bitcoin transaction and Peso transaction are effectively the same, you exchange one currency for US Dollars. But there is one catch that you need to understand. Currencies that we are familiar with are naturally attached to sovereign nations like the Dollar in America. When you want to use your American Dollar in some other nation, you need to exchange your currency for the currency of that nation. Exchange is the very nature of why currencies exist. In housing, people exchange currencies for property all of the time. Since housing is marketed here in America in US Dollars, if a seller wants to get paid in Bitcoin, then the buyer will need to use a cryptocurrency exchange like Coinbase to convert dollars into Bitcoin. Similarly, if a buyer has Bitcoin and the seller wants US Dollars (which is assumed), then the exchange will be used to move Bitcoin to dollars. Cyber currencies are not controlled by any bank or government. To all extents and purposes, the currency is established by a group of people mutually agree to its value and it trades on the open market like any currency with bids and asks. High risk investors are driving the market more than the use of Bitcoin for products and services. On April 3rd of 2017, Bitcoin was valued at about $1000 per theoretical Bitcoin, a relative value that was stable and lasted from 2009 to […]