July 22, 2024

Is Crypto Really Money From Nothing? | by Tony Yiu | Alpha Beta Blog | Jan, 2024

Photo by James Lee on Unsplash

A simplified example for exploring crypto’s impact on our economy

One thing I’ve gone back and forth on over the past few years is the monetary and economic impact of cryptocurrencies. Because it really is like money from nothing. Today, the aggregate crypto market has a market cap of more than $1.6 trillion. 15 years ago that market cap was $0. So over the past decade or so, we basically added Australia’s entire economy in terms of wealth via the crypto boom. So what are the economic consequences?

Simplifying with a thought exercise

Let’s try to make it easier to think about with a thought exercise. Pretend that we live in a small town whose economy consists primarily of just two things — dollars and bread. People work to earn dollars and use those dollars to buy bread. Each day, the 100 people of the town buy 2 loaves of bread each from the town baker for $10 per loaf. So the transactional portion of the town’s economy adds up to 100*10*2 = $2000 a day. Given that there is only a single baker, the baker is quite the rich man compared to his peers. the townspeople on the other hand earn very modest incomes — $20 a day, all of which they spend on bread (they also have the option to eat less and save but most don’t).

In the riverbed by the town, crystals are discovered. These crystals are stunningly beautiful and very hard to mine, and some of the people in town start collecting them as a hobby. Nobody thinks much of it until one day a few years later, the baker (who was too busy baking to gather any crystals), needing an anniversary gift, pays his neighbor $1000 for ten of his crystals. When word gets around about the purchase, the 20 townspeople that had gathered up the vast majority of the crystals get really excited (the riverbed had already been pretty much mined empty). They each own 100 crystals — so doing the math, they believe they’re now each worth a cool $10,000 (since the baker paid $100 per crystal).

A crystal trading rush starts. Some folks without crystals cut their bread intake in order to save up the money to buy some from their peers — they put their savings in the bank until it’s time to buy. Others borrow from the local bank (which has money to lend thanks to the rich baker as…

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