This post marks the start of a series on cryptoasset valuation. The purpose of this series is to assemble, in small steps, the correct approach to cryptoasset valuation.
I will be learning as I go along. Hypotheses stipulated in some post might be rejected again in a later post of the series. Whenever I have clarified some issue related to cryptoasset valuation myself, I will add a new post to the series.
The series is going to end with a post presenting the approach to cryptoasset valuation I regard as the correct one and which might have been arrived at by myself or by somebody else.
So let’s start.
In this first part of the series I merely want to write down a couple of thoughts on the equation of exchange as it relates to the issue of cryptoasset valuation.
When I started researching on cryptoasset valuations I came across two texts (one by Chris Burniske, the other by John Pfeffer) which made several interesting points regarding the topic of cryptoasset valuation. In particular, they made some remarks on the relation between the equation of exchange (MV = PQ) and cryptoasset valuation, pointing out that a given protocol is analogous to a simplified economy.
What (if anything) can we infer from the equation of exchange for the issue of valuing cryptoassets?
One thing we can infer from
MV = PQ
is that the price of a crypto-coin is inversely proportional to velocity. Given M and Q, an increase in V (the velocity) implies a corresponding increase in P (the price level in the protocol economy). Please note that an increase in P means inflation, i.e. a decrease of the value of the crypto-coin.
This inverse relationship between velocity and coin-value, which is pointed out by both Pfeffer and Burniske, means that store-of-value and medium-of-exchange uses of a cryptoasset are in opposition.
The interesting question regarding cryptoasset valuation is what is the “GDP” (PQ) of the protocol economy? Is it really just ‘the aggregate cost of the computing resources necessary to maintain the blockchain’, as John Pfeffer asserts?
This question is to be examined.
As I pointed out before, the basis of a monetary union is the agreement of all member states on a uniform development of the price level across the member states and nothing else.
So, ensuring that Unit Labour Costs and prices across member states develop in line with inflation in the European Monetary Union (EMU) as a whole is the only condition that needs to be fulfilled for the EMU to work. However, once Unit Labour Costs and prices across member states have been allowed to substantially diverge, the realignment of relative prices is extremely painful due to the absence of fiscal transfers and because (mainly due to language barriers) labour mobility is significantly restricted within the EMU.
Thus any substantial divergence of Unit Labour Costs and prices across member states threatens the survival of the EMU because member states are, of course, tempted to avoid the high cost of ‘internal devaluation’ by leaving the currency union (i.e. by devaluing externally instead).
Given that (due to lack of labour mobility and lack of fiscal transfers) a realignment of wages and prices is so costly, the EMU needs a mechanism to prevent asymmetric shocks from leading to substantial differences in Unit Labour Costs between member states.
Given that member states don’t have their own monetary policy any more, fiscal policy is the only tool left to achieve such a mechanism. That is, instead of the nonsensical 3% deficit limit, there should be a fiscal rule requiring member states to set the budget balance in such a way that Unit Labour Costs and prices develop in line with inflation in the EMU as a whole.
Using fiscal policy in such a way involves inefficiencies and may not work anyway. But if Euro policymakers want to prevent the Eurozone from breaking apart, they should at least try this approach because the EMU’s current framework virtually guarantees failure.
Do I believe the necessary adjustments to the Eurozone’s architecture are going to be implemented, preventing its break-up?
No, I don’t.
Most of the European policymakers haven’t even recognised the problem.
Bryan Caplan was on The Rubin Report. Here’s a nice four minute segment with him talking about Anarcho-Capitalism:
If you want to watch the whole interview, you can do this here.
Want to lose weight? – Try the Venezuela Diet!
A couple of weeks ago, I posted about Joe Quirk’s and Patri Friedman’s book on Seasteading. Now another book on this topic has been published: Victor Tiberius’ Seasteads – Opportunities and Challenges for Small New Societies.
Taking a more academic approach, the book can be considered complementary to Joe Quirk’s and Patri Friedman’s book on Seasteading.
It consists of essays mostly written by university professors and explores the political, economic and legal possibilities of Seasteads. An overview of the chapters with abstracts can be found here.
If you are interested in Competitive Governance and Seasteading and want to gain insight into the prerequisites for Seasteads to become a long-term success, I can highly recommend this book.