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How Supply Affects Crypto’s Value, Explained

Debate has been raging on whether cryptocurrencies with a fixed supply are good or bad. Do they increase prices and demand, or stymy spending?

So is crypto actually a currency?

This is open to interpretation.

While some crypto startups have sought to ensure that their tokens can be used to buy something specific — whether its collectible cats or stocks — others are creating assets with a deliberately limited supply to help crypto users store value and see it appreciate over time.

One example is Bitcoin Rhodium. Its commodity, XRC, has a total supply of 2.1 million tokens coded in the blockchain. Named after a rare precious metal, the new crypto asset argues that other solutions were not a tempting proposition for investors seeking a long-term investment in crypto securities. It describes itself as the final part of the “Crypto Trinity” — along with Bitcoin and Litecoin — which is designed to appeal to a broad spectrum of investors, many of whom have different needs and interests.

As well as bridging the gap between crypto and traditional investments by offering a  time-bound dividend, Bitcoin Rhodium also says it offers a decentralized peer-to-peer exchange between precious metal investors and users of XRC, BTC and LTC — efficiently matching supply and demand without the need for intermediaries.

What happens when there are no Bitcoins left to mine?

Firstly, it might not be something you need to worry about — it’s unlikely many of us will be around in 120 years.

As this Cointelegraph feature explains, miners will particularly feel an impact. They are currently rewarded when they mine a block, but these rewards are going to tumble over time and eventually disappear altogether when supplies are exhausted. Satoshi Nakamoto himself predicted that the onus would change from block rewards to transaction fees once this plateau is reached — after all, transactions will still need to be validated on the blockchain. This could mean consumers end up paying higher fees in order to ensure their transactions are processed quickly.

As the number of Bitcoins remains stagnant and prices fall, divisibility is going to prove to be a vital factor in keeping supply levels strong. This cryptocurrency has eight decimal places — and Nakamoto reasoned that this would ensure that small purchases could still continue to be made. Without this, you’d end up in a situation akin to paying for a $1.50 can of cola with a $5 note, and not getting any change.

Ethereum tokens are divisible to 18 decimal places — and as this article explains, this is important because it ensures that they can easily be exchanged for different crypto assets or fiat currencies with differentiating value.

Over time, divisibility could prove to be more important than you may think. By 2017 — more than a year ago — a report had suggested that 3.8 million Bitcoins have already been lost. That’s 18 percent of the overall supply. Loss, theft and destruction were all likely factors, and you can bet your bottom dollar this figure is higher now.

What are the downsides of deflation?

One of the main downsides is a concept known as a “deflation death spiral.”

Like with hyperinflation, this is where things go to extremes the other way. Demand decreases because fewer people are spending money — yet, at the same time, prices are tumbling. Because the number of consumers buying goods or services has reduced, wages are vulnerable to falling, and economic productivity tumbles with it. This can lead to companies going out of business altogether.

It’s almost like a staring contest, where companies and consumers are waiting to see who blinks first. Businesses keep cutting their prices in an attempt to woo customers, but the public is holding out because they expect prices to fall. Ultimately, there’s a risk it could all become a race to the bottom.

This goes back to the Austrian School of Economics’ perspective that people would still need to spend money for essentials. It also believes that, as long as a currency or economy isn’t built on foundations of debt, the levels of deflation would stabilize to prevent such a death spiral.

In a way, this leaves cryptocurrencies at an impasse. How can it be transacted in order to gain momentum and attract mainstream adoption without missing out on the fact that their assets could be worth more in the future? Some advocates, like this Medium blogger, argue that the best way to remedy this is to make purchases using crypto — and then instantly buy more of it using fiat. If small things like coffee and lunch are bought using crypto, it can help demonstrate its utility and boost demand, with more merchants accepting it as a method of payment.

How do deflationary, fixed-supply assets affect consumer behavior?

When done right, it can reduce consumption — in a good way.

Many economies around the world are driven by the principle that it’s better to spend money now before it devalues in the future because of inflation. Debts — in the form of loans and credit cards — are rampant, and this applies at a government level too.

Deflationary assets encourage consumers to spend their money wisely so they can see their remaining funds appreciate in the future. But as Jorg Guido Hulsmann from the Austrian School of Economics points out, this doesn’t necessarily mean that crypto holders wouldn’t end up spending anything at all. Consumers would still spend money on essentials — food, fuel and mortgage payments — fully acknowledging that it could be cheaper in the coming years, as urgency is a factor.

Also, in an economy with a deflationary currency, there would still be times where you want to treat yourself — going to a bar, having a nice meal out or going to the cinema. Hulsmann argues that such crypto assets don’t have to be the death knell for consumer spending altogether, but it would make someone think twice before buying something they don’t really need.

It could also change the public’s relationship with debt — and make them more reluctant to borrow money for flashy cars and big televisions when they know that their payments would be increasing in value with every monthly repayment that passes.

So, Bitcoin may be deflationary. Isn’t deflation a bad word?

Not necessarily — this can help the cryptocurrency remain valuable.

Deflation relates to a decrease in the price you pay for goods and services. It’s the opposite of inflation — a term you’ve probably heard of if you’ve ever wondered why prices keep rising in supermarkets. Although it is considered a bad thing in the traditional economy, it isn’t necessarily a bad thing in the crypto world.

Inflation is a problem because that $1,000 you store in a safe for a decade could end up buying you a lot less. Just look at the United States Inflation Calculator, which shows that a $1 item in 1913 would cost $25.43 today.

As Blockonomi’s Brian Curran explains, inflationary markets also lead to “rampant debt levels” and push economies to live beyond their means. It can also end up going to extremes — and in Zimbabwe, inflation rates soared from 59 percent in 2000 to 80,000,000,000 percent (yes, 80 billion) in 2008. This is hyperinflation, and it renders currencies unusable. Venezuela, a country suffering from extensive political instability, has become one of the world’s biggest crypto markets because of hyperinflation, with one trader saying: “Even though Bitcoin is volatile, it’s still safer than the national currency.”

Cryptocurrencies such as Bitcoin are finite — with some economists comparing them to “digital gold” as a result. As output rises, the prices of goods are going to fall, but crypto as a store of value could rise simultaneously. Advocates of deflation argue that this is far more stable than what we see in the global economy today.

Ethereum doesn’t have an overall cap, and instead, new crypto is injected into its ecosystem every year. Although this makes it inflationary, inflation rates are decreasing as more ETH enters circulation.

Are cryptocurrencies with fixed supplies a good thing or a bad thing?

This is a hot topic for debate, and crypto companies have taken different approaches when creating their own assets.

The world’s biggest cryptocurrency, Bitcoin, has a fixed supply of 21 million — and last April, it was confirmed that 80 percent of this total had already been mined. Although newly minted Bitcoins aren’t going to be around forever, as the number available is going to decrease over time, there’s still a long way to go before they will all enter circulation. In fact, as things stand, the supply of new coins won’t be fully exhausted until 2140.

Those in favor of fixed supplies, as seen in Bitcoin, say that this creates digital scarcity. Lower supply can mean higher demand, thereby increasing prices. They also say that this sets crypto aside from the global financial system, in which central banks can effectively print more money through a strategy known as quantitative easing, which can lead to inflation and mean the dollar in your pocket isn’t worth as much as it used to be.

But in terms of cryptocurrencies achieving mainstream adoption, some opponents argue that fixed supplies actually stop people from spending, meaning that digital assets are speculative investments that people hoard. As this Bloomberg article argues, depreciation is impossible when an asset is finite, and this creates the risk of crypto owners waiting to get their goods cheaper. When it comes to conventional currencies, inflation is something that disincentivizes consumers from holding onto their cash — the longer it’s in their wallet, the less purchasing power it has.

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Gibraltar Blockchain Exchange Insures Its Crypto Assets With Local Broker

The Gibraltar Blockchain Exchange has insured all of its assets with local insurance broker Callaghan.

The Gibraltar Blockchain Exchange (GBX) announced that it is offering insurance on all of the assets listed on its platform, in an official GBX blog post Dec. 10.

The exchange reports that it will use local firm Callaghan Insurance Brokers to insure its assets, specifying that “all assets in the custody of the GBX are fully insured, including both hot and cold wallets.” The policy also reportedly “covers all forms of professional indemnity.”

GBX, a subsidiary of the Gibraltar Stock Exchange (GSX), opened in July of this year and has raised a total of $27 million in funding. In the past 24 hours, the exchange saw about $8.5 million in trades, currently placing it in 60th place on CoinMarketCap’s exchange rankings by adjusted trade volume.

As Cointelegraph reported, last month the exchange was awarded a license by the Gibraltar Financial Services Commission (GFSC).

As the firm’s blog post states, Callaghan Insurance Brokers is a privately held insurance company based out of Gibraltar The firm’s managing director is also a member of the GFSC’s board.

This is not the first crypto exchange that has managed to obtain insurance on the assets it holds. Gemini, the cryptocurrency exchange owned by the Winklevoss twins, also secured coverage for its custodied digital assets from insurance firm Aon this October.

For its part, Gibraltar’s government has recently shown interest in the regulation and development of blockchain technology in the country. As Cointelegraph reported in October, the local government launched an advisory group meant to develop blockchain-related educational courses.

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Financial Exchange Patent Explores Tamper-Proof Blockchain Bidding

A state-backed financial asset exchange in China’s Chongqing city is turning to blockchain to make online auctions tamper-proof and transparent.

According to a patent application filed in December and revealed on Friday by the China State Intellectual Property Office, the Chongqing Financial Asset Exchange (CQFAE) is exploring how to create a system that allows multiple parties to bid for a financial asset over a distributed network.

The document explains that the envisioned network would be run by invited validator nodes that are separate from the companies who participate in bidding for certain assets, such as letters of credit or corporate bonds.

When companies submit their bid to the network, the validator nodes authentic the data and then broadcast the new price for the next level of the auction, which is calculated based on various criteria encoded to smart contracts on the blockchain.

The asset exchange said the effort is necessary because the existing centralized database system is vulnerable to malicious alteration of data, either by bidding parties or even auction organizers.

It stated in the patent filing:

“The centralized online platform could make the bidding process become unfair and less transparent as the bidding parties are also unable to supervise the process. As such, the authenticity and security of the bidding data can’t be guaranteed.”

Founded in 2011 as an authorized exchange by the municipal government of Chongqing, the CQFAE functions as an intermediary between small businesses looking to raise capital and lenders such as investment firms and traditional banks. It further facilitates the trading of corporate loans and letters of credit.

While it’s so far unclear if the firm plans a blockchain product based on the patent application, it notably comes a month after the Chongqing city government revealed its plan to create a “blockchain digital asset exchange.”

As previously reported by CoinDesk, the news initially caused confusion in the Chinese cryptocurrency community, which speculated that it could mean a government-backed cryptocurrency trading platform.

A government officially reportedly clarified later that the platform is focused on facilitating exchanges of “non-standard assets” such as credit loans and letter of credit,

CQFAE Patent by CoinDesk on Scribd

Auction bid image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Wallet To Accept Collectibles Such As Crypto Kitties And Fighters As Functionality Expands

The new service will use ERC-721 compliant tokens to ensure rare and desirable assets are sold as a whole rather than in parts.

An established crypto wallet provider is developing a service where users can store collectibles – ranging from rare digital pets to desirable fighters.

Lumi says its service will allow users to swipe through their collection at ease – and it is currently invited interested crypto holders to sign up via email.

The company says it wants to help crypto holders bring all of their “unique collectible characters in one place” – including CryptoKitties, CryptoCuties, CryptoAlpaca, CryptoFighters and CryptoCelebrities. It hopes to support thousands more upon launch.

Most of these assets drive from games where players can breed and collect rare characters. In the case of CryptoKitties, “adorable creatures” cannot be replicated, removed or destroyed – meaning that unique creations retain their value. Given the immense value in the collectibles market, blockchain also helps ensure that ownership of these prized animals is tracked securely.

ERC-721 compatible tokens are going to be used by the Lumi Wallet for collectibles. The company says this is because rare collectibles such as Crypto Kitty have attributes such as color, age or breed which make them extremely desirable. In one case, it claims a particularly rare cat was traded for $110,000 through the platform.

The company adds that these tokens also ensure that assets are sold as a whole, rather than in parts. Although ERC-20 compliant tokens enable assets to be divided into small amounts when a sale is taking place, Lumi argues that this approach is incompatible with the collectibles industry – and it would be absolutely unheard of in the real world.

A thriving app

Lumi already offers an ERC20 standard-compatible wallet which is available through Apple’s App Store and Google Play, the marketplace for Android devices. The company also has a web version of its interface, and says it “never sits still” and is always offering new services to customers.

Its crypto wallet allows Bitcoin and Ethereum to be sent and received securely, and any account can be recovered through a 12-word backup phrase in the event that devices are lost or stolen. At a glance, it provides a clear indicator of how much assets – such as cryptocurrencies and collectibles – are worth in BTC, ETH and US dollars, with price graphs indicating any fluctuation in value during recent trading sessions. PIN codes and Face ID technology also helps guarantee that funds are protected.

When funds are being transferred, Lumi offers four different tiers of fees based on how long transactions will take to complete – meaning there are options for crypto holders on all budgets.

 

Disclaimer. Cointelegraph does not endorse any content or product on this page. While we aim at providing you all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor this article can be considered as an investment advice.

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BankChain Project Launches Blockchain Exchange for Stressed Assets

Primechain Technologies, a Mumbai-based startup that operates India’s BankChain consortium, has launched a blockchain system for the trading of so-called “stressed” assets.

The project, built on a blockchain called Primechain-ASSET, will see the creation of an exchange for selling and buying stressed assets, said Sudin Baraokar, innovation adviser at State Bank of India, a member of BankChain.

Stressed assets include non-performing assets (NPAs), restructured loans, assets under reconstruction and written-off assets.

Allowing banks to divide up stressed assets and sell them to other banks, asset reconstruction companies or funds, the blockchain platform comprises a smart contract-powered auction system, built-in regulatory reporting and other features. The blockchain will also offer a repository for documents related to the assets, according to the release.

Baraokar continued:

“This [project] will help banks get a more data and market-driven price discovery of stressed assets and will automate and bring a more orchestrated effort for sale of Non-Performing Assets (NPAs). By leveraging blockchain, we can then continue to develop more structured products once we have a Loan Asset Exchange system in place.”

NPAs have come into limelight recently, as an observed decline in asset quality has been touted as an economic risk for banks.

“Stressed assets have become a multi-trillion dollar challenge for the global banking sector. The gross non-performing assets of the banks in India are over Rs. 8 lakh crore [$123 billion],” Shinam Arora, CEO of Primechain, said in the statement.

Also addressing the issue, the Reserve Bank of India last month issued a reassessed framework for banks, allowing early detection and identification of stressed assets.

Graph image via Coindesk archives

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Blockchain Will Fulfill the Broken Promise of the Internet For Creatives, Says INK COO

In a presentation at BlockShow Asia, Daniel Zhai, COO of Blockchain startup INK Labs Foundation, introduced the company’s Intellectual Property Assets Exchange built on the Qtum Blockchain. The platform will help artists both protect and monetize their creative works.

According to Zhai’s presentation, current global creative industries revenue is at $2.25 tln market cap, while Bitcoin is currently under $260 bln. INK is seeking to bring Blockchain technology into the creative industry to make content production more secure and beneficial to the creators themselves.

Speaking about the current state of the creative industry in the Internet age, Zhai stated:

“[The] Internet did revolutionize the creative industry…but the pattern is broken…If you wrote a song and somebody listened to your song and…they copy it. So there are various acts of infringement happening on the Internet. So, original content creators, they can’t claim what is theirs by right.”

By providing a distribution network that maintains copyright ownership, INK’s platform will allow artists to both better protect, distribute, and be rewarded for their work. The peer-to-peer (P2P) nature of Blockchain technology lets lesser known artists be compensated for their creations by their supporters and fans, without depending on a third party, like a record or publishing company.  

The INK platform allows artists to protect and monetize their project or creative endeavor via tokenization, transforming each work of art into an asset in which the public can invest. INK’s team create the tokens and handle the technical details so that artists can continue to focus on their work.

According to the company’s presentation at BlockShow Asia, INK already raised $65 mln during their ICO in November and plans to hold their first system launch by Q1 2018.

BlockShow Asia is an international event with more than 1,500 attendees in the tech, finance, and Blockchain industries, dedicated to showcasing and supporting innovations in Blockchain technology.

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Shark Tank Investor: Bitcoin an Asset But Requires Education to Avoid Disaster

Shark Tank investor Kevin O’Leary has offered both encouragement and warning to Bitcoin investors in a recent interview on CNBC’s Make It. He offered a stiff warning for those who don’t understand Bitcoin, and an encouragement that the cryptocurrency is definitely an asset, if not a viable currency.

O’Leary was quick to point out that those wanting to invest in Bitcoin but who don’t understand it may create a ‘cocktail for disaster.’ He said:

“I’m quite sure that 99 percent of the people that own Bitcoin do not understand how it works. That always is a cocktail for disaster. You should never invest in something you don’t understand.”

Not a viable currency, but successful asset

Additionally, O’Leary made it clear that, at this stage, Bitcoin is not suitable as a currency for transactions. In his own experience, he was unable to complete a $200,000 transaction because the other party was concerned over volatility.

Nevertheless, the famous investor was not completely down on Bitcoin either. He views the cryptocurrency as one of the most successful assets in the world, based on global speculation. 

In the final analysis, he concluded, Bitcoin may go up or down, and so it’s more of a gamble than an investment. He advises investors to only put in what they can afford to lose, saying:

“I don’t know if it is going to $40,000 or zero, and nobody knows. So, I just think it is a wonderful entertainment, just like a slot machine is, or putting chips on a roulette wheel. Right now it is fun, exciting, entertaining. As long as you can afford to lose everything you put into it, go with it.”

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$1, $1,000, $1 mln; Bitcoin’s Price Doesn’t Matter, its Existence Does

There’s little doubting that Bitcoin would not be where it is today – as an entity and in terms of its price – if it wasn’t for its pattern of monumental growth. This ‘Satoshi cycle’ of interest growing with price, growing more interest, has formed Bitcoin into somewhat of a financial titan.

This well-talked about titan is still in its infancy however, despite its high value. And while people continue to flood into the market in the hopes of not missing out, one must remember what else Bitcoin offers.

Is it a currency, or an asset?

This argument of currency over asset, or store of value, has raged on for some time now with a few strong factions forming. There are those who believe that Bitcoin, like the whitepaper says, is a currency and should be liquid enough and functional enough.

Then there are those who believe that Bitcoin is dead and Bitcoin Cash is the new Bitcoin, as it functions like a currency.

There are those who are calling Bitcoin digital gold and backing it as a new asset class for investors to store and profit from.

Cameron Winklevoss, Bitcoin’s first recognised Bitcoin billionaire with his twin brother, said recently:

“We’ve always felt that Bitcoin, given its properties, is gold 2.0 — it disrupts gold. Gold is scarce, Bitcoin is actually fixed.”

Either or, asset or currency, Bitcoin offers the man in the street a lot more power than he used to have when it comes to any form of financial movement. Investing or spending, with Bitcoin people are set free.

As a store of value

Through history investing has been ellitest and exclusionary, so much so that Silver had a run in the 70s and 80s because it was unguarded by Wall Street and had properties that appealed to the man on the street.

To that end, Mark Fisher a famed trader has likened Bitcoin to that silver run as everyday individuals are making their first major investment in Bitcoin, rather than stocks, bonds, gold or other highly controlled assets. Fisher said:

“The reason people are so attracted to Bitcoin is because people want something that’s actually moved dramatically; there’s no Wall Street to it. The thing that every cab driver is talking about all day long.”

As a currency

Even though the ‘store of value’ camp may be winning the race to define Bitcoin at the moment, it still has the ability to be used as a currency and it has the properties of decentralization that again makes it highly important in this new era.

People no longer trust and appreciate banks for the way they have created the monetary system. Banks set high fees, waiting times and regulations on sending money – individuals own money – and that is starting to get on many people’s nerves.

Bitcoin may not function perfectly, having its own fees and waiting times, but it’s still a damn side better than banks when it comes to moving money. Its decentralized nature puts full control in the hands of the individual.

Be proud to be a Bitcoiner

There are those who have one eye on the stock ticker all day, ready to push the eject button when things get a little scary, but the fact of the matter is that Bitcoin is here to stay, and it should be celebrated for what it can do, not what price heights it can reach.