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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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Report: Venezuela Converts Pension Bonuses into State-Issued Crypto Petro

Venezuela has reportedly automatically converted pensioners’ most recent monthly bonus into its national oil-backed cryptocurrency, the Petro.

Venezuela has automatically converted pensioners’ most recent monthly bonus into its national oil-backed cryptocurrency, the Petro (PTR), according to a report from English-language politics blog Caracas Chronicles Dec. 12.

First launched as a pre-sale in February, the controversial Petro has been in circulation as one of Venezuela’s two official currencies as of August 20: the second being a rebranded fiat currency, the Bolívar Soberano (Sovereign Bolivar, or Bs.S.), which is indexed to the Petro.

According to Caracas Chronicles, pensioners’ recent government payouts Dec. 7 arrived initially in Bs.S. to pensioners’ web fiat wallets, but were automatically withdrawn and converted into Petro, with the new balance reportedly accompanied by a laconic description, “savings in petro.” The blog reproduces the alleged messages sent to pensioners as follows:

“MOTHERLAND WALLET: CREDIT for an amount of Bs.S. 1,800.00 for the concept of Elderly Love Pensions (Third month Christmas bonus 2018) on 12/07/2018.

MOTHERLAND WALLET: DEBIT for an amount of Bs.S. 1,800.00 for the concept of Savings in Petro on 12/07/2018”

As of January 2017, pensioners in Venezuela have received their bonus payouts via the government’s “motherland card” (carnet de la patria) scheme, which has been linked to a mobile wallet (Billetera Móvil) as of January 2018, accessed through the government web portal patria.org.ve.

When payments were made in Bs.S. without subsequent PTR conversion, pensioners would reportedly receive a notification of credited funds, transfer their credit to a bank account, and then –– in Caracas Chronicles’ description –– queue “all day” at a branch to withdraw their funds.

The blog alleges that dependency on the carnet de la patria system to access much-needed pension bonuses and other social benefits has enabled the government to pressure citizens to “ditch their official banking system,” and that adding payment functionality –– as well as integrating the Petro and Patria wallets, without needing recourse to a bank –– would complete the government’s desired short-circuit.

Chronicles Caracas claims both the Patria and Petro initiatives are a bid to secure “full control over citizens’ finances,” and impel them to save Petros as “protection” from the hyperinflation the government itself “provokes.”

The official sale of Petro in Venezuela started this November, with several top officials — including Maduro — purchasing it via the official website. As of press time, the currency is not yet available on any of the top-100 crypto exchanges on CoinMarketCap.

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Managing Savings In Zero Interest or Inflationary Economy

The most recent potential nominee to the Federal ReserveMarvin Goodfriend, is in favor of negative interest rates. In simple terms, if a retiree kept cash in a savings account, that money would slowly dwindle as negative interest rates ate into the principle.

This type of scenario is not as far fetched as it may seem. Such a policy is possible among major government powers because central banks allow for arbitrary interest rate manipulation.

What’s more, with central bank interest rates at zero or just above zero, the risk of inflation has risen to an all time high. Such inflation would further erode savings and devalue most major fiat currencies in the world.

Additionally, transactions with fiat currencies are riddled with high fees, middlemen, long wait times and slow processing. The problem is real.

Currency solutions

While the current cryptocurrency market provides some solutions, such as increased liquidity and the potential for inflation control and fee reduction, consumers are not wholly convinced. For a solution to truly be viable, it must incorporate fiat currency as well.

The X8currency platform has created a currency solution that will truly solve all of these issues in a single system. After 10 years of platform development, the X8 team has released the X8C ERC-20 token.

The scientific basis for the token is founded on the concept of diversification, making it possible for contributors to the X8currency to diversify their investment into a wide array of fiat currency (USD, JPY, GBP, EUR, CAD, AUD, CHF, NZD) and monetary gold holdings. When an investor initiates a purchase, those funds are included as part of the large reserves held by the X8currency platform.

By diversifying into a number of currencies and gold, X8currency creates an automatic hedge against fluctuations in any single currency or precious metal.

This diversification process is optimized by the Automatic Reserve Management AI technology – a proprietary artificial intelligence system – which chooses the best possible array of fiat and gold in order to provide liquidity and stability for investor funds.

Internal functionality

To protect users from risky legal concerns regarding securities laws, the X8currency team has created a dual token structure. The X8C token is linked directly to the reserves deposits within the platform. This makes it the central token within the marketplace, as it is created any time an investor moves funds into the X8currency platform.

The parallel token, X8X, is a utility token, designed as a gatekeeper token that requires users to pass through customary KYC (know your customer) verification before accessing the X8C tokens. Investors must hold X8X tokens in order to be eligible to purchase X8C tokens.

The system is designed to bridge between the crypto and fiat worlds, and is engineered to Swiss financial standards. For more information, check out the X8currency blog, or read their carefully crafted whitepaper.

By building a unique link between the crypto and fiat worlds, and providing controlled hedge diversification structure, X8currency has created a method for protecting the cash assets of more than 3.5 bln people within the scope of the world’s top eight currencies. The impacts of inflation, interest rate manipulation and arbitrary central bank control can be mitigated or eliminated through the X8currency platform.

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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Adoption of Bitcoin Picking Up Speed in Venezuela, Called “Lifesaving” Currency

Bitcoin is now becoming a constant part of many Venezuelans’ everyday life.

Whether they’re buying food, plane tickets, or even paying employees, Bitcoin is now a common mode of payment for Venezuelans. Frankly, many people in the country rely on cryptocurrencies for survival.

Survival of fittest

Venezuela’s hyperinflation has rendered the national currency, the Bolivar, nearly worthless. Thousands of ordinary people have begun turning to the world of cryptocurrency to salvage what little value remains in their savings..

One Venezuelan, John Villar, knows the struggle of having a his national currency become worthless, so he sticks with Bitcoin for all of his transactions. He said that his situation, choosing digital currency is not a matter of politics but of survival. Bitcoin transactions are relatively swift for anyone with a smartphone: Websites like LocalBitcoin and Colibit function as exchanges where Venezuelans can buy and sell bitcoins using a local bank account.

Government’s move

Cryptocurrencies have become so fashionable that even President Nicolas Maduro has proposed a government-backed version called the Petro. Members of his administration have met with Venezuelan Bitcoin entrepreneurs to determine how such a currency might work. Though few details have been released, many in the Bitcoin world have responded skeptically to the idea. It seems unlikely that Venezuelans will trust a digital currency issued by a government they have little faith in.

In Venezuela, the so-called “crisis currency” is allowing desperate Venezuelans to make potentially life-saving purchases.

Villar had been unable to find several of the medications needed to treat his wife’s multiple sclerosis in Venezuela for the last two years, a story not uncommon in a country whose public health system has been crippled by shortages. Instead, he purchased them abroad with Bitcoin and used courier services to deliver them to Venezuela.

Authorities have largely permitted trading of Bitcoin in Venezuela, though they have heavily fined and detained people who attempt to mine the digital currency. For Villar, the stakes are especially high, and not just for his business. An engineer who once ran a biometrics enterprise, he is staking his financial future on the development of a game involving an alternative cryptocurrency called PepeCash.

A dozen employees operate from a small office filled with computers in an industrial community east of the capital. All receive part of their salary in Bitcoin. His wife, also an engineer, is now largely bound to a wheelchair.

“At this moment, I don’t have a single bolivar.”

Ambassadors from other digital currency projects, such as Dash, have been trying to familiarize Venezuelans with an array of cryptocurrencies. Earlier this fall, Dash sponsored 12 free conferences in the country in order to raise awareness.

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Bitcoin Price Doubles in Troubled Zimbabwe

A surprise political move by Zimbabwean president Robert Mugabe, who fired his deputy Emmerson Mnangagwa, has played havoc on the US dollar/bond note parallel exchange rate, as well as on Bitcoin price in the country.

Bitcoin was already trading at a highly inflated rate in the troubled African country as its demand skyrocketed as a potential alternative to the dregs of a currency that Zimbabwe has left. However, that inflation has hit almost 100 percent as it trades about $13,000 per coin.

Trading on uncertainty

Unsurprisingly, with this latest political coup by the entrenched president, there is much speculation and worry about the already fragile and almost non-existent fiat currency system. Zimbabwe operates on bond notes linked to the US dollar.

Traders have been trying to move out of monetary assets as even on the dollar there is a 62 percent premium. It has meant that investors are trapped by the currency shortages, seeking an alternative to exit the country – such as Bitcoin.

Despite hitting a price of over $13,000 traders say that Bitcoin is booming as it is the strongest alternative.

Collapse of banking

Zimbabwe is beginning to act like an interesting case study for what happens when a country begins to collapse around its monetary system – it is also being witnessed in Venezuela.

Moving money out of Zimbabwe is starting to become impossible, and as people try and flee monetarily out of the crumbling state, they are finding refuge in Bitcoin.

Soon, banks in Zimbabwe have stated that Visa debit cards would no longer be usable for international payments without prior arrangements and pre-funding with hard currency.

“You will be required to make prior limit arrangements with the bank,” Stanbic said in a message to depositors last week. Econet Wireless has also stopped foreign payments on its MasterCard linked EcoCash mobile money debit card.

Bitcoin as a refuge

Because of the decentralized nature of Bitcoin, there is no impact on it from this political upheaval, in fact, it is only benefiting from it. The Bitcoin premium of almost 100 percent is not because of the political issues, rather the high demand surrounding worry of collapse.

Bitcoin again shows its potential and power when the banking system again shows its potential for mass collapse and hysteria.