Federal Reserve Economists Say Altcoins Growth Responsible For Bitcoin Price Meltdown

Bhushan Akolkar
By Bhushan Akolkar
Posted on Jan. 12, 2019
Federal Reserve Economists Say Altcoins Growth Responsible For Bitcoin Price Meltdown

Two economists - David Andolfatto and Andrew Spewak - at the Federal Reserve Bank of St. Louis has recently published an article explaining the meltdown in the Bitcoin price. The report explains different price points that Bitcoin can achieve while considering different potential futures like infinite appreciation, indefinite, zero and somewhere in between. 

The report doesn’t predict any extreme outcome for Bitcoin, but it says that the Bitcoin price will be somewhere in between. It also goes to conclude that the growing number of altcoins in the crypto space is one of the major reasons dragging down the Bitcoin price. 

The price of Bitcoin, as we know, is driven by supply and demand and thus it is a highly speculative and volatile asset. On the other hand, new altcoins are making inroads with their innovative technology and value proposition. Hence, investors are also moving their funds to other crypto projects causing a dip in the demand of Bitcoin. 

Countering the Belief of Bitcoin Maximalists

For long Bitcoin believers or maximalists have argued that Bitcoin will eclipse the developments by other tokens. However, if compared to the peers, the Bitcoin blockchain network hosts fewer dApps when compared to the newly introduced projects like Tron, Steemit, Dash, and others. 

To explain this, the Federal Reserve economists write: “Consider the following thought experiment. A restaurant selling meals for $10 will happily accept payment in the form of one Hamilton bill ($10) or two Lincoln bills ($5). That is, the nominal exchange rate between Hamilton and Lincoln bills is 2:1. Now, suppose that the supply of Lincoln bills is increased but the supply of Hamilton bills remains the same. The exchange rate remains unaffected […] That is, the increase in the supply of Lincoln bills has led to a decline in the purchasing power of both Lincoln bills and Hamilton bills, even though the supply of Hamilton bills has remained fixed. Might an expansion in the supply of Altcoin have a similar depressing effect on the price of Bitcoin?”

On the other hand, the Bitcoin network doesn’t host many ICO projects. Ethereum and the upcoming EOS projects are one of the most preferred platforms by ICO projects to launch their tokens. 

The exponential growth of the ICO market in 2017 fuelled the demand for Ethereum. 

Bitcoin’s Intrinsic Value and Considering It As a Store of Value

The authors argue that Bitcoin’s real utility is the transfer of money through a peer-to-peer system as well as a store of value. While commenting on Bitcoin’s intrinsic value, the authors wrote: 

“Consider now the bearish case for Bitcoin. This outlook is based on the view that Bitcoin has no fundamental value and that sooner or later the market will recognize this fact. In our view, one can accept that Bitcoin trades above its fundamental value without claiming that its fundamental value is zero. In fact, many securities trade above what might be considered their fundamental value. Gold, for example, trades above its value as measured by its industrial applications.”

Besides, the underlying blockchain technology of cryptocurrencies has got multiple applications apart from cryptographic secure payment systems. Thus people across the globe are sure to come in contact with blockchain technologies with even banking institutions planning a shift towards this evolving sector.  

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