A simple example to explore the impact of cryptocurrencies on our economy
HeyOne thing I've debated back and forth over the past few years is the monetary and economic impact of cryptocurrencies. Because it's really like Money out of nothing. Today, the total market cap of the cryptocurrency market is more than $1.6 trillion. 15 years ago, the market cap was $0. So, over the last decade or so, we've basically added to the entire economy of Australia in terms of wealth via the cryptocurrency boom. So what are the economic consequences?
Simplify through thinking exercise
Let's try to make thinking easier with a thinking exercise. Suppose we live in a small town whose economy consists mainly of only two things: dollars and bread. People work to earn dollars and use those dollars to buy bread. Every day, 100 town residents buy two loaves of bread from the town baker for $10 each. So the transaction portion of the city's economy amounts to 100*10*2 = $2000 per day. Since there is only one baker, the baker is quite the rich man compared to his peers. On the other hand, the townspeople have a very modest income – $20 a day, which they spend all on bread (they also have the option of eating less and saving but most of them don't).
Crystals were discovered in the river bed next to the city. These crystals are stunningly beautiful and very difficult to extract, and some people in the city start collecting them as a hobby. No one thinks much of it until one day a few years later, the baker (who was too busy baking to collect any crystals), in need of an anniversary gift, pays his neighbor $1,000 for ten of his crystals. When news spreads about the purchase, the twenty townspeople who collected the vast majority of the crystals get really excited (the riverbed was already largely empty). They each have 100 crystals – so when they do the math, they think each of them is now worth $10,000 (since the baker paid $100 per crystal).
The rush in crystal trading begins. Some people who do not have crystals reduce their consumption of bread in order to save money to buy some from their peers – they put their savings in the bank until it is time to buy. Others borrow from the local bank (which has money to lend thanks to the rich baker as well…
