Cryptocurrencies and the Velocity of Money

Cryptoeconomic Systems Conference 2020

19 Pages Posted: 13 Feb 2020 Last revised: 7 Apr 2020

See all articles by Ingolf Gunnar Anton Pernice

Ingolf Gunnar Anton Pernice

Weizenbaum Institute for the Networked Society

Georg Gentzen

Weizenbaum Institute for the Networked Society

Hermann Elendner

Austrian Blockchain Center (ABC Research); UCL Centre for Blockchain Technologies

Date Written: November 20, 2019

Abstract

Velocity of money is central to the quantity theory of money, which relates it to the general price level. While the theory motivated countless empirical studies to include velocity as price determinant, few find a significant relationship in the short or medium run. Since the velocity of money is generally unobservable, these studies were limited to use proxy variables, leaving it unclear whether the lacking relationship refutes the theory or the proxies. Cryptocurrencies on public blockchains, however, visibly record all transactions, and thus allow to measure - rather than approximate - velocity. This paper evaluates most suggested proxies for velocity and also proposes a novel measurement approach. We introduce velocity measures for UTXO-based cryptocurrencies focused on the subset of the money supply effectively in use for the processing of transactions. Our approach thus explicitly addresses the hybrid use of cryptocurrencies as media of exchange and as stores of value, a major distinction in recently proposed theoretical pricing models. We show that each of the velocity estimators is approximated best by the simple ratio of on-chain transaction volume to total coin supply. Moreover, “coin days destroyed”, if used as an approximation for velocity, shows considerable discrepancy from the other approaches.

Keywords: velocity of money, cryptocurrencies, price models

Suggested Citation

Pernice, Ingolf Gunnar Anton and Gentzen, Georg and Elendner, Hermann, Cryptocurrencies and the Velocity of Money (November 20, 2019). Cryptoeconomic Systems Conference 2020 , Available at SSRN: https://ssrn.com/abstract=3499500 or http://dx.doi.org/10.2139/ssrn.3499500

Ingolf Gunnar Anton Pernice (Contact Author)

Weizenbaum Institute for the Networked Society ( email )

Berlin
Germany

Georg Gentzen

Weizenbaum Institute for the Networked Society ( email )

Berlin
Germany

Hermann Elendner

Austrian Blockchain Center (ABC Research) ( email )

Favoritenstraße 111
Vienna, Vienna 1100
Austria

UCL Centre for Blockchain Technologies ( email )

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