St. Louis Fed vice president and director of research David Andolfatto is of the opinion that the existence of Bitcoin will discipline the Fed and other central banks to continue to run responsible policies. He thinks that if these bodies don’t discipline their activities, people could switch to something else.
Earlier, David Andolfatto came up with a presentation wherein he discussed about the digital currencies wherein he called Bitcoin “a stroke of genius.” He admits that the digital currency’s technology is forcing existing financial institutions to think that they have to either adapt or die. He is quite optimistic about the digital currencies and asks the Fed to welcome them.
Mr. Andolfatto gave a clean and simple presentation on Bitcoin wherein he says that it is a monetary system governed by a computer algorithm and provides low-cost banking to anyone in the world. The best part about Bitcoin according to him is that its supply is free of political manipulation.
Bitcoin is a Bubble if it is defined as a Liquidity Premium
He also addressed the accusation that have been put on Bitcoin that it is a bubble. In his presentation Mr. Andolfatto says that Bitcoin is bubble if a bubble is defined as a liquidity premium i.e. bubble = Market Price – Intrinsic Value and since intrinsic value of BTC = 0, market price consists purely of a bubble.
Clarifying his stand on Bitcoin being a bubble or just an accusation he said that it is not an issue with the digital currency as with many other assets as well like gold and UST. The most surprising point in his presentation was that Mt. Gox collapse wherein he said that the wallets were stolen; it was not a problem on the part of Bitcoin.
Demand Volatility Cannot be ignored by Bitcoin Supporters
On the point whether Bitcoin should be considered good money, Mr. Andolfatto said that good money should maintain a stable purchasing power over short periods of time. He also clarified that the price- level stability depends on both money supply and money demand.
He said that advocates of Bitcoin (and gold) want a rigid supply, but neglect demand volatility. However, they have to understand that money demand can fluctuate violently in the short run. At the same time an “elastic” supply of money is needed to stabilize purchasing power.
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