I recently took an interest in cryptocurrencies. Mostly, I'm interested Ethereum and Smart Contracts, but all the news about Bitcoin's rising price has prompted me to study currencies and economics in general.

The next generations are embracing this technology and it's only accelerating.

Should people that have spent a lifetime saving USD be concerned about the impact alternative currencies will have on the future value of their savings?


Let's compare the total size of circulating BTC to US dollars. According to coinmarketcap.com, the total value of all Bitcoin is 250 billion as measured in US dollars. Throw in Ethereum, Bitcoin Cash, IOTA, Ripple, Monero, Dash, Bitcoin Gold and Litecoin, and you're at 350 billion US dollars. (Bitcoin makes up the sizable majority of all cryptocurrency.)

Now compare to the total amount of US dollars. This one is a little harder to measure because what counts? When you keep a BTC in your wallet, that's just exactly one BTC. But if you keep $10,000 in a bank account, the bank usually loans some percentage of your money out to other people. Economists use varying "money supply" measures. In order of most to least conservative, there's M0 (just circulating paper money and coins), M1 (M0 plus demand deposits), M2 (M1 plus savings deposit and money market funds), M3 (M2 plus large corporate cash balances basically). Then you have near money-like instruments like foreign exchange reserves, treasury bills, short-term corporate paper, foreign currencies closely pegged to the dollar (like the Chinese Remnibi).

Let's just use M2 to get a reasonable lower bound. Currently that value is 13 trillion. So we can say that cryptocurrencies currently represent less than 3% of the total value of circulating US dollar and dollar like instruments.

To devalue the purchasing power of the dollar by 10%, at least 10% of the savings in M2 would have to shift to cryptocurrencies. (And most likely much more than just M2). That would represent an aggregate flow of 1.3 trillion. That would be a gain of 371% from current cryptocurrency capitalization. I.e. Bitcoin at $61,000.

And that's even assuming all the hypothetical new money flow comes from dollar savers only (and no European, Asian or Middle Eastern investors). Not to mention that not all Bitcoin investment is coming from money savers, a lot is coming from demand for speculative assets. In many ways the marginal Bitcoin investor is probably substituting for stocks and commodities. Not CDs and money market funds. More than anything, I'd say its gold and silver prices that probably are impacted the most by Bitcoin mania.

Another way of thinking about Bitcoin is figuring out which fiat currencies it actually sizes up to. Using the above methodologies, taking M2 money supply, all cryptocurrencies put together are still smaller than the Turkish Lira. (Which is about 400 billion USD).

TL;DR Cryptocurrencies at their current size are a pittance compared to major fiat currencies. To meaningfully affect the value of currencies like USD, EUR of JPY, Bitcoin will have to rise in value substantially compared to its current market capitalization. That doesn't mean it won't happen eventually, but current USD savers probably shouldn't be sweating unless the BTC bull market keeps running for a long time.

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    Well 371% gain could easily be seen in cryptos, Bitcoin alone made over 1000% this year... – Kozuch Dec 10 '17 at 17:00
  • So, you're saying that within a month or two we could see cryptocurrencies overtake the USD. (Joking, a little, about the insane rise in valuations lately.) – Michael Prescott Dec 12 '17 at 1:32
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    @Kozuch - Possible, but remember every time Bitcoin gets larger it takes exponentially more money to keep moving the price up the same percentage. At the limit Bitcoin can't keep moving up 100% a year forever. – user79126 Dec 12 '17 at 12:21
  • What exactly do you mean by "takes exp. more money"? Like exp. growths one after another? – Kozuch Dec 12 '17 at 12:28
  • Yeah. For Bitcoin to grow 1000% from $30 billion market cap to $300 billion market cap takes $270 billion influx of new investors. To grow another 1000% would take a $2.7 trillion influx. Since there's only a finite amount of money in the world, no asset can keep growing significantly faster than the general economy forever. – user79126 Dec 13 '17 at 23:28

Considering that the US dollar has lost 90% of its purchasing power over the last 100 years you should be worried regardless of cryptocurrencies.

  • I'd be more worried, except that Bitcoin has shown it can gain or lose that much in a matter of days. Given a choice between a predictable 3% annual inflation and a 10% day-to-day volatility, I know which I'd pick. – Mark Dec 13 '17 at 1:35

Move some of your savings into Bitcoin or etherium simply as insurance against hyperinflation. BTC is not the threat to fiat currencies; Bitcoin is the lifeboat away from fiat currencies when they ultimately implode.

The more an imploding dollar worries you, the more to move into non-fiat assets like Bitcoin. The Fed has not stopped the printing presses. If that does not worry you, stay in USD, but keep a small amount of BTC or etherium just in case!

  • If you treat Bitcoin as a currency, it underwent a period of hyperinflation in early 2014 that would have ranked as one of the worst in history, and is currently undergoing a period of hyperdeflation that is unprecedented in economic history. – Mark Dec 13 '17 at 1:46

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