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Currently we have a choice between two types of monetary assets: currencies whose supply increases without limit (public currencies) and currencies whose supply is exogenous (e.g. Bitcoin, also gold). Investors do not want to hold both types of currencies: the former are losing their value, the latter have an abnormally high price volatility. What would be needed is an intermediate currency between public currencies and Bitcoin, according to economists at Natixis.

Key quotes

“The money supply corresponding to public currencies (dollar, euro, yen, pound sterling, Swiss franc, etc.) has increased considerably. This considerable increase in the supply of central bank money may lead to a decline in the value of money (the same amount of money has a lower capacity to purchase goods or assets; it is well known that in contemporary economies it is mainly asset prices that are rising, i.e. it is the value of money in its capacity to purchase assets that is falling) and a loss of confidence in money as economic agents anticipate the loss in value of money, they try to get rid of the money they hold.”

“The number of Bitcoins supplied is exogenous, predetermined and increases less and less. This raises a serious problem: since the supply of Bitcoin is exogenous, any shock to the demand for Bitcoin results in a drastic fluctuation in its price. This explains the recent very strong rise in the price of Bitcoin, but this rise could be much stronger, as it would be sufficient for a small fraction of the world’s money supply to be invested in Bitcoin. So the result is massive volatility in the price (exchange rate) of all currencies – such as Bitcoin – whose supply is exogenous. If the price surges, a panic movement may be triggered, and then the price will fall drastically. This price volatility will in the long run eliminate demand for monetary assets whose supply is exogenous. ” 

“Investors do not want to hold both types of currencies: the former are losing their value, the latter have an abnormally high price volatility. An intermediate currency, whose supply is managed, would be needed: the money supply would not increase excessively, and would respond to demand shocks to stabilise prices (i.e., interest rates and exchange rates). This is what central banks used to do in the past, not what they are doing nowadays.”