The Demand for Money (and Crypto)
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Why do central banks raise interest rates? To increase the demand for money.
By their definition, the demand for money is how much of it we insist on not spending.
When times are hard, the demand for money goes up: If you think you might lose your job, or that your taxes might go up, or that the landlord might raise your rent — you’ll want to keep more money on hand.
That is the demand for money that central banks manipulate with their interest rates and their quant easing and tightening, and it’s what makes one fiat currency go up relative to other fiat currencies — as evidenced by the current world-beating outperformance of the US dollar.?
It’s also a good part of what makes cryptocurrencies go up and down.
Driving Demand?
When demand for dollars is high, demand for bitcoin is low — simple enough: The primary motivation for thinking bitcoin will be good is because you think the dollar will be bad.
It’s a little less binary for ETH, where the demand drivers are more varied.
Post Merge, I see four primary reasons to hold ETH: DeFi, NFTs, staking and transaction fees.?
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Demand for ETH will therefore be a function of how much people intend to post collateral in DeFi, purchase NFTs, stake for yield, or pay transaction fees — the more of any of those things you plan on doing in the near future, the more ETH you’ll want to hold now.
With the exception of staking, people are not doing much of any of those things just at the moment.?
DeFi collateral is stagnating, NFT volumes have collapsed, and transaction fees are low.
As for staking, the jury is out on how much of a demand sink it will turn out to be: Liquid staking derivatives like stETH and cbETH allow you to trade out of staked ETH at any time — so it’s not clear to me that staking yields will stop people from selling ETH any more than dividend yields stop people from selling stocks.
Staking may even have the opposite effect, as ETH issuance increases along with the percentage of ETH staked (not linearly, tho).
More issuance means lower demand and therefore lower prices for ETH — just like the UK’s announcement of more gilt issuance meant lower demand and therefore lower prices for GBP.
And as the prospect of lower tax bills means UK residents have less need to hold pounds, low GWEI fees mean Ethereum users have less need to hold ETH.
That could change, of course: The pipeline of new applications coming to Ethereum is full to bursting, which should mean more fees, more activity, and more reasons to hold ETH.?
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Much of that activity may happen on L2s, however. And smart contracts from big users like OpenSea are getting more efficient (reducing the need to hold ETH).?
But L2 security is TBD, so expect ETH block space to demand a premium (more demand to hold).
How these demand drivers all play out should, I think, determine the price of ETH.?
It will take a while to materialize, however, and macro is likely to muddy the picture for a long while still.?
In the meantime, all you can do is monitor the demand for money — and keep over-tipping.
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Procurement account manager
2 年If indeed dollar is going bust, then only real assets/commodity with bitcoin makes sense. Bitcoin maxi would keep the mining going, while ETH/Defi/NFT would self implode when the centralized nodes are at the mercy of AWS.
Executive Search for high growth Fintech ventures | Host of Fintech Chatter Podcast
2 年A simple yet completely accurate summation of where we stand. The only mass adoption use case of ETH is speculation. Until that changes then it’s going to be a slow burn.
Realtor Associate @ Next Trend Realty LLC | HAR REALTOR, IRS Tax Preparer
2 年Well said