Cryptocurrency Demand Shift

We’ve all heard about a shift in demand.  Not all of us see it in action.  With a dynamic market, we can.  The one for cryptocurrencies fits the bill.

Last August, the top 100 cryptocurrencies had quantities and prices indicated by the white circles in the figure.  Those with a red dot in the center of them formed their red Demand Frontier as of August 1, 2019 (with a P-Value, the chance this equation came about by chance, of 1.28E-04).

Then things changed.

On Friday, March 20, 2020, 94 cryptocurrencies (we lost some), with blue squares for their quantities and prices, reflecting a downward and inward shift in demand.  Each of the Demand Frontier points shifted down (the corralled ordered pairs), except for Tether (which grew slightly) and Ripple (which went down and in).  The result was a shift in the cryptocurrency Demand Frontier to the one in blue, which is steeper (the slope was -1.47, is -1.57) and more highly correlated (R2 was 92.6%, is 96.8%, with P-Value falling to 9.92E-06).  Though the log scaling tends to disguise it, the market lost over 40% of its market capitalization.

What holds up currency prices?  We’ll look at that next time.

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The Demand For Money: Crypto vs. Fiat Currencies

Earlier, we examined Demand for fiat currencies and found they had an Upper and Outer Demand Frontier.  Those types of monies have existed for millennia.  A new form of exchange began to take off over a decade ago.

Cryptocurrencies began to become popular with the advent of Bitcoin.  How does the Demand for cryptocurrencies behave relative to the one for fiat currencies?  As it happens, when it comes to Demand, both payment forms have something important in common.

Below, using a fiat currency study from July and one on crypto 20 days later, note the slopes of their Demand Frontiers are nearly identical.  At left in yellow, the crypto Demand Frontier slope is -1.47 (P-Value 1.28E-04), while that for fiat currencies is -1.42 (P-Value 7.88E-05).  At that time, at the Demand Frontier, cryptocurrencies had reached about 1/1000th of the fiat currency extent. Observe with the steep cryptocurrency Demand Frontier, at its limit, there is more money at the upper end of this curve.  Bitcoin’s market capitalization was nearly twice that of the rest of its market combined.

We need to see how each currency form reacts to the coronavirus. Look for my next post on that.

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