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.

#currency #demandforecasting #cryptocurrencies #currencytrading

Measuring Demand

Two useful measures of Demand are the Demand Frontier and Aggregate Market Demand.

The Demand Frontier describes a market’s outer boundary.  For the S&P 500, the dark green dots show the outermost quantities (stock volumes) and prices (split-adjusted stock prices).  The Demand Frontier is the green line of best fit through them.  It shows the market’s price limits and its reaction to price changes.

Another way to portray buyers’ price sensitivity is with Aggregate Market Demand.  Here, an algorithm splits the stocks into price bins, distributed 1) equally concerning price, or unequally distributed to price following 2) a Fibonacci or 3) Geometric series for the number of observations per bin.  In this case, a 6 bin split (divided by red lines) provides 5 red points (bin 5 is empty).  Each red point is the total stock quantity in each bin and the average weighted price of those stocks.  The red line through them is Aggregate Market Demand.

Demand Frontier and Aggregate Market Demand slopes converge with many observations.  Here, the slope of the Demand Frontier is -0.244; the Aggregate Market Demand is -0.236. Good agreement between the slopes provides good evidence about market workings.

How does Value relate to Demand?  Read the next post.

#demandforecasting

Value, Demand, and 4D States

Last time we tackled Value as sustainable Prices based on product Features, shown in Value Space.  There, 2 Valued Features, horizontal dimensions 1 & 2, drive Value, which determines Price, vertical dimension 3.

We earlier depicted Demand with a horizontal Quantity dimension 4 and the same Price dimension 3.

Last week we showed how the Antarctic claims of Argentina and Australia meet at the South Pole, their air spaces abutting the Earth’s axis.  If we call the South Pole “0,” every point away from it is positive.

As Value Spaces and Demand Planes share a common Price Axis, they abut one another as do the Argentinian and Australian claims.

It follows Value and Demand form 4D systems, such as that for electric cars below.  Every point in Value Space has a matching one on the Demand Plane.  Look at the green lines running to the isolated point in Value Space, connecting to its opposing Demand Plane point.

The diagram shows the Law of Value and Demand:

  1. Product Features determine Value
  2. Value determines Price
  3. Price determines Quantity sold
  4. Quantity sold is a feature

Value and Demand form linked, dual states.

How do we handle more valued features?  Please see the next post for the answer.

#prices#demand#4Dsystems#marketanalysis

The Demand For Money

Well, that’s an odd title, I’ll grant you that.

Really, what we’re addressing here is the demand for fiat currency.

Recall in previous posts we found Demand Frontiers for multiple markets. Sometimes these curves have breaks. Such is the case for fiat currencies. As shown in the diagram, this market has an Upper Demand Frontier and an Outer Demand Frontier.

Upper Demand Frontiers emphasize the price-limiting boundary for a market, while Outer Demand Frontiers focus on the quantity-limiting ability of a market to absorb the product. These boundaries help countries’ central banks to figure out how many currency units to issue.

What maintains the price of any currency? Please look at the next post for the first of two answers.

#demand #prices #currency #demandforecasting

A Change Of Perspective

Modern economics gets inspiration from thermodynamics, constantly looking for the equilibriums such systems demonstrate.

Multidimensional Economics has a different point of origin.

Consider the maps below and the three questions that follow.

Which two countries are these?

Where do they touch?

Why does it matter?

Look to the next post for the answers.

#demandforecasting #prices

Why Find Demand Frontiers?

In the last few posts, we’ve been examining Demand Frontiers. You might ask, “What is the point of doing that?”

Well, let’s look.

Recall in the last post, we found the Demand Frontier moved little in 20 years.  In 2016, the Demand Frontier had an equation describing the line running from the upper left to the lower right in the diagram below.  Because the programs forming this line clustered closely about it, the standard deviation of the line is relatively low: $25.5 million.

The United States Air Force proposes to build 100 B-21 bombers at a “projected average procurement unit cost of $550 million per plane in FY2010 (https://lnkd.in/g4Rkx2R or $610M per plane in 2016 dollars.  What are their chances of making that number of planes at that price, given the standard deviation of the Demand Frontier?

As shown below, the B-21 Target is nine standard deviations over the predicted limiting price ($380M) for the B-21.  Examined by another metric, the historical maximum percentage deviation over the Demand Frontier was 17.8%.  The B-21 program proposes to exceed it by 60.5%.

What was the procurement history of other programs that tried to exceed the Demand Frontier? We will find out next time.

#demand #demandforecasting

Demand Frontiers Change – But Some Not By Much

Markets change.  Demand Frontiers depict the limits of markets to absorb products based on their prices to the quantities purchased.  While some markets change rapidly (cell phones, flatscreen televisions, computers, etc.), others, especially at their limits, are slow to respond.

The market for fighters and bombers is such a market.

At its Demand Frontier, this market has changed little in 20 years.  The constant over that period changed less than 2.5%, and the slope less than 1.0%.  (Note: The F-35A, shown in a previous post, once corrected for its revised 2016 values, fell off of the Frontier).

If a market’s Demand Frontier is stable over decades, what are the chances of vastly exceeding it?  Tune in to the next post for the answer.

#demand #demandforecasting #prices

Demand Frontiers

The circles in the last post represent the outermost quantity-price points for the bomber market. We call the line of best fit through them the Demand Frontier.

Demand Frontiers form for all mature markets.  They move as the products that form them change their quantities sold or prices.

What does this Demand Frontier reveal about the upcoming B-21 Bomber? (Answer in next post)

#demand #demandforecasting #demandfrontier

Demand Is Not Hypothetical

Virtually all economics textbooks treat Demand hypothetically.  They strike a line to show how prices would theoretically fall as quantities increase.

In the real world, market Demand manifests itself as a series of points, with quantities (here, of bomber models) on the horizontal axis, and prices (as bomber prices) on the vertical axis, as shown below.  Note the limiting values for this market, shown in open circles.  Collectively, what do these circles represent? (Answer in next post)

#demand #demandplanning #demandforecasting