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Old 11-13-2017, 11:54 PM   #1
Nooseknot
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The role of central banking in a world of increasing crypto-currency adoption

Quote:
Originally Posted by US Congressional Research Report on Bitcoin
The Federal Reserve conducts monetary policy to affect the flow of money and credit to the economy in order to achieve stable prices, maximum employment, and financial market stability. At Bitcoin’s current scale of use, it is likely too small to significantly affect the Fed’s ability to conduct monetary policy and achieve those three goals

However, if the scale of use were to grow substantially larger, there could be reason for some concern. Conceptually, Bitcoin could have an impact on the conduct of monetary policy to the extent that it would (1) substantially affect the quantity of money or (2) influence the velocity (rate of circulation) of money through the economy by reducing the demand for dollars.

Regarding the velocity of money, if the increase in the use of Bitcoin leads to a decrease in need for holding dollars, it would increase the dollar’s velocity of circulation and tend to increase the money supply associated with any given amount of base money (currency in circulation plus bank reserves held with the Fed).

In this case, for the Fed to maintain the same degree of monetary accommodation, it would need to undertake a compensating tightening of monetary policy. At a minimum, a substantial use of Bitcoins could make the measurement of velocity more uncertain, and judging the appropriate stance of monetary policy uncertain.

https://fas.org/sgp/crs/misc/R43339.pdf
We have a general thread on bitcoin which I mean to keep my "views" out of. We have a thread that questions the legitamcy of the movement altogether. I wonder if there is interest in exploring the possibility that bitcoin becomes significantly popular enough to affect the value of fiat (ie domestic currency of each nation).

In the bitcoin community there is something called "hyperbitcoinization" which is basically a tipping point where the world snap switches to bitcoin as a world currency. http://nakamotoinstitute.org/mempool...itcoinization/

However that article came out in bitcoin's infancy where there wasn't a widely understood scaling problem. And I claim its devoid of economic theory. Nonetheless it is difficult to get devout bitcoiners to discuss the fact that central banks have a counter measure to a currency that threatens the value of the money they issue: they could reign in the some of the supply money via monetary policies.

Typically the goal is to inflation target a slight amount (ie 2%). But if bitcoin's adoption level and value was putting downward pressure on the market value of a certain fiat, can it really be argued that central banks would just print themselves out of existence?

Here we are assuming there are no problems with bitcoin and that it is to act like gold to be ultimately deflationary in regard to its purchasing power. I'm interested in anyone's thoughts in regard to this premise especially if they understand banking theory better than me.
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Old 11-14-2017, 12:53 AM   #2
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Re: The role of central banking in a world of increasing crypto-currency adoption

yeah... definitely what bfi needed, another bitcoin thread...
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Old 11-14-2017, 01:06 AM   #3
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Re: The role of central banking in a world of increasing crypto-currency adoption

This seems like an economics question, did they just get rid of that forum?
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Old 11-14-2017, 06:07 AM   #4
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Re: The role of central banking in a world of increasing crypto-currency adoption

They should replace the economics forum with a bitcoin forum. I'm guessing regular BFIers, which I am not, would be happier. Or mods can just start moving Bitcoin threads in the economics forum.
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Old 11-14-2017, 10:55 AM   #5
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Re: The role of central banking in a world of increasing crypto-currency adoption

Can we contain this crap all in like one cancerous crypto thread? Mods please?
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Old 11-14-2017, 11:49 AM   #6
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Re: The role of central banking in a world of increasing crypto-currency adoption

I'm just looking for a discussion that isn't based around the belief that bitcoin is "flawed". Every thread is crowded with naysayers that aren't very knowledgeable on the subject. So I'm hoping for a thread that starts with the premise that bitcoin "works" so there can be reasonable discussion about its future relation with our existing banking system.
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Old 11-14-2017, 11:59 AM   #7
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Re: The role of central banking in a world of increasing crypto-currency adoption

so you want a circlejerk of "HODL" and "to the moon"? there's enough of that all over the internet.
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Old 11-14-2017, 12:02 PM   #8
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Re: The role of central banking in a world of increasing crypto-currency adoption

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so you want a circlejerk of "HODL" and "to the moon"? there's enough of that all over the internet.
You won't find one other single person that believes that bitcoin will inspire central banks to print fiat of a higher quality. Every bitcoiner thinks bitcoin will hyper-inflate fiat because they have no idea how the banking system works. It's a unique topic and TBH most of the "too the moon" sentiments bug me just as much as the ignorant comments about how bitcoin is "flawed" security wise.
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Old 11-14-2017, 12:17 PM   #9
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Re: The role of central banking in a world of increasing crypto-currency adoption

You've made 22 posts per day about bitcoin since showing up here last month yet you don't realize this thread will become the same circle jerk.

It's been obvious from day 1 that you don't want a discussion given they way you treat anyone that doesn't whole heartedly agree w/ you.
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Old 11-14-2017, 12:18 PM   #10
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Re: The role of central banking in a world of increasing crypto-currency adoption

If cryptocurrency becomes widely adopted, demand for fiats will be lower, tending to decrease their value and reduce their buying power. This effect would be inflationary. So the central banks just tighten up a bit to compensate - ie raise interest rates and buy fewer government bonds (unwind the QE).

There are also countering effects of technology and demographics. Techonolgy (across many industries not just banking) is very deflationary, and demographics is also in countries that dont have growth in the workforce.

So its a tug of war but central banks have the tools to deal with inflation. they may be light on tools to deal with low inflation and low growth but this crypto argument would help in that regard
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Old 11-14-2017, 12:20 PM   #11
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Re: The role of central banking in a world of increasing crypto-currency adoption

currency with increasing purchasing power and widely adopted world currency doesn't really work together.
pick one.

Last edited by BooLoo; 11-14-2017 at 12:30 PM.
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Old 11-14-2017, 12:20 PM   #12
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I'd actually prefer a thread with the premise that bitcoin isn't "screwed" and then I can stay out of the other threads that are full of people that don't understand what they are talking about. Those threads are stuck on arguing with bitcoin can "work", and I'd like to move into a dialogue based on the premise that it will, to understand and inquire into its possible positive effects on our banking system.

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Originally Posted by BooLoo View Post
deflationary currency and widely accepted world currency doesn't really work together.
pick one.
See, I'd rather dialogue with you, then the other threads already. I agree with you WHOLEHEARTEDLY. But we HAVE had historical circumstances where gold was fairly relevant and although it didn't necessarily circulate it did have an positive effect on the quality of money that did circulate.

I think you would understand why most bitcoiners are unwilling to talk about how a deflationary currency won't circulate very well.

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Originally Posted by piepounder View Post
If cryptocurrency becomes widely adopted, demand for fiats will be lower, tending to decrease their value and reduce their buying power. This effect would be inflationary. So the central banks just tighten up a bit to compensate - ie raise interest rates and buy fewer government bonds (unwind the QE).

There are also countering effects of technology and demographics. Techonolgy (across many industries not just banking) is very deflationary, and demographics is also in countries that dont have growth in the workforce.

So its a tug of war but central banks have the tools to deal with inflation. they may be light on tools to deal with low inflation and low growth but this crypto argument would help in that regard
This is what I want to go in to. Most bitcoiners think banks will print themselves out of business but that's just ignoring what central banking is. Banks can enact monetary polices as counter measures. And I would suggest its obvious they will do so rather than to fade out of relevance.

Some argue that people will take out fiat loans en masse and this will crash our banking system, but I think a fiat loan for bitcoin is sort of a good loan perhaps (good for the customer and the loaner). It wouldn't necessarily be bad for the economy if a nation was "importing" bitcoin via loans like this and so there wouldn't be a terrible inflationary pressure on the fiat that represents that nations economy.

Is this a sound argument? I've never read of bitcoiners considering it.

Last edited by Mike Haven; 11-16-2017 at 06:28 PM. Reason: 3 posts merged
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Old 11-14-2017, 12:29 PM   #13
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Re: The role of central banking in a world of increasing crypto-currency adoption

We're well aware of the fact that you'd like everyone to take you at your word that bitcoin is flawless and will work perfectly. Unfortunately many people are unwilling to accept that premise. That's why we continue to discuss it.

Are you really unaware of the fact that your 521 zealous posts on the subject, combined with your absolute refusal to consider what anyone else here has to say on the subject, does nothing to further the topic?


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See, I'd rather dialogue with you, then the other threads already. I agree with you WHOLEHEARTEDLY.
What a shocking revelation to find out you only want to talk to people who agree with you WHOLEHEARTEDLY!
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Old 11-14-2017, 12:34 PM   #14
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Re: The role of central banking in a world of increasing crypto-currency adoption

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We're well aware of the fact that you'd like everyone to take you at your word that bitcoin is flawless and will work perfectly. Unfortunately many people are unwilling to accept that premise. That's why we continue to discuss it.

Are you really unaware of the fact that your 521 zealous posts on the subject, combined with your absolute refusal to consider what anyone else here has to say on the subject, does nothing to further the topic?

What a shocking revelation to find out you only want to talk to people who agree with you WHOLEHEARTEDLY!
It's always going to be that those that are not well educated on the subject are naysayers. It's common. This is why I'd like to start a dialogue based on the premise bitcoin "works", and it can be separate from those that want to argue about something they have done very little research on.

Did you see piepounder's post? Do you see how they are furthering the dialogue, while you are just repeating emotionally based criticism of my character rather than engaging on the subject? Anyone can create conflict that doesn't add to the discussion-you aren't doing anything useful and you have limited time on this earth. You don't belong in this thread.
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Old 11-14-2017, 12:42 PM   #15
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Re: The role of central banking in a world of increasing crypto-currency adoption

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Originally Posted by Nooseknot View Post
See, I'd rather dialogue with you, then the other threads already. I agree with you WHOLEHEARTEDLY. But we HAVE had historical circumstances where gold was fairly relevant and although it didn't necessarily circulate it did have an positive effect on the quality of money that did circulate.

I think you would understand why most bitcoiners are unwilling to talk about how a deflationary currency won't circulate very well.
there were also historical circumstances where people thought gigantic stone discs were a good store of value.

but then there were better alternatives that were safer and easier to manage.

i'm sorry, but for me the discussion about this hypothetical ends at
widespread adoption and use vs increasing purchasing power.
a currency that has both will not exist alongside today's alternatives.
i've got nothing to add or discuss going forward.

/funny side note: one might argue that rai stones, the stone discs i'm talking about, were a primitive form of blockchain.

Last edited by BooLoo; 11-14-2017 at 12:51 PM.
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Old 11-14-2017, 12:44 PM   #16
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Re: The role of central banking in a world of increasing crypto-currency adoption

I'm not sure we're in a world of "increasing crypto-currency adoption" yet. Who is actually using these as a store of value and/or as a means of economic exchange?
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Old 11-14-2017, 12:48 PM   #17
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Re: The role of central banking in a world of increasing crypto-currency adoption

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there were also historical circumstances where people thought gigantic stone discs were a good store of value.

but then there were better alternatives that were safer and easier to manage.

i'm sorry, but for me the discussion about this hypothetical ends at
widespread adoption vs increasing purchasing power.
a currency that has both will not exist alongside today's alternatives.
The history is that you can have a high value low velocity medium like gold and this functions in tandem with a lower value high velocity medium like a form of paper money. I don't believe bitcoin (especially layer 1) can be the former. But it can still be very valuable and allow for high value settlement. I don't see it as a world currency. But that it can function like a digital gold still allows for the possibility that it puts pressure on central banks to adjust their policies in relation (ie see op quoting CR report)


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I'm not sure we're in a world of "increasing crypto-currency adoption" yet. Who is actually using these as a store of value and/or as a means of economic exchange?
We certainly are not, but we can think about the effects if this did happen (also see the quote in the op).
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Old 11-14-2017, 12:52 PM   #18
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Re: The role of central banking in a world of increasing crypto-currency adoption

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Originally Posted by Nooseknot View Post
This is what I want to go in to. Most bitcoiners think banks will print themselves out of business but that's just ignoring what central banking is. Banks can enact monetary polices as counter measures. And I would suggest its obvious they will do so rather than to fade out of relevance.

Some argue that people will take out fiat loans en masse and this will crash our banking system, but I think a fiat loan for bitcoin is sort of a good loan perhaps (good for the customer and the loaner). It wouldn't necessarily be bad for the economy if a nation was "importing" bitcoin via loans like this and so there wouldn't be a terrible inflationary pressure on the fiat that represents that nations economy.
if people are taking out fiat loans on mass, it increases money supply and places more demand on goods and is therefore inflationary. the central banks react to inflation of this sort by raising interest rates, making those loans more expensive to take out, which stop people from doing it as much.

now if people in one country take out loans to buy bitcoins, and it did have a material impact, it would be countered by exchange rates and central bank raising interest rates, making that practice unattractive and causing a money flow the other way.
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Old 11-14-2017, 01:01 PM   #19
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Re: The role of central banking in a world of increasing crypto-currency adoption

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if people are taking out fiat loans on mass, it increases money supply and places more demand on goods and is therefore inflationary. the central banks react to inflation of this sort by raising interest rates, making those loans more expensive to take out, which stop people from doing it as much.

now if people in one country take out loans to buy bitcoins, and it did have a material impact, it would be countered by exchange rates and central bank raising interest rates, making that practice unattractive and causing a money flow the other way.
Cheers.

Now, you might understand this better than me. But think about it in terms of gold with the assumption that it is increasing in objective value (ie versus a basket of commodites/currencies etc.). I mean to say these loans used to purchase gold 2.0 would be quite serviceable. Good loans. So the increase in money supply would correspond with a strong economy (from an international point of view), and so I think this wouldn't be the same as expanding the money supply arbitrarily?
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Old 11-14-2017, 01:07 PM   #20
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Re: The role of central banking in a world of increasing crypto-currency adoption

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The history is that you can have a high value low velocity medium like gold and this functions in tandem with a lower value high velocity medium like a form of paper money. I don't believe bitcoin (especially layer 1) can be the former. But it can still be very valuable and allow for high value settlement. I don't see it as a world currency. But that it can function like a digital gold still allows for the possibility that it puts pressure on central banks to adjust their policies in relation (ie see op quoting CR report)
then it's just another low velocity medium with limited everyday use... like basically everything else in the world.
stocks, bonds, cars, jewellery, houses, land, rare metals, basically everything shiny, art, rare books, wine, baseball cards, sports memorabilia... i think you get the point.
nothing central banks will need to worry about.
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Old 11-14-2017, 01:09 PM   #21
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Re: The role of central banking in a world of increasing crypto-currency adoption

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Most bitcoiners think banks will print themselves out of business but that's just ignoring what central banking is. Banks can enact monetary polices as counter measures.
In the past there were central banks that thought they could keep printing to wipe their debts, stimulate the economy and just correct the inflation part later. But there isnt any current or prospective central banker in any modern economy that thinks that is a viable path. If inflation goes up they are all jacking rates to restrict money supply, even if it kills growth to avoid being stuck in a crippling spiral or stagflation.

Central banks these days know how to tackle inflation. what they are struggling with is the opposite...Japan has gone so far as effectively monetizing debt - the government will never have to pay it back to the BOJ. still no inflation.
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Old 11-14-2017, 01:13 PM   #22
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than it's just another low velocity medium with limited everyday use... like basically everything else in the world.
stocks, bonds, cars, jewellery, houses, land, rare metals, basically everything shiny, art, rare books, wine, baseball cards, sports memorabilia, printed-14yo-girl-selfies signed by taylor swift... i think you get the point.
nothing central banks will need to worry about.
You've misunderstood. Fiat is high velocity because its inflationary in relation to "gold" which is low velocity because its more stable in value. Banks don't need to worry about a higher velocity counter part if the cause is the medium's declining value.

But if there is something that people are moving to as an option for their savings because its increasing in value in relation to the money they supply then this could effect their mandate.

Keeping in mind I quoted the congressional research report that perfectly states the truth of this. It is certainly something that they would need to consider and its stated in the report.

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In the past there were central banks that thought they could keep printing to wipe their debts, stimulate the economy and just correct the inflation part later. But there isnt any current or prospective central banker in any modern economy that thinks that is a viable path. If inflation goes up they are all jacking rates to restrict money supply, even if it kills growth to avoid being stuck in a crippling spiral or stagflation.

Central banks these days know how to tackle inflation. what they are struggling with is the opposite...Japan has gone so far as effectively monetizing debt - the government will never have to pay it back to the BOJ. still no inflation.
I think you said there is no inflation and inflation isn't a problem? Venezuela I think is an example where bitcoin is more significant there. As their dollar tanks the price of bitcoin in relation goes up faster than most other countries so it kind of increases the instability in that regard. This what the report I quoted alludes too. The effects of mismanaging are increased with the option of a better savings medium, as I understand, and as I understand the report explains.

Last edited by Mike Haven; 11-16-2017 at 06:29 PM. Reason: 2 posts merged
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Old 11-14-2017, 01:18 PM   #23
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Re: The role of central banking in a world of increasing crypto-currency adoption

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You've misunderstood. Fiat is high velocity because its inflationary in relation to "gold" which is low velocity because its more stable in value. Banks don't need to worry about a higher velocity counter part if the cause is the medium's declining value.

But if there is something that people are moving to as an option for their savings because its increasing in value in relation to the money they supply then this could effect their mandate.

Keeping in mind I quoted the congressional research report that perfectly states the truth of this. It is certainly something that they would need to consider and its stated in the report.
like i already said, there will not be a high velocity means of exchange with steadily increasing purchasing power.
if crypto is replacing fiat it can't have increasing purchasing power.
if crypto is 'replacing' gold, central banks don't need to care about it (very much).

Last edited by BooLoo; 11-14-2017 at 01:29 PM.
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Old 11-14-2017, 01:31 PM   #24
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Re: The role of central banking in a world of increasing crypto-currency adoption

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like i already said, there will not be a high velocity means of exchange with steadily increasing purchasing power.
if crypto is replacing fiat it can't have increasing purchasing power.
if crypto is 'replacing' gold, central banks don't need to care about it.
If people are parting with fiat like its a hot potato and holding their saving in bitcoin en masse then this will definitely require the attention of central banks:

Quote:
Regarding the velocity of money, if the increase in the use of Bitcoin leads to a decrease in need for holding dollars, it would increase the dollar’s velocity of circulation and tend to increase the money supply associated with any given amount of base money (currency in circulation plus bank reserves held with the Fed).

In this case, for the Fed to maintain the same degree of monetary accommodation, it would need to undertake a compensating tightening of monetary policy. At a minimum, a substantial use of Bitcoins could make the measurement of velocity more uncertain, and judging the appropriate stance of monetary policy uncertain.
Your axioms to don't make this irrelevant.
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Old 11-14-2017, 01:33 PM   #25
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Re: The role of central banking in a world of increasing crypto-currency adoption

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I think you said there is no inflation and inflation isn't a problem? Venezuela I think is an example where bitcoin is more significant there. As their dollar tanks the price of bitcoin in relation goes up faster than most other countries so it kind of increases the instability in that regard. This what the report I quoted alludes too. The effects of mismanaging are increased with the option of a better savings medium, as I understand, and as I understand the report explains.
I'm talking about modern democracies when I say inflation isnt a problem.

Venezuala is a mess for a lot of reasons beyond the central banks control. If noone wants to invest in the country exchange rate will plummet with the capital leaving the country and until that stabilizes there will be huge inflation. Companies that do business there are at risk of assets being seized.

I didnt read that full reports but yes the net effect is there is instability and because of that capital will leave the country. where it goes to usd or crypto or gold, im not sure it matters - perhaps crypto makes it easier. Its capital thats leaving driving down the buying power of their currency which raises the price of imports therefore high inflation. With r without crypto the capital will flee an environment like that, but with more options it will flee faster.
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