...by Daniel Szego
"Simplicity is the ultimate sophistication."
Leonardo da Vinci

Saturday, October 28, 2017

Notes on purchasing power of a cryptocurrency

As cryptocurrencies are getting into the mainstream, we might as well start to think over if there is a meaningfully definition of purchasing power of a cryptocurrency.

"Purchasing power is the number and quality or value of goods and services that can be purchased with a unit of currency." - Wikipedia.

However, we need some differentiation here. For the first run, the question is what goods and services can you buy directly with the given cryptocurrency. Certainly there is always the possibility to exchange the given crypto into some other crypto or some fiat currency, however it is pretty much the question if we want to consider purchasing power this indirect way as well. On the other hand general price volatility is somehow feel to be somehow pretty high.

Considering these facts, I think we should distinguish two different measures: 

1. Cryptocurrency coverage: A measure that show what, how many goods or services, can you buy for a given cryptocurrency. It is certainly not so easy to formulate it exactly, however we can argue that Bitcoin has certainly a bigger coverage than Litecoin, which has surely a bigger price coverage than the other noname cryptos. 

2. Cryptocurrency purchasing power: it should look similar to the classical purchasing power, like we might as well interpret as the purchasing power of the crypto after changing it to US dollar for example. Certainly the US dollar choice is pretty arbitrary, the reason for that is that most services and goods that are sold by crypto at the moment are usually denominated in US dollar. However on a long run, perhaps better measures can be found as well.