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Review Summary: Cryptocurrencies and the Velocity of Money

Review Summary: Cryptocurrencies and the Velocity of Money
Contributors (1)
Published
Mar 01, 2020

Review Summary
Cryptocurrencies and the Velocity of Money. [PDF]
Ingolf Gunnar Anton Pernice (Weizenbaum Institute for the Networked Society), Georg Gentzen (Weizenbaum Institute for the Networked Society), Hermann Elendner
(‡ accepted for both conference and journal)

Paper summaries from the reviewers:
“This paper analyzes different approaches to calculating velocity in a cryptocurrency, and comes to the conclusion that the most common approach, coin days destroyed, is inferior. This paper does a good job of empirically measuring and comparing using the different approaches to measuring velocity. It’s missing discussion of the main thing coin days destroyed has going for it, which is that it's much harder to make lots of fake velocity using a limited number of coins.”

“The question of velocity of money - in the context of most popular cryptocurrencies - is of a great deal of interest in the community. This paper is mostly methodological, even atheoretical and as a result largely orthogonal to most orthodox epistemic framings of economics.”

Comments on the strength of the paper:
“The paper takes Fisher’s velocity of money theory, and attempts velocity measurements using results derived from processing the bitcoin blockchain. It compares and contrasts with other measures being adopted by the cryptocurrency community just as coin days destroyed. The idea of using cryptocurrency to explore these issues is an excellent one, and providing open source software to support the paper, will considerably facilitate other work in this contentious area.”

“The paper presents measures calculated directly from the blockchain blockledger, and presents graphs of the data over time. The authors are also volunteering to make their code open source. The authors should look perhaps a little more deeply, and skeptically at the literature in Economics around the quantity theory.”

“It is extremely unfortunate that a proper repudiation of the velocity theory of money hasn’t been acknowledged by Economics to this point of time, since Velocity effectively represents a cancelling problem in the “identity” proposed by Fisher. Velocity is actually present on both sides of the equation, as it is a factor of the number of transactions performed. This problem is even evident in the examples Fisher provides in his original monograph.  For this reason, in the opinion of this reviewer, Economists either tend to avoid it or tie themselves in knots with it. That issue is also evident to some extent in this paper.”

“This is an issue that needs to be resolved, since the implications for any form of economic theories based on monetary measurements are significant.”

Critiques:
“There is clearly something important connected to the number of transactions/exchanges for a given monetary denomination that are being performed within an economy, it’s just not something that can be captured by looking simply at price levels. However because of the unprecedented transparency, the crypto-currencies present a very interesting way of exposing these issues. My suggestion would be to look at the bounds on the price level, created by coins being spent more or less quickly, rather than actual price levels. Bear in mind, much of the confusion around the issue in Economics, stems from the definition of money as physical cash, rather than bank deposits. Close attention is typically needed when reviewing the related literature as to what the actual definition of money is, that the author is basing their theories on.  Any acknowledgement at all in Economics that the banking system had been expanding the deposit money supply independently of the physical (asset) cash supply, comes nearly 20 years after Fisher published his theory.”

“The biggest problem to me is to focus on the velocity of bitcoins that people transfer over their hands often. For instance, page 5, Section B, "Hence, the measure can be interpreted as the average number of turnovers that effectively circulating money units were able to achieve in period p." Page 9, "To calculate the velocity measure based on money in circulation, we select the special case of a time window equal to period p = 1 day." I cannot find the information of "the percentage of coins that are NOT of money in circulation," which, to my knowledge, is predominant.”

“It seems that in an attempt to make it very difficult to fake as a metric coin days destroyed winds up measuring more the amount of currency in circulation than its velocity. Some analysis of how inherent gameability is to measuring what it is you actually would to measure with velocity would be very welcome.”

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