Efficient
markets maintain cross elasticity of demand and cross elasticity of
supply. In addition to these forces, reliable cryptocurrency
exchanges have established trusted cross pricing among
cryptocurrencies pairs. This cross cryptocurrency denomination
results in a money multiplying effect in the cryptocurrency market.
By
either directly pricing a particular cryptocurrency in other pairs,
or by increased liquidity readily accessible to anyone with a
computer, bitcoin, ethereum, and other cryptocurrencies are
increasing cross priced with other cryptocurrencies. This cross
pricing is causing the cryptocurrency market to become more elastic
relative to its underlying fiat demand.
For
example, a hypothetical $20,000 purchase of ether could raise the
entire cryptocurrency market by $100,000. Buying $20,000 of
ether has a price inflating effect on bitcoin as bitcoin's value is
somewhat priced in ether. By the time arbitrage is performed to
absorb the purchase of ether, bitcoin's price relative to ether may
outrun the utility of arbitrage.
Cryptocurrency
markets now experience a sort of money
multiplier effect,
not through banks inflating the money supply by supplying customers
loans, but through cross price action outrunning arbitrage.
Cryptocurrency
market value is now less tied to value derived from fiat base
money,
which in this case could be thought of as liquid fiat money actively
available for use in exchange of cryptocurrencies. Instead, a
particular cryptocurrency value is more tied to this cross pricing.
The larger this fiat base money supply, the much larger the
cryptocurrency market value becomes.
State
issues fiat has not been sufficiently divisible for such usage,
causing price stickiness thanks to its indiscrete nature, but
cryptocurrency's divisible properties allow "money creation"
merely through division and cross pricing.
Bitcoin's
decreasing liquidity, compared to a lopsided liquidity of fiat, may
have helped spur the sudden explosion of cryptocurrency value.
Bitcoin's decreasing liquidity due to unresolved technical
issues helps increase cross pricing money multiplier effect. Holders
may not have time to sell before markets reprice other assets,
which are then in turn pricing bitcoin itself. This illiquidity
may have caused a feedback loop in cryptocurrency. When
purchasing however, services like Coinbase allow relatively quick
purchases, a lopsided purchasing liquidity power of fiat relative to
illiquid bitcoin selling.
This
may also mean there could be extraordinary downward swings in value
as markets adapt to this illiquidity.
Regardless
of hypotheticals, cross pricing further removes bitcoin's value from
being tied to fiat. Cryptocurrency is becoming a more closed
system as internal cross pricing increases and external fiat pricing
decreases.
