Does Bitcoins Comply With Liquidity Preference Theory?

Answering the question, “Does Bitcoins comply with liquidity preference theory?” does not require any complicated analysis. The issue here is the liquidity preference theory.

Those who believe that the market price of bitcoins is constantly and eventually always stable, thus justifies the market speculation and the speculation on the future price of bitcoins. Those who prefer a debatable definition of bitcoins in the general market like “the digital unit of a virtual currency” are more likely to promote a speculative view of the Bitcoin’s price. A majority of these people are also looking to learn more about Bitcoins and whether they really comply with liquidity preference theory.

The liquidity preference theory is that currency is easily convertible into goods and services which are not true for Bitcoins. The idea is that the value of the currency is determined by supply and demand for the currency. In this case, the supply of the currency is determined by the number of units being created. Thus, the fewer the number of units the greater the value of the currency.

In this context, a large number of currencies have been replaced one by another, each depreciating in terms of its predecessors. The peg between one currency and another is that it acts as a filter for determining the price of the currency and thus tries to control the price of the currency.

Bitcoin is different from traditional currencies in that it has no peg to any other currencies. Because of this, there is no such thing as a price control or bubble. The price of Bitcoins is completely arbitrary.

While there is no volatility in the price of Bitcoins, it will be difficult to predict the value of Bitcoins and thus will make it difficult to determine how much will be required to purchase something. Because of this, the valueof Bitcoins may be affected by what other people will think or believe about its value and its use. It is only a matter of time before the value of the Bitcoin increases and another currency declines.

At the same time, if Bitcoin does become popular and becomes the preferred currency of many people, it is possible that there will be demands for a greater number of Bitcoins to be created and hence a decrease in the number of Bitcoins needed to purchase a certain item. This may then result in a change in the value of the Bitcoin.

There is no clear-cut answer to the question “Does Bitcoins comply with liquidity preference theory?” in this regard. The value of the Bitcoin depends on the number of units created, the supply of Bitcoins in circulation and other factors that cannot be predicted.