The model, or imaginary world, I use to state what bitcoin is in an informative, but also simple way, goes like this:
You have an endless space of mail boxes. Not literally endless, but so big that you never explore it. There’s money in some of the boxes, unlocked, but you don’t bother “checking mail boxes”, you’ll never find anything as there are too many to search.
You have a limited token money unit that can be moved to the boxes, in theory, cheaply and fast. You never get to hold your money as physical bank notes, just move it between mail boxes (addresses) in the network.
Unless someone breaks the law and gets your private key (it happens), your token money units will be safe, and ready for you to spend. Upcoming augmentations that can be run with Bitcoin allow for a high degree of anonymity, though the platform is already host to countless “illegal” transactions, such as moving ill- or otherwise begotten gains out of China and into an international bank account (namely, Bitcoin itself).
There’s no reason to expect bitcoin to be stable in price. If a certain species of financial “whale” is dumping cash into the bitcoin network, the price will rise (say when big time drug wholesalers got into it). If some class of Bitcoin-holder leaves, the price will tend to fall. Perceptions about these Crypto currencies’ long term value—expectations arguably underlying much of the current valuation—are also subject to change. Bitcoin is valuable for some reason other than the need for stability. It’s valuable because as long as you have the internet, no one can stop you from going up to your “mailbox” and spending your cash.
Bitcoin and NGDP?
The Fed may be passive enough, perhaps chastened by their wrong call on inflation in 2014-2016, that the they hesitate to move, to stop strong GDP growth from “causing inflation”. It’s not credible to complain about inflation until inflation is at least at the 2% target, given years of undershooting. The combination of Trump’s ‘regulatory effect’, plus the new Fed leadership (“I like winners”), plus the tax cut law, worked to lift NGDP to more normal levels…for two quarters.
Crypto currencies, apparently the equivalent of volatile bank accounts, appear to be net wealth. The increase in wealth, by some $700 billion, as well as the 40% increase in the S&P 500 since late 2017, certainly had some “wealth effect” on NGDP.
Will Bitcoin be a Schelling Point? A sturdy hunk of driftwood in a sea of weird, new networks? Will anyone ever use the thing for transactions other than: emergency savings, drug trafficking and money laundering? We don’t know. So far, it does not seem to have had much effect on the macro economy.