To buy a car with BTC
The Osborne effect in crypto industry
The article I wrote aims to encourage understanding of the arrival of cryptocurrencies in our daily lives. It is a simple essay that attempts to popularize the transition from complex ecosystems to crypto currencies. “Crypto” is expressed in $ for greater simplicity, it has a beneficial power, being interested in it makes it possible to anticipate future changes. The blockchain, which is the hidden face of cryptocurrency, is used in industry as a trusted third party, as an immutable and tamper-proof intermediary, but also as leverage. The blockchain distributed ledger enables secure transactions across the planet without intermediaries. The applications of this technology are numerous and the use of “coins” as a means of payment is one of them.
This article will first briefly address the concept of money which is very poorly understood, even by those who handle it every day. Next, I will discuss a concrete example of buying a good with Bitcoin.
This article is not investment advice, it does not encourage the adoption of cryptocurrency and it aims to enlighten with the help of a practical case related to the use of cryptocurrency. in our daily life.
If you are interested in the world of crypto currencies and blockchain, I provide training on these topics. If you decide to go for it, I also encourage you to do your own research.
Money
To understand the cryptocurrency universe, you have to go back to the period of 2008 which plunged the world into a violent crisis. This subprime mortgage crisis has shaken public confidence in the global monetary system. This period saw the emergence of Bitcoin, and its decentralized network whose objective was to overcome the deficiency of the system so that the world could continue to live. The subprime mortgage crisis was stemmed by massive currency injections and Bitcoin caught on. The recent arrival of the health crisis has again raised doubts, a new massive injection of liquidity into the system, thus creating uncontrollable financial bubbles and record inflation.
The notion of money varies according to the sources. Google defines currency as collateralized coins of metal, as a medium of exchange and unit of value […]. The Larousse meanwhile defines this term by a piece of metal struck by the sovereign authority to be used for the measurement of values, exchanges, savings […].
In the “modern” economy, the structure of legal and sovereign money is divided on one side into fiat money which is money whose supports have no intrinsic value and which cannot be converted into gold. It is no longer the value of the precious metals that serves as a guarantee of the currency, but the confidence of the public. Nowadays, all currencies are based on trust.
On the other hand, scriptural money, literally written, is made up of bank deposits in current accounts in commercial banks. These entries for a long time held in registers are now managed by computer. They form the bulk of the money supply, far ahead of banknotes and coins. These entries do not represent a quantity of real money but amounts that banks owe to depositors, who trust the current system. When you make a credit, the commercial bank adds a line in its registers of the amount of your credit. The commercial bank is the trusted third party.
From this division of money emerges the idea of electronic money, known in the common imagination. Electronic money is monetary value that is stored in electronic form, including magnetic.
Broadly speaking, a currency would be “electronic” when it is managed by computer, stored on electronic media and used by devices that are themselves electronic. We can consider that the currencies used today are all electronic. Notes and coins would be the only non-electronic monetary forms. The check would be the last non-electronic form of use for a deposit account.
In a narrow conception, only money stored independently of a bank account, on electronic memories, would deserve the qualification of electronic. Fed by coins or notes, or by transfer, the provision appearing on the device is no longer either a note or a coin (fiduciary money), nor a bank deposit (scriptural money). In this conception, electronic money becomes a separate category of money supply.
To illustrate, let’s take the example of Mr X who wants to buy a $43,000 BMW.
The example of a $43,000 BMW bought in 2022
Elon Musk is making a buzz about selling his cars in “cryptos”, especially around the DogeCoin coin meme. He’s not the only one with this idea. Take for example a BMW that has a value of $43,000 sold for 1 BTC to Mr X. As of the date of writing, BTC is trading at $43,000~.
If Mr X wants to buy a car for $43,000 and he wants to pay for it in Bitcoin, it’s possible. Mr X transfers 1 BTC to seller Mr Y through the network. The buyer owns a car priced at $43,000 traded for 1 BTC. If Mr X bought in October 2020, 1 BTC at the price of $10,000, he will also have to pay the 30% flat tax on the capital gains, i.e. 33,000 X 30%. Seller B, on the other hand, can immediately convert his BTC into currency without additional taxes, including VAT of course. Mr X’s BMW retails for $19,900. Or the price of a used Zoé. In this trade, MR X wins $13,100.
Here is the first positive demonstration of the effect of cryptocurrency, a possibility of leverage in the acquisition of a good, as if you were investing in gold, or a company stock that would have made 400 % in 1 year. To continue the demonstration and anticipate the future, other concepts are to be integrated, in part.
Money supply
The money supply is important for imagining the future. The global money supply, i.e. the currency issued by central banks and held by individuals (households, businesses or banks), in the form of coins, banknotes or sight accounts with the central bank rises to 12,000 billion in 2020 [1]. This is the M1 base, it would be appropriate to add the M2 (savings, and passbooks, etc.) and thus approximately double the amount to $24,000 billion. The numbers are for 2020 and the M1 and M2 money supply is even bigger in 2022 and I may be understated.
In reality, the cryptocurrency absorbs part of this monetary base M1 and M2. BTC is currently around $800 billion. This means that $800 billion is in the Bitcoin blockchain network. The network consists of approximately 19,930,000 BTC tokens. The BTC is therefore worth around $43,000, the price of a BMW.
Let’s go back to Mr X who invested again in 2022 for $6,000 worth of BTC, or 0.136 BTC.
The Osborne Effect in Cryptocurrency
Adoption of cryptocurrencies is a matter of time. The Osborne effect is known to innovators, it is characterized by an S-curve. This curve proved to be true during the adoption of all the novelties since the post-war period: the dishwasher, the oven microwaves, color televisions, GSM telephones, smartphones and electric cars have had or have S-shaped curves. the rapid evolution of technological objects. Adoption is accelerating as products get to market faster. This Osborne effect is reflected in the world of crypto currencies by the shift spread over time of the monetary masses M1 and M2 towards decentralized networks (fig1) to the detriment of conventional currencies (FIAT). It is the adoption and development of uses such as payment and savings.
Imagine that a quarter of this M1 M2 global money supply slides on the 5-year scale in the network, this would then represent $6,000 billion which would propel BTC to $300,000. This level of amount hypothesis was raised by firms such as ARK invest recently [2]. That is to say, the new equivalent of the BMW purchased for 1 BTC in 2022 by Mr X would be worth 7 times less BTC in 2027. For 1 BTC in 2027, Mr X could buy 7 BMWs.
Mr X renews his car in 2027
Mr X therefore renews his car for a new BMW at $43,000 for no longer 1 BTC but for 0.136 BTC this time. Mr X has therefore done well to buy BTC in 2022 for $6,000, this time he has the possibility in 2027 of buying a new BMW for 0.136 BTC or approximately $17,000 (purchase of BTC in 2022 + tax of 30 % on capital gains), for this new car. Well done Mr X! Satisfied, Mr X invests again for around $10,000 in the network for 0.034 BTC
Now imagine that we follow the curve of the Osborne effect and that the total slippage of the monetary masses M1 and M2 on the BTC network occurs for 24,000 billion $ in 2032 (according to the 2020 figures), the BTC would then be worth 1 $267,000 ~ in 2032 (fig.2).
Price perception can be a barrier to adoption
We remember the transformation of the franc into € and the comparison of the goods with the 2 values. With 5 francs, or less than 1 €, we could buy 1.0 liter of gasoline in 1989. In 2022, the liter is at 1.5 €, twice as much, that’s inflation. In addition, currently, a property purchased for €150 no longer bears comparison with the franc. 150 € was equivalent in 2001 to 1,000 Francs, ⅙ th of the minimum wage. A pair of fashion Nikes costs 150 € these days. This comparison is of great importance in the use and adoption of crypto currencies, in addition to systemic effects such as crises and/or inflation that will lead to their use; society, the human race with its biases, will accommodate and adapt to use so that they are in line with its needs.
In 2032, Mr X wants to renew his BMW and buy a new car worth $43,000 in exchange for BTC, whose unit value now equals $1,267,000. So what does Mr X think of a car at 0.034 BTC? isn’t that a bit ridiculous? BTC is divisible into mXBTC (milli Bitcoin), µXBTC (or BITS) and SATOSHI (10nXBTC or SATS for insiders). The reaction of users to the societal adoption of crypto currencies would therefore mean that Mr X no longer resonates in 2032 in BTC but in SATS for his purchase of a bread, in BITS for his purchase of a car and in mXBTC for his purchase of an apartment. The BMW that Mr X wants to buy in 2032 would therefore be worth 34,000 BITS. A car with a market value of $43,000 would be equivalent to 34,000 BITS in 2032. It will be likely that at this time, the $/BTC conversion will be present in people’s minds as was the €/Fr in the 2000s. The natural resonance of this future time would therefore focus according to my hypothesis more on the BTC value of the car than its $ value.
A more nuanced reality
The reality will surely be more complex and nuanced because to M1 and M2 will be added the direct payments in crypto currencies that some citizens will receive from their employers and companies will exchange BTC for manufactured goods. This point of convergence and acceleration between the production of goods, the product of trade, the creation of value and the remuneration of labor or other factors that will be added to the network are modeled by the Dead Cross (fig 3). This point defines the moment when the BTC would become a reference of confidence in the same way as the $ or the €. Where many users of the systems would recognize the value of the crypto currency and would have a confidence identical to that granted to the FIAT system. Past that point, the current system would die out, overwhelmed by innovation, a victim of low user numbers and a growing lack of trust.
An Earth with finite resources, currencies in limited quantity
The successive crises that we have experienced, are experiencing or will experience are gradually weakening the global financial system. Cryptocurrency has tremendous leverage currently, it can allow de-poverty, access to more wealth, to more well-being. The currency evolves, is plural and is based on confidence in a system that brilliant mathematicians like Charles Hoskinson, one of the founders of the Ethereum network and founder of the Cardano network, see in perdition, in collapse. The world of cryptocurrencies, not just Bitcoin, will experience a dazzling evolution in the coming years. Adoption by institutions, innovators and individuals demonstrates that these systems are here to stay. Also, this debate deserves a whole study because many protocols have a defined number of tokens, thus matching the finite resources of our planet with the need for an economy that is also limited, perceptible in the imagination of humanity.
