HomeCryptoBitcoinWhat does Keynes' theory have to do with the price of Bitcoin?

What does Keynes’ theory have to do with the price of Bitcoin?

Among the many theories of Keynes to explain modern economics, there is one that has been juxtaposed with the price of Bitcoin. 

In particular, we refer to the Keynesian beauty contest theory, the theory that gives explanation to the so-called behavioral economics. 

Keynesian theory juxtaposed with the price of Bitcoin

For those who do not know, John Maynar Keynes was one of the most important and revolutionary economists of the 20th century.

His theories are still studied, analyzed and applied in today’s economy.  

His thoughts and works are the foundations of current world economic science, including when we talk about the crypto world, the rising ribbon of the new century. 

In particular, Keynes has been associated with Bitcoin and its success in recent years, which has caused its price to grow to astronomical figures. But what does Keynes have to do with the price of Bitcoin?

One theory in particular has been associated with the famous cryptocurrency, the beauty contest theory, developed by the British economist to explain stock market fluctuations. 

Keynes’ “beauty contest” theory

Keynes’ “beauty contest” theory is a metaphor used by the famous economist to illustrate the concept of how investors can make financial decisions based not so much on the fundamental valuation of assets, but rather on their perceptions of what other investors think or will do.

Imagine a beauty pageant in which participants must choose who they consider the most attractive person among a number of contestants. 

However, instead of voting based on their personal preference, participants must try to guess who will be chosen as the most attractive by the majority of other participants. 

Thus, the goal is not to choose the person one thinks is objectively the most attractive, but to predict who will be chosen by the majority.

This concept can be applied to financial markets in the following way:

  1. Investors try to anticipate not only which asset is technically sound or fundamentally advantageous, but also which asset they believe the majority of other investors will choose.
  2. This behavior can lead to a situation where investors do not necessarily follow an investment strategy based on logic or data, but rather try to anticipate the expectations of the crowd.
  3. As a result, asset prices may be influenced more by collective perceptions and market trends rather than objective valuation.
  4. This can lead to volatility and irrational price behavior as investors try to “guess” what other investors will do.

The association made with Bitcoin that caused its price to rise

In the context of cryptocurrencies, blockchain and Web3, this theory can be applied to market speculation. 

Investors may be influenced not only by the technical characteristics of a cryptocurrency or a Web3-related project, but also by expectations about the behavior of other investors. 

For example, if many investors believe that a particular cryptocurrency is gaining in popularity and value, they might be more inclined to invest in it, even if there are no solid fundamentals to justify such an increase in interest.

Particularly with regard to Bitcoin much is driven by speculation and herd behavior. 

In the crypto context, it is a theory that explains that investors often follow herd behavior. 

When Bitcoin begins to see an increase in price or an increase in interest from the public, many investors may decide to enter the market not necessarily based on a deep analysis of Bitcoin’s fundamentals, but rather because they believe other investors will. 

This behavior can lead to speculation-fueled price increases, similar to what Keynes had in mind with his concept of a “beauty contest”

Another possible association is precisely what is known as FOMO (Fear Of Missing Out), investors’ fear of being cut off from any future gains. This prompts the investor to move quickly so as not to miss out on any profits. 

Another comparison between Bitcoin and Keynes: the concept of the “Clearing Union”

John Maynard Keynes formulated the idea of an institution called the “Clearing Union,” a global central bank-like entity responsible for aggregating all the accounts of different states. 

This concept plays a crucial role in the context of a single world currency because it can credit or debit a specific amount of currency when trade action takes place between countries.

The key notions are as follows: bankers (representatives of the “Clearing Union”) do not replace the national currency, but become the sole medium of exchange used in international trade between countries. In addition, the “Banker” itself is not susceptible to market fluctuations or speculative manoeuvres by individuals.

The “Clearing Union,” free from political interests, plays the role of keeping countries’ economic accounts in balance through offsets, ensuring successful transactions.

So far, no economists or politicians have implemented this theory in practice, although entities and currencies have been created that echo its concepts. 

However, none of these have fully replicated Keynes’ model. To be successful, this theory would require a broad, easily traded currency with no national ties, such as Bitcoin.

The idea is whether “Bitcoin” or another cryptocurrency could take on the role of the “Banker” idealized by Keynes. This could represent a more concrete prospect than mere economic speculation.

A new model could be developed, combining the Keynesian principles of a single currency with the world’s most traded cryptocurrency, thus revolutionizing our conception of the global economy. 

The basic concept is similar to the one proposed by Keynes, but with some fundamental changes: the “Clearing Union” would act as a central bank, superparties, but with jurisdiction extended not only to international markets but globally, making Bitcoin the single currency for all everyday transactions.

The prospect of a single global currency might seem a difficult utopia to achieve, considering the interests of central banks and leading states. 

However, in a constantly changing world, with the accelerating transition from paper to electronic money and the increasing demand for simplicity and speed in international transactions, the creation of a single global currency could be a plausible solution to current challenges.