The equation of exchange is as old as economics itself.
First derived by John Stuart Mill, then referenced by Adam Smith, the equation of exchange has gained popularity more recently through Milton Friedman and other monetary theorists.
The equation of exchange is the foundation of cryptocurrency valuation in the ESC framework.
The Equation of Exchange, MV = PQ
The equation of exchange, MV = PQ is an algebraic equation used to solve for various components of a currency’s value.
It is typically used by economists to find the necessary supply of a currency – or, the minimum value of the monetary base needed for commerce.
When not enough fiat currency circulates, notes trade above their face value.
Cryptocurrencies experience the same demand pressure, but since cryptocurrency prices are floating, their prices appreciate to meet demand for purchases.
Increasing demand pressure and decreasing circulating supply causes a cryptocurrency’s price floor to increase.
If a cryptocurrency’s price on exchanges is close to its price floor – the price below which it cannot sustainably trade – the traded price must also increase to meet demand for value to be transferred through it.
The cryptocurrency valuation framework uses the equation of exchange to identify price floors and design tokens which hold their value.
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