Moneyness: How bitcoin illustrates the idea of a liquidity premium

Moneyness: How bitcoin illustrates the idea of a liquidity pr...

tweeted that it would be accepting bitcoin as payment. Over the next twenty-four hours, the price of bitcoin steadily rose on Mt. Gox , the major bitcoin exchange. See chart below. This is a great illustration of the idea of a liquidity premium . All assets carry a liquidity premium. This premium will be smaller or larger depending on an asset's ability to be easily bought and sold, or its liquidity. The idea of liquidity is straight from Carl Menger, who figured things out back in 1872 (pdf ). Keynes also knew this, read Chapter 17 of the General Theory. (This is one of those great examples of Austrians and Keynesians agreeing). Other words for liquidity include saleability and marketability. In short, the more marketable an asset, the larger its liquidity premium, which in turn means a higher price. Illiquid assets have small premiums and lower prices. In announcing the ...

Full article: http://jpkoning.blogspot.com/2012/11/how-bitcoin-illustra...