Monetary Base

The monetary base of a currency is a measure of how much of the currency is in circulation. A country can increase its monetary base by releasing additional money to the public. This is often done with newly minted currency. The government may introduce currency by buying assets from the market or spending money on projects. A country can decrease its monetary base by selling assets to the market.

Increases in the monetary base lower the value of the currency by causing inflation. Decreases in the monetary base raise the value of the currency, causing deflation.

The monetary base is only one way of measuring the money supply. The monetary base can also be called M0. It is the most stringent measure, and only includes the actual amount of money in circulation. M1 is M0 plus “cash equivalents” which can be easily converted into cash. This generally references people’s deposits in bank accounts. M2 is M1 plus “near-cash” assets that can be converted into cash relatively quickly, such as savings accounts or short term investments.

Bitcoin’s monetary base is regulated by the network itself. Unlike fiat currencies, Bitcoin’s monetary base is governed by immutable algorithm, and is capped at 21 million bitcoin.