IMHO, the risk is how crypto is purchased. If purchased via debt, there is a lot of risk if it crashed. If its owned outright, the risk is much less.
The housing crash of 2008 was a drunken debt binge. Housing by its nature is funded by debt and that is why we saw such a massive impact when it cratered.
I 'think' that most crypto is being purchased by people who have idle cash on hand. They don't want to invest in debt because the return is absurdly low. They don't want to invest in stocks because the US Fed has poured so much money into the system that stock prices are nuts. Thus, crypto seems like a good deal. Add to that the confidence that you can always spot the top and get out before the crash and voila, you have the crypto surge.
At least the money put into housing actually went into housing - i.e. something that has an actual real-world use, and can reasonably be expected to generate some income at some point.
Money put into bitcoin went into buying electricity, just to burn it into heat. Someone is in for a rude awakening when they try to extract income from cryptos, not just sell them to the next fool over.
You mean all of those houses that need to be tear down as they deteriorated to the point of ruin?
China has so such vast reserves of dollars that they can crash US $ value and cause international panic. Meaning that at any stage you $ saving have chance to be worth nothing.
The BTCs do have value and its a cryptographic promise that cannot be broken. People forget that when using all of those tired old arguments.
BTC is also a sign of new generations knowing that the game is stacked and unfair, and they refuse to play it. BTC is no a problem is a sign of broken system.
> You mean all of those houses that need to be tear down as they deteriorated to the point of ruin?
People got paid to put them up, and people were paid to tear them down. At least some people were able to put food on the table because of that activity, even it was kind of wasteful.
> China has so such vast reserves of dollars that they can crash US $ value and cause international panic. Meaning that at any stage you $ saving have chance to be worth nothing.
Do they have more than what is present in the US itself? More than the EU? Japan?
Even if USD ends up dropping in value relative to other currencies, it will help US exports, where the US is second-highest:
> The BTCs do have value and its a cryptographic promise that cannot be broken.
BTC is just as imaginary as anything else of "value" for humans except for air/oxygen, shelter, water, and food. Regardless of what is called "money" is is a figment of the human imagination: sometimes more useful, sometimes less.
At least with dollars I can buy a hamburger, pay my taxes, etc.
> There is a guarantee of negative inflation. There is noone who can out of blue print 1T of BTCs and give it to rich to stimulate economy.
I would count this as a "con" and not a "pro". A fixed money supply is one of the things that caused a minor economic hiccup to turn into the Great Depression.
Crypto's biggest problem is treating it as an asset, not an exchange medium, of course if it was widely being used as an exchange medium I think we likely would have already saw regulations to shut it down as governments will not allow anything to compete with their fiat money
The tether article a week or two ago described them lending tremendous amounts of USD to exchanges and various crypto bank-like entities with Bitcoin as collateral
“ I also learned that Tether had lent billions of dollars more to other crypto companies, with Bitcoin as collateral. One of them is Celsius Network Ltd., a giant quasi-bank for cryptocurrency investors, its founder Alex Mashinsky told me. … Hoegner, Tether’s lawyer, [said] … that its secured loans are low-risk, because borrowers have to put up Bitcoin that’s worth more than what they borrow.”
Let’s not devolve into thought ending reactionaries. I’m aware of the negotiated reality.
My point is it’s not a law of physics, but a social contract to be negotiated.
We owed pensions to people and took those away, so it’s not as if society has a very good track record of paying what it’s owed, so don’t get too hung up on those words meaning something forever.
You might take continuous iteration of our social contract as seriously as code; as we can see letting it accrue technical debt and bit rot is not so great.
1. The brutish way: legislate that all T-bills are now worth 1/10th of their nominal value. Potential risk: riots and capitols set on fire. In practice, this was done in history many times without much consequences.
2. The "boil the frog" way: let inflation run hard for a decade, until a 100$ T-bill buys you a nothing but couple of big macs. This has been happening for the better part of a century.
> You are claiming that defaulting on sovereign debt would have no consequences?
First, at the sovereign level, it only has consequences if the lender has more guns than you.
Seconds, most "debt" in OECD countries is not owed to sovereign entities, but to the countries population themselves, who if push comes to shove will just have to accept that their bonds are worthless if it is ever legislated to be thus.
That isn't true. If a country makes a habit of printing too much money, then creditors will start to insist on only loaning it money denominated in other currencies. And once it starts doing that, the country can be forced to actually default on its debts:
Crypto has flash crashed a large number of times already in the last 10 years, each time weeding out speculators and weak hands and coming back 10x once business was taken care of.
I consider this to be an actual feature of crypto.
Very serious. Large volatility swings punish gamblers (day traders) and rewards strong hands / long term players who made a bet they can afford to lose (investors).
So, the bet you're making is not 'volatility swings will wipe me, the whale investor, out'.
It is 'This system will eventually supplant governments and fiat money systems, which it directly competes with. I benefit hugely from this system, so the governments will allow me the crypto whale to become the truly powerful one and I'll be able to buy and sell them as their fiat currency collapses leaving me HODLing the only true asset.'
"They'll never object to that, or make it illegal or anything. That would be RUDE. And anti-freedom.'
I think you're correct about the volatility swings, but the nature of societies is that they've gotta come up with defenses against the whales like you, otherwise you're just King over everyone. Those defenses won't be further volatility swing, but legislating against your profiteering directly. Not because it doesn't work, but because it does.
> So, the bet you're making is not 'volatility swings will wipe me, the whale investor, out'.
No, the bet I'm making is that if BTC goes to zero, it won't affect my life in any way, shape or form.
If, on the other hand it continues going up, which I believe it will, it provides me with additional side money to play with.
> his system will eventually supplant governments and fiat money systems, which it directly competes with
I don't believe BTC will supplant government-managed money systems.
As a matter of fact, I don't even think I wish for that to happen. I'm much happier for it to remain a parallel system, an escape hatch if you will, to keep govts honest because they know if they decide to shave their flock too hard, there is an alternative.
Basically, like in any political system, you want to have counter-powers if you want everyone to behave.
And up until now, there was no such thing on the currency / wealth preservation front: all the power was in the hand of the govts.
BTC is a very welcome change to the status quo.
> "They'll never object to that, or make it illegal or anything. That would be RUDE. And anti-freedom.'
You seem to imply that I'm looking at the situation from a very naive pov.
I think that there's a high likelihood some governments will try to make it illegal. Specifically for the reasons I outlined above (escape hatch).
What I count on is the historically established tendency for sovereign powers to profoundly disagree with one another and using said sovereignty to explicitly allow some things that their counterparts forbid.
A political marketplace, if you will, and one in which you can participate because of the highly cross-border nature of BTC.
> they've gotta come up with defenses against the whales like you
???
What a very strange thing to say.
First, you're inferring from my handle that I am a bitcoin whale ... that's quite a stretch. I like Bitcoin, that's clear from my posts, but you have strictly no clue how much of it I hold.
Second, you seem to be implying that I'm somehow hurting other people / society ... another giant stretch and something I feel is a completely unjustified attack. This whole 'King over everyone' business is particularly strange, the only creature on this earth I sometimes lord over being my dog when he pesters me too much.
If crypto is purchased via debt then whomever lent the money are morons and need to lose their shirts.
But yes there is a problem that there is a lack of safe investments that pay a little above inflation. Bonds used to do that, but they don't anymore, because there are too few people who need money and too many who have it (ironically the price of money has cratered).
I suspect that this is linked to our inability to build things anymore. With interest rates in the toilet the various government should have borrowed way more money so that they could invest them in bridges, road maintenance and so forth.
Copying a comment I made a few days ago that applies to this thread as well:
I was just discussing Bitcoin 'investing' with a client last week and one of his engineers overheard us and told us a friend of his (another fresh Lebanese immigrant) maxes out his credit cards on the first of the month buying bitcoin, then sells it on the last day of the month and pays off the credit card and pockets the difference. I just...had no response to that. It seemed so obviously dangerous and irresponsible that I couldn't believe a grown adult would do that.
AND THEN he told me about another friend who does the same thing--but with the tuition/living money his family scrapes together and sends him from Lebanon. To me, that was not only stupid, it was a staggering betrayal in trust. Imagine your entire family scrimping and scraping to get money together to send you to college in the US and then you just casually betting it on Bitcoin.
If your credit card has a low maximum (say $2k), and you don't pay interest on the balance you pay off every month, your downside risk is having to pay the card interest, and your upside is passive currency exchange income.
Your acquaintence is going to be very wealthy. Not from this trade, but from the instinct to see the leverage opportunity and take that risk. Sure, bitcoin could go to a small fraction of what it's trading at, and he is out $2k minus whatever he netted on the leveraged trading. The cost to account for it properly outweighs any profits at that level, but it's a scrappy trade by someone who saw the opportunity.
As someone who still mainly makes money with labour, I was impressed anyway.
There are ways to hedge against the tether time bomb. Imo some money will flow out of crypto entirely if tether blows up. But most of it will flow to other stable coins.
If bitcoin can cause a financial meltdown at a 1T market cap then what about Apple at 2.3T or Microsoft at 2.2T? Facebook is at 915B and is not doing to so well lately either.
I would think these companies would need to be split up as it would be too big of a risk that a "financial meltdown" could occur...
I see your point; all stocks are to certain (or large:) degree ephemeral.
But at the same time, I like the quote: “Reality is that which, when you stop believing in it, doesn't go away.”
Apple's stock may crash; but there'll still be 10's of thousands of people selling 100's of millions of iPhones. They'll keep doing it, as I don't see interest in iPhones being cut off in a day (slow or fast decline, maybe). Heck, even Blackberry as a company is still around somewhere.
Bitcoin is ALL market sentiment / vaporware / belief.
(A comparison to Fiat money may be more apt, though would take me out of discussion - I simply haven't the foggiest deep understanding of "what if currency X crashes / how likely is it / what is it backed by REALLY if anything" )
> Bitcoin is ALL market sentiment / vaporware / belief.
Sure, but if you take minute to think about it, so are iPhones.
They sell because people want them.
Supply and demand.
You are then going to tell me about utility.
I claim that:
a) utility is just another way to describe demand
b) cryptos do have utility:
- shielding wealth from govt
- shielding wealth from inflation
- shielding wealth from disgruntled spouses
- moving large quantities of wealth quickly across borders
You might or might now agree with the "morality" of these attributes, but that's neither here nor there: when it comes to economic utility, that's not really a part of the conversation.
Personally I am pulling back on the inflation claim. Im not sure that the claim that bitcoin is an inflation hedge is accurate. Or at least I haven't investigated it enough to continue advocating that claim.
I'm also not sure that bitcoin does shield wealth from government, at least in the US it doesn't. It certainly does a better job if your government is not the US. The other two claims I agree with.
To me the utility of btc is simple. It's the ability to opt into a different and codified monetary policy. That policy is collectively securitized. If I don't agree with the monetary policy of a or any government I can opt I to a system outside of that. Imo this serves as competition to centralized banking.
There's a huge difference in that the apple and MS produce an enormous amount of value and gain mountains of revenue by producing goods and services. Apple's market share could wane the same way as IBM but it won't crash. The value of Bitcoin is 100% notional. It's all demand driven by FOMO. No one needs it. We could lose interest really quickly the way we did with Friendster and it would be dead really quickly.
Facebook has billions of daily users and its stock trades at a reasonable multiple of earnings. Imo the average person thinks of Bitcoin and they think it's something you buy and if you're lucky you get a Lambo (to flex on Instagram). The speculative hype to utility ratio is different to that of FB, Apple, etc
So ban all bank transactions with the fiat exchanges then.
This is where I really respect China, they actually act. When they have a housing problem, they build more housing. When they have an energy problem, they build hydroelectric dams and nuclear power plants. When they have an electricity demand problem, they ban cryptocurrencies.
It seems the West has just lost the ability to carry out effective action and invest in infrastructure.
Most of China’s “solutions” cause as many new issues as the original problems due to authoritarian implementation. Housing is ludicrously expensive in China and falls apart in areas its needed, and worthless ghost cities (which also fall apart) in areas it was added without demand. The damn system was done without regard for areas affected by massive changes in flood patterns. And the electricity demand problem was one caused by governments subsidizing cryptocurrency miners over local needs in the first place.
The west is over regulated and our infrastructure takes forever to build and maintain. What infrastructure that does get built, however, lasts. China builds more faster, but it’s often ill thought out and falls apart quickly.
The west can and should improve how we handle infrastructure. China is a bad model. We should look to how we were able to create solid infrastructure more quickly in the past.
It's easy to get things done when you answer to no one.
> When they have a housing problem, they build more housing
Often forcing residents to sell their land (which for many is their livelihood) at cut throat rates, and sending gangsters in to 'persuade' them when they refuse. Several have resorted to self-immolation in protest over the years.[1]
> When they have an energy problem, they build hydroelectric dams
Which devastates the local environment and that of neighbouring countries, and increases the chance of earthquakes.[2]
The west could carry out effective action and invest in infrastructure, but our serious unacknowledged issues with corruption prevent effective execution. It's less blatant than in other countries because we have a veneer of the rule of law, but there is still incredible corruption. The real issues hit hyperspeed when the "Citizens' United vs FEC" ruling was made since it codified a lot of the corrupt practices by equating cash to speech, incentivizing a lot of the current grift in politics.
With reference to their housing and energy problems, and solutions, you might want to check in on current events!
With regards to faith in centrally planned interventions: China also had an overpopulation "problem," and they "acted" and now the population of women of child-bearing age is set to diminish by 20% over the next decade.
Outside of the largest megacities, urban populations are shrinking as birthrates have plummeted. China has enough empty housing to house 40 million people and yet real estate prices remain too high -- real estate was relied upon to fuel growth and so there has been massive speculation.
There aren't enough new families being formed to fill the housing.
As far as energy is concerned, China's problem is that the price of coal is going up, mainly because Europe requires more coal as they have reduced domestic capacity at the same time that Russia is reducing NG exports. China runs on coal, mainly.
I feel lucky that we didn't have so much "action" because it's only going to get uglier from here on out for China.
The problem with interventionism is it assumes that brutal, large scale political and economical decisions are the correct ones and that all foreseeable consequences are taken into account.
As witness by countless examples (eg the one child policy), their track record is far from exemplary.
Also: history shows time and again that banning something that is in high actual demand usually only results in the market going underground.
Because in China what one man says goes, and nobody else has any other say.
You can't just railroad legislation through the US government, or any representational democratic republic. That's kind of the whole point!
I guess you have never been to China? China is #1 on coal plants (and still building more) and home to the upcoming biggest housing bubble in the world.
The activities of most central banks could trigger a financial meltdown. Financial meltdowns are a regular thing, there is one happening with Evergrande right now.
Focus on the positives. Bitcoin is actually a really interesting way of effecting an international wealth transfer that is totally independent of governments.
People with power in the IMF doesn’t like Bitcoin competing with the fiat monetary system so much, as they want to force countries to tax Bitcoin higher. There are some countries (like Germany, Portugal, Malta and Cyprus) where there’s no capital gains tax for selling BTC, and people are moving there (Adam Back moved to Malta for example, but he’s not the only one).
The article draws parallels with the sub-prime mortgage market but it's potentially much worse than that with crypto. It's more like the gold tied currency market of the 1930s. Bitcoin acts as digital gold and sometimes as a currency (See https://benoitessiambre.com/specter.html).
Apparently the labor market is starting to be affected:
Maybe I’m not creative enough, but how can gambling on the value of a digital hash trigger a financial meltdown. It seems to me that gambling would be just as risky. Are there orders of magnitude more people involved in bitcoin than gambling?
Here's a few ways I could think of:
1. It's much more difficult to gamble with debt/debt is not used for gambling to such an extent that the scale would have enough of an effect.
2. From an economy's perspective gambling is net zero. What is catastrophic to an individual is a benefit for the person(casino) on the other side of the bet. Whereas the loss of value from bitcoin would reduce the total balance sheet for the economy.
3. I think that Bitcoin as assets can be used as collateral for other purchases or to be loaned out for others to use. This creates a chain of wealth based on the value of a bitcoin. Break the foundation of this chain (reduce the price of bitcoin by 75%) and that entire chain of wealth creation is broken.
4. The revenue from gambling is around $40 billion per year in the United States, whereas the market value of Bitcoin is over $1 trillion. It's really not apples to apples at all though, since it's market value vs. revenue. I'm not sure a good way to compare the gambling market vs. the crypto market.
>Cunliffe said there was evidence that speculators were beginning to borrow money to buy crypto assets
That is not a new phenomenon, and all that matters is how much money is actually borrowed to onramp into crypto.
What also matters is who does that borrowing to buy crypto and if they have the shoulders to weather a 10x price down event, something which is a real possibility with crypto.
Finally, I'll note that the person crying wolf in this article is among those who stand to lose a huge chunk of their influence and power should crypto really take off in the sense of being used by the average joe to store value away from the grabby hands of governments.
But commercial banks are not investing billions of dollars in high risk crypto assets so I don't see how crypto hype can cause financial meltdown except small number of big private investors losing a lot of money in crypto because they got nothing better to invest in other than overblown and hyped crypto coins, tokens and DeFi platforms(Andreessen Horowitz comes to mind).
Speaking of retail investors they are not the problem because your average crypto investor doesn't care about losing couple of thousands of dollars investing in some pump and dump crypto stuff .
Everyone knows crypto isn't triple A rated like subprime mortgages were. Anyone that's holding anything but a small portion of their wealth in crypto is playing with financial ruin.
That's not how you get into financial ruin. You get into financial ruin by leveraging onto a speculative position (borrowing money to buy an asset that goes upside down). I suspect most retail cryptocurrency buyers are not doing this yet.
It also seems strange that people would be worrying about a highly leveraged speculative frenzy while simultaneously acknowledging that the underlying asset is highly volatile.
The irony is that almost monotonically increasing prices of other assets lull investors into a false sense of security that encourages ever larger leveraged positions, resulting in increased risk exposure. But volatilility, especially for digital assets (sic), usually flushes out and resets build-ups of highly leveraged positions in both directions.
It's my overall hypothesis that deleveraging events in crypto should happen more frequently and be less catastrophic systemically. The tether question not with standing, but I believe even if an event such as tether blowing up wouldn't be the end of crypto it would just birth a new thing over night to take its place.
The real question is where do they borrow the money from?
If lenders were doing their due diligence properly (as in: I'm going to lend you a 100 grand, but you had better explain what you're going to do with it and how I'm going to get it back plus some interests), then I see zero problem with people borrowing to buy risky assets such as crypto.
If lenders are to dumb or lazy to do their work, I see this as a win for the ecosystem when they get liquidate by a crypto crash: they'll probably be a little more careful next time they lend money or altogether go do something else.
In other words: the problem is not with borrowing to bet on crypto, but with the facts that it's all too easy for financial institutions to lend other (unsuspecting) people's money to huge credit risk borrowers (just like in 2008).
> “The bulk of these assets have no intrinsic value and are vulnerable to major price corrections.
This is published the same week that the US created a paltry extension to pay its obligations; of which 1 of 2 parties had 0 votes in the house for -- and that party makes up 50% of the Senate.
There's a lot of other industries that have a bigger market cap than Bitcoin. It doesn't make sense as Bitcoin has been one of the best assets to invest in the last ten years. This might be one of their ways to spread FUD about cryptocurrency.
Seriously, we're only days away from the US threatening to default on its debt - and they're worried about cryptocurrencies being "Worthless" the next day.
That’s why the comparison is apt. “Cars are were bad for cities” isn’t a remotely hot take, and yet nobody claims that the invention of the car was a net-negative for the world.
Misleading headline as usual. Borrowing a bunch of money to gamble on Bitcoin, just like borrowing to gamble on anything else, can lead to a meltdown.
The reality is that the financial world operates on about the same level as a sportsbook or racetrack. Except for some insane reason we treat the traders and hedge fund managers like priests instead of bookies and addicts.
One thing that people will figure out eventually is that cryptocurrency at least makes it hard to hide all of the borrowing and side bets.
Edit: thought about it for a minute, sportsbooks and racetracks are much more honest than the global financial system.
The housing crash of 2008 was a drunken debt binge. Housing by its nature is funded by debt and that is why we saw such a massive impact when it cratered.
I 'think' that most crypto is being purchased by people who have idle cash on hand. They don't want to invest in debt because the return is absurdly low. They don't want to invest in stocks because the US Fed has poured so much money into the system that stock prices are nuts. Thus, crypto seems like a good deal. Add to that the confidence that you can always spot the top and get out before the crash and voila, you have the crypto surge.