You don't understand money – and it's a good thing for Bitcoin(beta.sapien.network)
beta.sapien.network
You don't understand money – and it's a good thing for Bitcoin
https://beta.sapien.network/post/z8dAvLCzGywheZFtgLCjcu3hhuv9WrAi5
74 comments
> These also exist in the bitcoin world, and have already caused problems— How long did MtGox operate without reserves?
Exchanges are not part of the bitcoin world, they are bridges to it.
Longer version of the above remark: what bitcoin is truly about is financial sovereignty, or, to put it in more layman's terms, lack of counterparty risk. The bitcoins held in a bitcoin exchange are mismanaged funds, you should never leave your cryptofunds in the exchange: "not your keys, not your coins".
PS: These days, you can even find "bridges", i.e. exchanges, that don't have even this problem anymore, e.g. HodlHodl exchange, which doesn't hold customer's funds, so it's impossible to achieve a fractional reserve malpractice.
Exchanges are not part of the bitcoin world, they are bridges to it.
Longer version of the above remark: what bitcoin is truly about is financial sovereignty, or, to put it in more layman's terms, lack of counterparty risk. The bitcoins held in a bitcoin exchange are mismanaged funds, you should never leave your cryptofunds in the exchange: "not your keys, not your coins".
PS: These days, you can even find "bridges", i.e. exchanges, that don't have even this problem anymore, e.g. HodlHodl exchange, which doesn't hold customer's funds, so it's impossible to achieve a fractional reserve malpractice.
I’m less concerned with philosophy and how people “should” be managing their assets than I am observing what people actually choose to do. The exchanges exist, their actions affect the value of bitcoin, and the value of bitcoin affects them. Therefore, any analysis of the bitcoin ecosystem must take them into account in one way or another.
Similarly, there’s no fundamental barrier to promising to pay someone bitcoins later that you don’t currently possess. That’s the seed of a credit-based economy, and also the piece of the fiat system that makes things so complicated. It is disingenuous to make a comparison that includes this complexity on one side but not the other without giving justification.
Similarly, there’s no fundamental barrier to promising to pay someone bitcoins later that you don’t currently possess. That’s the seed of a credit-based economy, and also the piece of the fiat system that makes things so complicated. It is disingenuous to make a comparison that includes this complexity on one side but not the other without giving justification.
It's no longer "philosophy" but education and awareness. The longer bitcoin exists, the more custodial exchanges get hacked and consequentially the better knowledgeable bitcoin users we will have.
You cannot bring points against bitcoin which actually happen more in centralization-backed entities than in decentralized scenarios.
You cannot bring points against bitcoin which actually happen more in centralization-backed entities than in decentralized scenarios.
There are plenty of examples of bank runs and other crises pre-regulation and pre-fiat currency, dating all the way back to the 1600s— that’s about as decentralized as you can get. If you want to argue that there’s something fundamentally different this time around, that’s fine, but I’d appreciate evidence rather than assertions.
In fact, the least problematic time in terms of bank runs appears to be the years of the highly-centralized Bretton-Woods system post-WW2 (1).
It’s also not like holding bitcoins yourself is entirely risk-free. You can accidentally expose your private key and have your money stolen or you can lose your private key and have it locked away forever. Either scenario means you no longer get to use your money, and any defense against one makes the other more likely; it’s a difficult balance to ask people to get right.
(1) https://en.m.wikipedia.org/wiki/Bretton_Woods_system
In fact, the least problematic time in terms of bank runs appears to be the years of the highly-centralized Bretton-Woods system post-WW2 (1).
It’s also not like holding bitcoins yourself is entirely risk-free. You can accidentally expose your private key and have your money stolen or you can lose your private key and have it locked away forever. Either scenario means you no longer get to use your money, and any defense against one makes the other more likely; it’s a difficult balance to ask people to get right.
(1) https://en.m.wikipedia.org/wiki/Bretton_Woods_system
Giving me an example of decentralisation set in the 1600s? Dude... The best way to finish this convo is the way Satoshi replied once: "If you don't believe it or don't get it, I don't have the time to try to convince you, sorry"
Every greenback may be registered. But physical currency is only a small amount of the actual circulating money supply.
Due to fractional reserve banking, banks lend money they don't have. Banks are only required to have 10% of the money they loan on reserve.
Due to fractional reserve banking, banks lend money they don't have. Banks are only required to have 10% of the money they loan on reserve.
You loan currency to a bank in the form of deposits, they keep some of that on premises due to the reserve requirement and loan out the rest to their other customers. In exchange for letting the bank use your money, you get insurance and a tiny interest payment.
Other than it being too young and inconsequential for people to bother, what property does bitcoin have that works against this scheme? Banks have worked this way since long before modern fiat currencies were developed, and they’ve always increased the money supply without minting new coinage. Whether it’s gold bullion, federal reserve notes, or bitcoin keys in their vaults doesn’t seem to make much difference.
Other than it being too young and inconsequential for people to bother, what property does bitcoin have that works against this scheme? Banks have worked this way since long before modern fiat currencies were developed, and they’ve always increased the money supply without minting new coinage. Whether it’s gold bullion, federal reserve notes, or bitcoin keys in their vaults doesn’t seem to make much difference.
Bitcoin is much like cash in that you can choose to opt out of making your money available for fractional reserve.
Why with cash many don't do that, beats me. According to Keynes, people should withdraw their cash when there is no interest to be gained ("liquidity trap"). In practice, people don't, and that makes Bitcoiners crazy: good marketing makes (especially badly informed) people act uneconomically, since they think they are saving, while they are actually investing in an indifferent manner.
Other important aspects of Bitcoin are, that it makes the money supply transparent, and everybody can validate transactions. This is not as simple with cash or gold.
Why with cash many don't do that, beats me. According to Keynes, people should withdraw their cash when there is no interest to be gained ("liquidity trap"). In practice, people don't, and that makes Bitcoiners crazy: good marketing makes (especially badly informed) people act uneconomically, since they think they are saving, while they are actually investing in an indifferent manner.
Other important aspects of Bitcoin are, that it makes the money supply transparent, and everybody can validate transactions. This is not as simple with cash or gold.
> Why with cash many don't do that, beats me.
The banks provide a service that has some intrinsic value: They protect your cash better than you can, and store it in a place that is physically separate from your home.
Home thefts occur with a higher frequency than bank thefts, and someone who's known to keep large quantities of cash in there home becomes a bigger target. If your money is stored in a bank, you're more exposed to a banking system collapse but insured against ordinary theivery. If your home is destroyed, then your money is still safe; if your bank goes bust you still have your home (or at least the things inside it).
The banks provide a service that has some intrinsic value: They protect your cash better than you can, and store it in a place that is physically separate from your home.
Home thefts occur with a higher frequency than bank thefts, and someone who's known to keep large quantities of cash in there home becomes a bigger target. If your money is stored in a bank, you're more exposed to a banking system collapse but insured against ordinary theivery. If your home is destroyed, then your money is still safe; if your bank goes bust you still have your home (or at least the things inside it).
Keeping cash does not mean one has to keep it at home. You can actually leave it in a safe at the bank and just use the bank as a warehouse.
In this case you have to pay a small fee, but you decrease the amount of cash that can be used for loans, and thus make loans more expensive, leading to better rates for lenders in the future. (At least this is my understanding at the moment - still getting into the topic, so please excuse if I am oversimplifiying.)
In this case you have to pay a small fee, but you decrease the amount of cash that can be used for loans, and thus make loans more expensive, leading to better rates for lenders in the future. (At least this is my understanding at the moment - still getting into the topic, so please excuse if I am oversimplifiying.)
> All of the author’s core questions can be answered just as well for coins and notes as they can for bitcoin— Every greenback has a unique serial number, after all.
Most money (specifically, most US dollars) are not in the form of coins or notes. See: https://www.quora.com/How-many-dollars-are-there
~1.4 Trillion USD in notes ~60 Trillion USD total
coins are certainly less than notes, but I'm not sure how much less, so let's guesstimate no more than 0.5 Trillion, and that's a stretch. So, about 97% of money is not in notes and coins.
Most money (specifically, most US dollars) are not in the form of coins or notes. See: https://www.quora.com/How-many-dollars-are-there
~1.4 Trillion USD in notes ~60 Trillion USD total
coins are certainly less than notes, but I'm not sure how much less, so let's guesstimate no more than 0.5 Trillion, and that's a stretch. So, about 97% of money is not in notes and coins.
This is certainly true. My point was that I see no evidence that, should bitcoin become mainstream, the situation would be any different- nothing about bitcoin prevents its use as the basis for a credit economy like notes are now and bullion coins were before them.
And it’s the credit that’s making things complicated, not the central banks.
And it’s the credit that’s making things complicated, not the central banks.
Bullion is usually not the basis for a credit economy. I remember reading Graeber's "Debt: The First 5000" about this point, but I forget the details. And if we're talking about an "illusory basis" (i.e. much more money than there is bullion) - so in a sense it doesn't matter all that much whether it's Gold or BitCoin. You won't have the distributed nature of BitCoin then, because banks would create "BitCoin-backed credit", i.e. banks create the money.
What confidence do you get out of serial numbers and existence of registry if there’s an entity that can freely print few more trillions?
Mtgox was a private enterprise that was managed by incompetent/malicious individuals, why does this always come up in bitcoin discussions? Mtgox is an example why you need to care about owning your money. People who lost money in mtgox didn’t own those money, they gave them away for a promise to have them returned.
Mtgox was a private enterprise that was managed by incompetent/malicious individuals, why does this always come up in bitcoin discussions? Mtgox is an example why you need to care about owning your money. People who lost money in mtgox didn’t own those money, they gave them away for a promise to have them returned.
Your description of money shows that you still treat it as an elementary system of debits and credits from a global ledger instead of an algebra of transactional commerce.
No, in fact they do not keep track of each individual dollar. At least for aggregate money supply; perhaps they do keep track of M0. I am not sure.
> Take the questions we mentioned above, and apply them to Bitcoin:
Sure, you can easily answer cherry-picked questions about Bitcoin.
But the important thing is: nobody in his day-to-day life needs to know these answers about real money, nor have they ever wondered about it.
I can buy groceries just fine with my Euros, without wondering how exactly it has been created. Just as I wouldn't tailor my own paragliding chute, because otherwise companies could rip me off. I just trust in sensible regulations, paraglider-making experts and, finally, the social fabric of society.
Sure, you can easily answer cherry-picked questions about Bitcoin.
But the important thing is: nobody in his day-to-day life needs to know these answers about real money, nor have they ever wondered about it.
I can buy groceries just fine with my Euros, without wondering how exactly it has been created. Just as I wouldn't tailor my own paragliding chute, because otherwise companies could rip me off. I just trust in sensible regulations, paraglider-making experts and, finally, the social fabric of society.
> "I can buy groceries just fine with my Euros, without wondering how exactly it has been created."
If literally all you know about money is that it is a token that lets you buy stuff at the grocery store, here is trwhat you don't know - how long is that situation going to hold up.
> "Just as I wouldn't tailor my own paragliding chute, because otherwise companies could rip me off."
I wouldn't try to sew a normal parachute let alone a paragliding chute. But one thing I know about safety-critical pieces of nylon or related things is that wear and tear is visible. A moderate rip, hole, tear in material, an engine that coughs, a tire that's deformed, all this stuff is a clue that there are problems ahead.
What signs tell you when there's problem in the relationship between your tokens and the grocery store? That's where a bit more understanding of money is useful. And, as the OP say, that understanding is difficult, actually (edit: tbh, that's literally the only worthwhile point in an otherwise terrible article).
If literally all you know about money is that it is a token that lets you buy stuff at the grocery store, here is trwhat you don't know - how long is that situation going to hold up.
> "Just as I wouldn't tailor my own paragliding chute, because otherwise companies could rip me off."
I wouldn't try to sew a normal parachute let alone a paragliding chute. But one thing I know about safety-critical pieces of nylon or related things is that wear and tear is visible. A moderate rip, hole, tear in material, an engine that coughs, a tire that's deformed, all this stuff is a clue that there are problems ahead.
What signs tell you when there's problem in the relationship between your tokens and the grocery store? That's where a bit more understanding of money is useful. And, as the OP say, that understanding is difficult, actually (edit: tbh, that's literally the only worthwhile point in an otherwise terrible article).
> how long is that situation going to hold up.
But you don't actually need to know the internals in order to know how long it will hold up.
You can black box update your probability of fiat currency holding up every month that fiat currency doesn't crash (let's define it as "lose 50% of its value"). In fact, by this metric it's pretty clear that fiat currency probability of holding up is much better then that of most (and all major) cryptos.
If anything, a lot of what ML/data science/quantitative finance has shown us is that hand constructed explanations made by experts typically have bad predictive power and statistical estimates typically have ok predictive power. For things related to money I would trust data over any expert mechanistic explanation.
But you don't actually need to know the internals in order to know how long it will hold up.
You can black box update your probability of fiat currency holding up every month that fiat currency doesn't crash (let's define it as "lose 50% of its value"). In fact, by this metric it's pretty clear that fiat currency probability of holding up is much better then that of most (and all major) cryptos.
If anything, a lot of what ML/data science/quantitative finance has shown us is that hand constructed explanations made by experts typically have bad predictive power and statistical estimates typically have ok predictive power. For things related to money I would trust data over any expert mechanistic explanation.
Well,
No one can know with certainty whether a given object or situation is going to hold up. Life isn't guaranteed.
Sure, you can tell yourself "X has worked so-far, that makes it continuing to work quite likely". But X is "driving your car without adding gas or oil", that it worked for a while hardly makes it more likely.
And, of course, you can't claim predictive power for a sequence of individual experiences. And if you apply regression to a Ponzi scheme, it will seem like a great idea.
No one can know with certainty whether a given object or situation is going to hold up. Life isn't guaranteed.
Sure, you can tell yourself "X has worked so-far, that makes it continuing to work quite likely". But X is "driving your car without adding gas or oil", that it worked for a while hardly makes it more likely.
And, of course, you can't claim predictive power for a sequence of individual experiences. And if you apply regression to a Ponzi scheme, it will seem like a great idea.
Your argument would only work if cryptos performed at least as well as fiat. The fact is all major cryptos have been far more volatile than fiat. In your car example, it might be that fiat is driving a car without adding gas or oil; but by that comparison crypto is driving a car that is actively on fire.
Why do you think my argument has anything to do with Crypto currency?
I make no mention of it and I am simply replying to "black box is a fine way to understand things" arguments. My point, my only point, a point removed from crypto entirely, is that one need specifics and not mere trends, to understand anything.
I make no mention of it and I am simply replying to "black box is a fine way to understand things" arguments. My point, my only point, a point removed from crypto entirely, is that one need specifics and not mere trends, to understand anything.
The situation will hold up much longer than any cryptocurrency will hold a stable value as compared to the price of basic things like food, clothing, and shelter. If your money is subject to wild swings in value, you can't make plans. It then works more like a highly volatile stock.
> here what you don't know - how long is that situation going to hold up.
And how exactly does Bitcoin help to answer that question?
Just looking at roller coaster ride that is the Bitcoin to USD exchange rate suggests it is an extremely volatile currency.
I would suggest that the last thing you would want in a currency system is extreme volatility.
And how exactly does Bitcoin help to answer that question?
Just looking at roller coaster ride that is the Bitcoin to USD exchange rate suggests it is an extremely volatile currency.
I would suggest that the last thing you would want in a currency system is extreme volatility.
I agree, my reply was simply to the claim that one does not have to understand money to use it.
If anything, I would say that an understanding of money would show that it's based on a web of trust and so bitcoin indeed solves no problem of money as such and is effectively some combination of Ponzi scheme, money laundering scheme and ideology.
If anything, I would say that an understanding of money would show that it's based on a web of trust and so bitcoin indeed solves no problem of money as such and is effectively some combination of Ponzi scheme, money laundering scheme and ideology.
Tell that to a Zimbawean.
EDIT: Seriously. Just because our Western bureaucrats are comparatively honest these days, doesn’t mean how it functions doesn’t matter? Things could change, you know, as history repeats itself.
EDIT: Seriously. Just because our Western bureaucrats are comparatively honest these days, doesn’t mean how it functions doesn’t matter? Things could change, you know, as history repeats itself.
Or a Venezuelan.
Or German Marks when they were worthless after WWI and bundled in huge stacks. I feel like people in “developed” countries think “this couldn’t happen to me” when time has shown us time and time again it certainly can and you will be powerless to the whims of your government. Our original poster feels the same false safety in his or her Euros. They have developed amnesia to the lessons of the recent past. Bitcoin can be a safety valve out in case of those same cyclical disasters. It is freedom from your government’s manipulations of your money. Is it perfect or ultra stable? Absolutely not, but every person, especially the ultra rich, needs it in their portfolio.
“The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” -Satoshi Nakamoto
“The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” -Satoshi Nakamoto
So we've been ravaged by ww3 and our money is useless. How exactly do I still have Internet access and who is running all this infrastructure to allow me to trade crypto with someone?
And why are cryptocurrencies, which are also a limited resource that can't be diluted, immune to inflation?
And why are cryptocurrencies, which are also a limited resource that can't be diluted, immune to inflation?
I am pretty sure deflation is the big concern with limited supply, not inflation. For exactly the reason that the supply is limited...
There are issues of Bitcoin one could argue about - but inflation is not one of them.
Give us a concrete scenario.
There are issues of Bitcoin one could argue about - but inflation is not one of them.
Give us a concrete scenario.
While deflation is a concern for the economy as a whole people who hold money generally like deflation. A lot of why people bought cryptos is in hopes of massive deflation (egbitcoin price going up). Also, the promise of cryptos is essentially deflationary since productivity (and total world wealth) goes up while e.g. bitcoin total supply is constant.
Deflation means that aggregate prices go down over time. I am not sure what it means that, as you said, people bought cryptos in the hopes that the dollar prices of bitcoins would ”””deflate”””. But sure, prices go up when demand go up - is this unusual?
(Sorry if I came across as arrogant.)
On whether deflation is bad for the economy. The standard example of this is the Great Depression, where massive amounts of credit was created and later people opted out of USD and wanted gold. There were bank-runs, as I’m sure you know. Thus FDR ”banned” gold (he even forced people to return gold or risk confiscation and jail time).
Of course dollar prices go down then, i.e. deflation.
I don’t see this as an argument that deflation is bad.
Or do you have another example or perhaps can correct me?
(Sorry if I came across as arrogant.)
On whether deflation is bad for the economy. The standard example of this is the Great Depression, where massive amounts of credit was created and later people opted out of USD and wanted gold. There were bank-runs, as I’m sure you know. Thus FDR ”banned” gold (he even forced people to return gold or risk confiscation and jail time).
Of course dollar prices go down then, i.e. deflation.
I don’t see this as an argument that deflation is bad.
Or do you have another example or perhaps can correct me?
You seemed to suggest in GP that one problem with fiat is that it may become deflationary (ie prices for goods in fiat will go down). I pointed out that Bitcoin is by construction deflationary, prices (in bitcoin) for goods go down as long as bitcoin occupies at least a fixed fraction of total exchange tokens.
Simple example, if bitcoin is the only exchange token in circulation then bitcoin will become more valuable as a function of time simply because the amount of "stuff" increases. This is as opposed to fiat, which increases in supply to compensate the increase of material wealth in the world.
The reason deflation is bad is because it discourages investment. If I can buy more stuff later with the same amount of tokens then I have an incentive to not spend my exchange tokens, thus reducing the total circulation of tokens/investment/etc. It also makes loans more painful (unless interest rates are negative), but if interest rates are sufficiently negative then this encourages people to not deposit money into loan originators (traditionally banks, but in crypto world could be something else).
Simple example, if bitcoin is the only exchange token in circulation then bitcoin will become more valuable as a function of time simply because the amount of "stuff" increases. This is as opposed to fiat, which increases in supply to compensate the increase of material wealth in the world.
The reason deflation is bad is because it discourages investment. If I can buy more stuff later with the same amount of tokens then I have an incentive to not spend my exchange tokens, thus reducing the total circulation of tokens/investment/etc. It also makes loans more painful (unless interest rates are negative), but if interest rates are sufficiently negative then this encourages people to not deposit money into loan originators (traditionally banks, but in crypto world could be something else).
> then bitcoin will become more valuable as a function of time simply because the amount of "stuff" increases.
> The reason deflation is bad is because it discourages investment.
I agree that economies are naturally deflationary because people don't stop working. So what? I think printing money is bad (as opposed to the concept of "inflation" which is an effect) is bad, because it distorts market mechanisms that occurr naturally - I'm talking about (more) efficient capital allocation here.
> The reason deflation is bad is because it discourages investment.
I agree that economies are naturally deflationary because people don't stop working. So what? I think printing money is bad (as opposed to the concept of "inflation" which is an effect) is bad, because it distorts market mechanisms that occurr naturally - I'm talking about (more) efficient capital allocation here.
If you are discouraged from investing (deflationary exchange token) then this leads to suboptimal capital allocation (since money will be used neither for investment nor loans)
> A lot of why people bought cryptos is in hopes of massive deflation
No. Bitcoin is not a get-rich-quick scheme, it's a not-get-poor-slowly scheme. It's mainly protection against inflation, not hope for massive deflation.
No. Bitcoin is not a get-rich-quick scheme, it's a not-get-poor-slowly scheme. It's mainly protection against inflation, not hope for massive deflation.
You say this, but that's not what drives volume. Most crypto volume is on exchanges, not on the chain, and that's due to speculation.
Finance in general is plagued of this too: most money movements are non-productive asset transfers (investing, buying/selling of businesses, ...; as opposed to salaries and individual end-user purchases). But you will always be able to pinpoint the baseline of bitcoin to its most useful feature: people avoiding the criminal monetary policies of their corrupted governments.
I assume the postal service still worked in post WWI Germany? We don't have to be living in a new stone age for our money to be worthless. I assume the internet would still work in some capacity.
Yeah, because of course it is known that newspapers, radio and tv all disappeared after ww1 and then also after ww2.
This is a good reason to buy physical gold and bury it somewhere. I'm not convinced it's a good reason to buy Bitcoin.
Because gold is less risky due to its traditional status as money? Just curious.
Yes. If gold ever completely loses value we are probably living in such a total collapse of civilization that all bets are off. Whereas I can easily imagine a scenario where the Bitcoin fad fizzles out and everyone's coins deflate massively in value.
I doubt the ultra rich are keeping significant portions of their wealth in money markets.
What a terrible crypto-shilling (is that a new currency?) article. Can I have my time back? Since time is money, I'll take 30 euros please.
One thing that crypto-idiots don't understand is that whatever currency it is, it's not worth anything if no one wants to exchange it with food (or clothes or shelter). If in the upcoming Mad Max future that farmer only takes tea leaves, everyone will be running around trying to find tea leaves.
One thing that crypto-idiots don't understand is that whatever currency it is, it's not worth anything if no one wants to exchange it with food (or clothes or shelter). If in the upcoming Mad Max future that farmer only takes tea leaves, everyone will be running around trying to find tea leaves.
> Don't you care to know where your food, your electronics or your clothes are coming from, who made them and how?
This is a pretty strange choice of examples, considering how little most people know about the manufacturing of any of those things. Besides, if bitcoin were to ever reach the masses, we'd start banking in it (because banks and useful and necessary), so M0-M3 doesn't go away. As soon as someone is holding fractional reserves, "how many bitcoins exist" is as relevant as "how many paper dollar bills exist".
This is a pretty strange choice of examples, considering how little most people know about the manufacturing of any of those things. Besides, if bitcoin were to ever reach the masses, we'd start banking in it (because banks and useful and necessary), so M0-M3 doesn't go away. As soon as someone is holding fractional reserves, "how many bitcoins exist" is as relevant as "how many paper dollar bills exist".
My take from the article is that Bitcoin, as cryptocurrency, is a mechanism that can be used to replace fiat money. It will never be because of exactly the reason the article says: there will be a maximum of 21 millions Bitcoin and that's all. And since the current mechanism behind fiat money is inflation (usually you want to have a slow inflation, not a fast Venezuelan one) is what drives people to spend them and create economy - this will never be applied to Bitcoin ever. Hence you get deflation in case of Bitcoin, which drives people to amass them instead of spending and you get in the end the current purpose of Bitcoin -> art like investment.
The only way to make them a currency is, keeping them limited to 21M, is to create some sort of "bleeding" mechanism where you force the owners to spend them (spend or lose) - which will never be implemented.
The only way to make them a currency is, keeping them limited to 21M, is to create some sort of "bleeding" mechanism where you force the owners to spend them (spend or lose) - which will never be implemented.
While this article don't cover everything, it acknowledges the complexity and that money is many things. Starting from coins and going towards things called 'money like'. And the author seems to know that not all bank lending is part of fractional reserve system.
Related to bitcoin one of the most critical and important aspects of fiat money from central banks is the liquidity. Liquidity means that money is available in price that does not fluctuate too much from day to day or month to month. Central banks are lenders of the last resort. Money should be boring and predictable, not exiting like Bitcoin. One of the definitions of money is 'most liquid asset'. If cryptocurrency can't do that, it can't replace money in daily business.
Related to bitcoin one of the most critical and important aspects of fiat money from central banks is the liquidity. Liquidity means that money is available in price that does not fluctuate too much from day to day or month to month. Central banks are lenders of the last resort. Money should be boring and predictable, not exiting like Bitcoin. One of the definitions of money is 'most liquid asset'. If cryptocurrency can't do that, it can't replace money in daily business.
Money is simple. Credit is complicated. And if Bitcoin is going to succeed lending Bitcoin will be normal and lead to similar behavior as in the gold standard.
This. I have never heard a remotely sensible discussion from crypto folks around following points:
1. If fractional reserve banking is bad, what or who is going to stop the appearance of that in bitcoin world? You need to understand that literally only thing you need for that is a bunch of people trusting so much one organization that they are willing to use the IOU from that as payment method. (Cough, tether, cough)
2. If fractional reserve banking is good or even okay, first thing you need to accept is that the bitcoin guarantee of fixed monetary supply does not exist. Second, completely unanswered issue is that why the heck bitcoin would be any better from fiat as the base of a fractional reserve banking system.
1. If fractional reserve banking is bad, what or who is going to stop the appearance of that in bitcoin world? You need to understand that literally only thing you need for that is a bunch of people trusting so much one organization that they are willing to use the IOU from that as payment method. (Cough, tether, cough)
2. If fractional reserve banking is good or even okay, first thing you need to accept is that the bitcoin guarantee of fixed monetary supply does not exist. Second, completely unanswered issue is that why the heck bitcoin would be any better from fiat as the base of a fractional reserve banking system.
1. There's nothing to stop fractional reserve banking. Bitcoin is just a more convenient bearer instrument (more portable, divisible, verifiable than gold), so if you don't trust a bank, it would be easier to opt out.
2. Personally I think fractional reserve banking is at very least problematic, because it leads to competitive advantage, but also eventual systemic collapse. (More about it: https://twitter.com/dpc_pw/status/1195932699141103618)
2. Personally I think fractional reserve banking is at very least problematic, because it leads to competitive advantage, but also eventual systemic collapse. (More about it: https://twitter.com/dpc_pw/status/1195932699141103618)
I guess you could say that goldsmiths pretending they have more gold than they really do is kinda similar to cryptocurrency exchanges doing the same.
However-- for Bitcoin and essentially no other valuable asset before it, it's perfectly reasonable for an exchange to continuously prove that every bitcoin in your account is uniquely backed by coins that they control.
No major exchange bothers to do it right now because the market doesn't demand it and any exchange that did would hurt themselves by causing their customers to care about the risk of insolvency. If you make the customer worry about solvency they won't necessarily be placated by the protocol that proves they're (bitcoin) solvent, so you're better off not raising the issue.
It's unfortunate because this is one of the areas where Bitcoin has a significant advantage over most other valuable assets.
No major exchange bothers to do it right now because the market doesn't demand it and any exchange that did would hurt themselves by causing their customers to care about the risk of insolvency. If you make the customer worry about solvency they won't necessarily be placated by the protocol that proves they're (bitcoin) solvent, so you're better off not raising the issue.
It's unfortunate because this is one of the areas where Bitcoin has a significant advantage over most other valuable assets.
I understand that the exchange can prove control of a certain amount of bitcoin, but how can they prove the amount of credit they have extended? By definition the credit is uncoupled from any blockchain, right?
If I can't verify how much credit they've extended, then even knowing how much assets they have, I can't tell how leveraged they really are.
If I can't verify how much credit they've extended, then even knowing how much assets they have, I can't tell how leveraged they really are.
> I understand that the exchange can prove control of a certain amount of bitcoin, but how can they prove the amount of credit they have extended? By definition the credit is uncoupled from any blockchain, right?
Solvency has two parts: Assets and liabilities. The 'prove control' is the assets part.
The other side of a solvency proof is that they can, without breaking anyone's privacy) show that every user's account balance adds up to the sum of Bitcoin they control.
In fact, they can prove solvency (that is, that each user has a balance and that they control at least the sum of distinct balances) without ever revealing the total amount they control or even how many accounts they have (other than a log(n)-ish lower bound). http://www.jbonneau.com/doc/DBBCB15-CCS-provisions.pdf
But forget privacy for a moment:
Imagine they were to publish a list of all accounts, all coins, signatures with all coins, and then timestamp that list with Bitcoin. Then the login JS that their site hands out (and which can be checked js pinning extensions) could at login make sure that that document checked out-- that the signatures were vaid, that the coins existed, that the totals summed up, that it was stampped in Bitcoin, and that your own balance was reflected in it. Presumably you see that that approach would essentially work. The only fanciness needed is making it communications efficient and private.
Solvency has two parts: Assets and liabilities. The 'prove control' is the assets part.
The other side of a solvency proof is that they can, without breaking anyone's privacy) show that every user's account balance adds up to the sum of Bitcoin they control.
In fact, they can prove solvency (that is, that each user has a balance and that they control at least the sum of distinct balances) without ever revealing the total amount they control or even how many accounts they have (other than a log(n)-ish lower bound). http://www.jbonneau.com/doc/DBBCB15-CCS-provisions.pdf
But forget privacy for a moment:
Imagine they were to publish a list of all accounts, all coins, signatures with all coins, and then timestamp that list with Bitcoin. Then the login JS that their site hands out (and which can be checked js pinning extensions) could at login make sure that that document checked out-- that the signatures were vaid, that the coins existed, that the totals summed up, that it was stampped in Bitcoin, and that your own balance was reflected in it. Presumably you see that that approach would essentially work. The only fanciness needed is making it communications efficient and private.
As a filthy casual observation, it doesn't seem like the risk of crypto is going away. If money is the abstraction of value, then it seems more intuitive that you will entrust your assets to a group of humans in a direct way (laws, army, etc) rather than an indirect way, by having all your value in crypto that is supported by an infrastructure still controlled by the government and/or companies.
Until there exists a truly decentralized and robust worldwide network, anything built on the current Internet is indirectly owned by a centralized entity of some kind (if not directly).
Until there exists a truly decentralized and robust worldwide network, anything built on the current Internet is indirectly owned by a centralized entity of some kind (if not directly).
Anyone have book or article recommendations on how money works?
You might try the credit-based explanation by the Bank of England [1] (linked to in the above article).
I think the tricky bit is that when a bank makes a loan, it creates money, but usually in other banks. The loan-making process creates money "out of nowhere" by increasing a bank balance, but since the borrower got the loan for a reason, they will usually withdraw it and pay other people, increasing bank deposits somewhere else.
The bank needs funds to cover the withdrawal, so from their point of view, it doesn't look like free money to them. They need funding to make loans and they only make money on the spread in interest rates.
But there is new money in other banks as a result of them making the loan.
(A technical point: even without funding, the bank has a new asset - the loan itself. They could sell that to raise funds. Banks can "originate" loans they don't keep.)
The end result is that a new loan exists and there is also new money, somewhere. Whichever banks have more deposits will be able to afford to make (or buy) more loans.
[1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
I think the tricky bit is that when a bank makes a loan, it creates money, but usually in other banks. The loan-making process creates money "out of nowhere" by increasing a bank balance, but since the borrower got the loan for a reason, they will usually withdraw it and pay other people, increasing bank deposits somewhere else.
The bank needs funds to cover the withdrawal, so from their point of view, it doesn't look like free money to them. They need funding to make loans and they only make money on the spread in interest rates.
But there is new money in other banks as a result of them making the loan.
(A technical point: even without funding, the bank has a new asset - the loan itself. They could sell that to raise funds. Banks can "originate" loans they don't keep.)
The end result is that a new loan exists and there is also new money, somewhere. Whichever banks have more deposits will be able to afford to make (or buy) more loans.
[1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
I haven't read it but I've been recommended Debt: The First 5,000 Years by David Graeber numerous times.
It’s a highly verbose book but worth a read. Graeber makes some solid points such as money didn’t evolve from bartering but instead evolved from debt
Lombard Street
Two issues with this article:
1. Obscurantism: Yes, money is complicated and most people don't know much about how it's created and what it even means, exactly. However, the leap from there to the claim that you _can't_ know, or that _nobody_ knows simply has no basis.
2. The BitCoin angle: While it is a good thing that you can easily (sort of) understand how BitCoin is created and how much there is, the article ignores the _implications_ of these facts about BitCoin. There can never be a democratic decision to inflate or deflate BitCoin; and - most BitCoin is already in existence and owned (the majority probably by a pretty small group of people), making it a sort of a pyramid scheme, as late-comers to the BitCoin game will be fighting over the scraps.
1. Obscurantism: Yes, money is complicated and most people don't know much about how it's created and what it even means, exactly. However, the leap from there to the claim that you _can't_ know, or that _nobody_ knows simply has no basis.
2. The BitCoin angle: While it is a good thing that you can easily (sort of) understand how BitCoin is created and how much there is, the article ignores the _implications_ of these facts about BitCoin. There can never be a democratic decision to inflate or deflate BitCoin; and - most BitCoin is already in existence and owned (the majority probably by a pretty small group of people), making it a sort of a pyramid scheme, as late-comers to the BitCoin game will be fighting over the scraps.
> crypto-currencies are simple and transparent.
beg pardon?
beg pardon?
I'm not saying you're wrong, but can you please state why this is a statement you find wrong?
There are so many levels to crypto, and my head is a bit too much in the crypto world that I can see a ton of reasons why this statement is correct. I can also see why it can be considered incorrect. What are the parts you take issue with?
There are so many levels to crypto, and my head is a bit too much in the crypto world that I can see a ton of reasons why this statement is correct. I can also see why it can be considered incorrect. What are the parts you take issue with?
Bitcoin is a multi faceted beast like nothing else. It is a cross between computer science/cryptography, governance/game theory and economics.
In my opinion the economics of bitcoin is the core, which is kept in balance and managed with game theory and decentralised governance and it is created with computer science and cryptography.
In order to truly understand what Bitcoin is then you need to fully grasp all these 3 facets. Most people don't, they read the headlines or look at bitcoin from one of the facets and write it off.
In my opinion the economics of bitcoin is the core, which is kept in balance and managed with game theory and decentralised governance and it is created with computer science and cryptography.
In order to truly understand what Bitcoin is then you need to fully grasp all these 3 facets. Most people don't, they read the headlines or look at bitcoin from one of the facets and write it off.
It is a clever hack, but it can never work as money. The money supply needs to roughly match the size of the economy. If there is too much of it, you have inflation. If there is too little of it, you have deflation, which in many ways is worse. With Bitcoin you have too little of it, because the total amount is limited, and that limit is smaller than economic growth is. That's why Bitcoin's price as compared to major currencies has soared. But people who used Bitcoin years ago to buy pizza feel really stupid because if they had held on to it, they would be much wealthier today. When it works that way, it isn't money. It's a mathematically interesting investment vehicle, perhaps.
In the absence of detailed understanding, it turns into a matter of trust.
Who will people trust more, banks and governments, or cryptocurrency nerds with untouchable money on the blockchain?
I think most people will opt for banks and governments, because when the going gets tough, the masses can overthrow them and expropriate from them. Cryptocurrencies put too many mathematical obstacles in the way of redistributing wealth against the owner's wishes.
Who will people trust more, banks and governments, or cryptocurrency nerds with untouchable money on the blockchain?
I think most people will opt for banks and governments, because when the going gets tough, the masses can overthrow them and expropriate from them. Cryptocurrencies put too many mathematical obstacles in the way of redistributing wealth against the owner's wishes.
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This article couldn't be more wrong-headed. The author seems to think that a fixed amount of money, or a money limited by the amount of some arbitrary commodity (like gold) is a good thing. But the gold standard was a disaster, and caused the American economy to explode every 15 to 20 years, complete with bank collapses and widespread hunger, or rampant inflation when a new gold rush occurred. A Bitcoin-based economy would have massive deflation, which would mean that nothing you could spend Bitcoin on, and keep, would be worth as much as just holding your Bitcoin, so people would be reluctant to invest in anything.
Central banks manage the money supply to be reasonably stable. Yes, bank loans create money, and the central banks regulate this process so neither inflation nor unemployment can get out of hand. This process offends libertarians who seem to think that a completely free system could work better, but it can't: you need a mechanism to keep the money supply roughly proportional to the size of an economy, and blockchain can't do that.
Central banks manage the money supply to be reasonably stable. Yes, bank loans create money, and the central banks regulate this process so neither inflation nor unemployment can get out of hand. This process offends libertarians who seem to think that a completely free system could work better, but it can't: you need a mechanism to keep the money supply roughly proportional to the size of an economy, and blockchain can't do that.
Yeah, the only thing the gets right is that few people have much awareness of theories of money.
But the thing with theories of money is that there isn't that much agreement among economists, bankers or government official on them. How much does it matter that the US government doesn't technically own/control the Federal Reserve? Opinions are divided. How bad is budget deficit? How bad is printing money? How exactly does one interpret fractional reserve banking? Opinions are again divided (that doesn't prevent periodic "everyone is ignorant on how money blah, blah..." article).
But the thing with theories of money is that there isn't that much agreement among economists, bankers or government official on them. How much does it matter that the US government doesn't technically own/control the Federal Reserve? Opinions are divided. How bad is budget deficit? How bad is printing money? How exactly does one interpret fractional reserve banking? Opinions are again divided (that doesn't prevent periodic "everyone is ignorant on how money blah, blah..." article).
These ideas aren't permitted because...
"Sapien Logo Sapien is not yet available in your location."
"Sapien Logo Sapien is not yet available in your location."
Money as understood by economists is not physical currency (coins, notes, etc), but an emergent property of the institutional use of IOUs of various kinds, like debts and fractional reserves. These also exist in the bitcoin world, and have already caused problems— How long did MtGox operate without reserves? Does Bitfinex actually have the reserves it claims to? If Bitcoin were immune from the problems of fiat currency, these questions wouldn’t even make sense to ask.