What is the problem with money and banks?

Water Cooler
#1

I’m on the computer right now. I see a piece of clickbait with some guy comfortably wearing a hoodie and a logo-less dark navy baseball cap, but his face is serious, so his appearance assures us that he’s someone who is tech-savvy. The caption underneath reads “Ethereum co-founder: Blockchain-based wallet could end need for banks.” This all sounds very forward-leaning, and in the back of my mind, I am vaguely aware of the arguments for some decentralized, democratized monetary system, whatever that means.

But, as I sit here with my bank account and credit card seamlessly linked to Amazon, Venmo, Zelle and, of course, Apple Pay, and as I painlessly click through all of my transactions without needing additional steps or second thoughts (all of these things just work, and they do so with the good old-fashioned greenback), I have to say that I’m hard-pressed to figure out what is wrong with the current system. I rather like it, and when it comes to my money, I certainly don’t want any “disruptors,” well, disrupting my stack of chips. If you’ve amassed any kind of wealth, the thought of transitioning to some unproven “currency,” I have to imagine for most people, is terrifying.

I get that there’s this thing called Bitcoin that continues to go up crazily. I don’t doubt that you can make a ton of money in it (ironically, the money you make is usually in USD though…you never hear about people hoping BTC will go up and up and up so they can…stay in BTC. The “cash out,” always involves conversion back into USD, which says less about BTC’s utility of being a legit currency on its own and more about BTC’s use as a speculative vehicle, but I digress…). But I find it hard to imagine that people will eventually find confidence to, on a daily basis, replace their currency use with a disambiguated patchwork of different cryptocurrencies created from nothing, and backed by nothing. True, the USD is a fiat currency also backed by nothing…or at least, that’s what a lot of people like to say. But that is a narrow definition of currency backing. In my view, a strong central banker that can support a certain exchange rate range and an inflation rate range through its actions, even if the currency isn’t “backed” by precious metals, is still effectively backed by a conscious entity that can step in and do some stuff when the feces hits the fan, instead of assuming that market forces are always correct when dealing with a fake currency created by people we don’t even know the identities of.

#2

but what if you have to send money to your relatives in Tanzania on a weekend???

1 Like
#3

so on tiktok, i made a vid about 3 disadvantages of bitcoin. it has like 300 comments and they got snarky and personal. i told them i ltierally wish they make a ■■■■■■■ of money as i dont give a ■■■■ if it goes up or down as i got no money on it. they called me a boomer… there were idiot saying just drop 1%, its literally nothing to you. and how everyone in their portfolio should have a risky allocation. anyways, there are some diehard followers for it. telling me to read a paper. i told them nah bich sum it for me.

#4

Can they not use some other system that exists for transferring money 24 seven through institutions that already exist? And would I be sending a highly volatile means of payment to said relatives in Tanzania? I assume if my relatives in Tanzania can receive bitcoin payments, then they certainly have a smart phone device at least…

#5

Now I definitely know you are growing up, if people are calling you a boomer…

#6

The attraction to cryptocurrency is far more basic than concerns about our financial system. The vast majority of holders are speculators trying to take advantage of the few people who are genuinely paranoid about financial system weaknesses. Anyone espousing doomsday fears about our current system is either a “prepper” or trying to take advantage of preppers.

#7

It is unlikely to ever be a transactional currency in anything but black markets. At best it is a speculative investment asset with an unlimited downside as their is no economic value (as in gold) and is without any form of sovereign or market intrinsic value. Good luck with that. The Baby Boomers learned the hard way the “Pet Rocks” and “Beanie Babies” made for poor investments LMAO.

#8

Ross Stevens has some interesting things to say about it.

Ross Stevens founded Stone Ridge in 2012, and serves as Chief Executive Officer and member of the Investment Committee. Ross founded the New York Digital Investment Group (NYDIG) in 2017, and serves as its Executive Chairman. Ross started his career at Goldman Sachs after receiving his PhD in Finance and Statistics from the University of Chicago (Booth) and his BSE in Finance from the University of Pennsylvania (Wharton). Ross founded and serves as the Advisory Board Chairman of the Stevens Center for Innovation in Finance at the University of Pennsylvania (Wharton).

#9

what was most interesting part? can you highlight?

#10

I would also note that this is a very US/developed world view. Many nations do not have stable currencies, stable central banks or access to USD/EUR/etc. and bitcoin represents a significant improvement.

#11

Right, I understand that argument. But as a currency substitute in countries with less reliable governments, you don’t want to replace one unstable currency with another? If the currency substitute fails as a reliable unit of exchange or predictable store of value, it threatens the viability of the substitute. So I hear you, the intentions are good, but in practice, I struggle to see how crypto in its current state is a viable substitute.

#12

This is a good place to start. It is really about adoption. There is a major network effect where once a currency reaches a critical mass of nodes and acceptance, its value rapidly increases.

#13

If a government falls or a currency is otherwise completely devalued in an emerging/frontier market that has no impact on bitcoin. It is not a replacement currency, but it is a diversifier. I would also note that bitcoin has been insanely volatile over its life, but it is still standing as a currency today. It is far from worthless. Relative to a central bank regulated fiat that falls into an inflationary death spiral, that is attractive.

#14

How much of Bitcoin transaction volume is actually used to facilitate an exchange of goods and services (aka, buy stuff), as opposed to an exchange of USD into BTC, or BTC into USD (aka, speculate or “invest”)? I have seen some estimates out there, and they are all considerably < 5%. This, to me, does not provide evidence that BTC has a great track record as an actual currency. And sure, you can make money on it…until you don’t. JohnyMac has already made the point about Beanie Babies and Pet Rocks. I think that’s in the right direction of how to think about Bitcoin.

The thing that troubles me about Bitcoin is the logical inconsistency used by its proponents. On the one hand, these visionary “investors” see the future, and see that BTC could potentially replace local currency in certain emerging and frontier economies. But on the other hand, BTC investors are betting on crypto continuing to shoot the moon, thereby sabotaging Bitcoin’s ability to be a stable currency alternative able to credibly simulate all of the economic functions of money.

The approach is substantially different from a fundamental trader of regular currency, who believes they know what the equilibrium exchange rate should be, and attempts to profit from dislocations. Trading GBP and UK tariffs are reduced? Hey, let’s buy some GBP since exports might increase, thereby increasing the demand for the GBP to facilitate the expected uptick in business. For Bitcoin traders, however, how can an equilibrium be estimated? More importantly, how can an equilibrium be estimated that is based on the expected long-term use of BTC as an actual medium of exchange and not merely a vehicle for speculation? If the percentage of transactions with BTC actually used to buy stuff is so small, I would argue the justification to buy BTC because it is the wave of the future, and suggesting it’s eventually going to significantly replace national or regional currencies is grossly premature, since it doesn’t appear it is actually being used in that way. Nor is the path down which which we can reasonably expect it to be used in that way manifestly evident.

#15

It’s funny, I’m not really a huge bitcoin bull at all, but I think the immediate dismissal of the entire concept in this thread has spurred me into more bullish territory. Anyway…

Bitcoin has not yet been around 10 years, so comparing its “track record as an actual currency” to USD is not useful. Unlike Beanie Babies or Pet Rocks bitcoin is an efficient means of transferring value and is nonfungible.

It is true that BTC is typically transferred into another currency prior to being spent. I think this is an interesting point, since the USD is being consistently devalued as central bank balance sheets continue to expand. Look at a chart of bitcoin price and central bank balance sheets, they show a similar trend in terms of expansion/contraction. USD is not as volatile, but is essentially certain to be devalued over time.

BTC should be thought of as a nascent currency technology. Its benefits include hard-wired scarcity (89% of all bitcoin ever to exist has already been created), decentralization (added resiliency) and protection from asset seizure (like when the EU closes banks and seizes deposits in Cyprus).

There has been relatively steady growth in bitcoin addresses since its launch, and I’d need to check but I know there are 10s of millions of bitcoin addresses. If we saw similar growth in adoption of a new technology company, this would be great growth.

Again, I’m not a huge bitcoin bull, but I would be hesitant to dismiss it out of hand and I do have some exposure. It is really necessary to change how you think about currency and to view BTC as a new technology. An argument can be made that BTC has properties that make it a better currency than fiat paper, just as an argument can be made that fiat paper is better than gold standard paper which is better than physical gold which is better than bartering, etc. It is interesting to think about.

Edit: I should add that the hooded guy ending banks is also stupid. What “bank” is, in the traditional sense, could change, however.

#16

As with many things in life, the true answer is usually somewhere in the middle.

I’m not dismissing the technology or the concept, even. I’m just doubtful that it will be Bitcoin which is the successful survivor of this whole experiment. As for Bitcoin being an efficient means of transferring value, well, I guess I would ask what exactly you mean by efficient. Transactionally? Sure. Economically, not so much. If I transfer 1 BTC to you today at, say, $50,000 USD, and the price plummets in 3 months to $25,000 USD, I would argue that transferring some purchasing power to you and then watching half of it evaporate in short order is neither an efficient or an appealing way to transfer purchasing power. Of course, folks will point to a price chart and say, but but but DoW, this is what the price is doing! It can only continue! I think most would say that this is bad analysis; of course the price can radically and severely reverse…by a much more vertiginous magnitude than we could expect out of, say, the U.S. Dollar, which of course may be on a slow devaluation course but we know it will die of old age where I can monitor its demise in a hospital, not have it delivered to me in a body bag from a skydiving accident.

1 Like
#17

It doesn’t produce anything. It can’t tax anything. It’s whole premise is limited supply with infinite money printing. If that’s the case have I got a deal for you. I have a limited crypto called supreme yeezy coin. I’m only making 1. They will be printing an infinite amount of paper so if you buy it today for 1m, you get all the unlimited upside.

1 Like
#18

Again, this response is very US-centric, where you have a stable currency with relatively predictable depreciation. Don’t get me wrong, I fully expect to pay for my kids’ college in USD. And, I acknowledge that BTC is volatile…it is less than 10 years old and is a completely new concept of currency.

Now consider Brazil, where the real was devalued by 40% last year and is not coming back up. If BTC was cut in half, that is not that different from local currency and it has a chance, perhaps a good one, of reappreciating. BTC is an attractive global alternative that cannot be easily taken by a government or see value destroyed by a central bank. There is a reason wealthy people, especially in certain countries, keep offshore bank accounts.

#19

I want to be careful to separate the concept of a crypto vehicle with the concept of “investing” in the crypto itself, because you keep pointing out that my analysis is U.S.-centric. To be clear, I don’t necessarily disagree with the idea of an alternative currency platform. I just don’t get why Bitcoin, specifically, should be the winner in all of this. Furthermore, for Bitcoin to be useful in the function you describe, it would need to become relatively stable around some price. What should that target price be? How do you analyze that? Most people have no idea, their analysis is, hey, here is this thing going up and up, let me get a piece of the action. And fractional ownership via platforms like Coinbase put the drug on every corner and accessible to every addict, like how vaping manufacturers flavor their juices like cotton candy to pull in the victims, er, “customers” as early as possible.

For all of the talk of helping these poor folks in countries with terrible currencies out, I do wonder why we couldn’t create a platform to allow folks in these areas to simply incrementally park money in an “app-ified” (call it WestCoin) account tied to USD, or EUR, or other stable currencies, and then payments could be made in those units. Regulatory issues? If so, what are they?

#20

Is Bitcoin the most efficient protocol? No. Will there be systems much better? Probably. But does that mean they won’t use Bitcoin? I don’t know, but history seems to suggest inertia and first mover advantage are stickier than I would suspect, as someone who enjoys thinking and optimization.

I personally try to take myself and view things from afar. My general take is Bitcoin is a scam. But based on my current reasoning, I also think I’d say the internet in 1995 was a scam. To me, this is cause for me to weaken my prior.

If we look at adoption in terms of number of users on Bitcoin, it’s actually mirroring the internet adoption curve based on what I’ve seen from crypto bulls on Twitter.

There are a large segment of the USA that don’t trust banks, or don’t have the ability to open one. Many of the payments we receive on our Subprime portfolio are from non bank sources. Life is much harder for those people. Then there are self imposed issues, such as making banks the police for money laundering. Part of this stuff is regulatory arbitrage. Part of it is unifying a bunch of seperate systems. Part of it is hype.

I do think Bitcoin volatility is a hindrance to adoption. And I’m still not convinced crypto is as stable as people believe. Perhaps Bitcoin has enough float at this point, but many are subject to various attacks to manipulate the system. So is Bitcoin the internet of 2021? Absolutely not. But is it the internet of 1995? I wasn’t observant then, but seems like it could be.