> “We’ve seen exactly that happen before. Bitcoin being such an excellent store of liquidity makes it so that it is drawn on in times of margin calls,” said Chris Bendiksen, head of research at London-based asset-management firm CoinShares.
Hope the author got a kickback for that ridiculous quote.
Crypto is bad for many things, but it is highly liquid. Daily trading volume on crypto broadly is the same order of magnitude of the entire US stock market (mostly in asia and mostly derivatives). https://ftx.com/volume-monitor
It's a transparent attempt to prop up the value of a resource held by the speaker by spinning a rapid decline in its value as somehow being a positive indication of value.
This person is asserting that the market for Bitcoin is a great source of liquidity.* This is patently untrue; it's well documented that dollars and access to banking (and thus liquidity) are scarce in the Bitcoin/cryptoasset ecosystem. This has necessitated Tether and other stablecoins, to enable trading in the cryptoasset ecosystem without losing dollars from the ecosystem, or wiring money into and out of the unbanked exchanges.
I think the subtext of this particular response to your question is also that Tether is a buck wild part of the cryptoasset ecosystem, being the people in whom the most trust has been placed, even though they have been repeatedly demonstrated to be lying and have obvious and severe conflicts of interest, and it's just a crazy rabbit hole and systemic risk that ought to be discrediting to the ecosystem as a whole. But time and again cryptoasset folks will roll their eyes and say, "This again?"
I'm frankly not interested in taking the time to cite any of this, but if you throw Tether into the HN search, there are many, many credible takedowns of Tether.
* At least, this is how I interpret "store of liquidity," liquidity isn't something you store? It's the property of a marketplace to execute trades readily and at a low cost? So this may be some jargon from the cryptoasset community with some alternative meaning.
BTC is liquid. You can easily convert BTC to a currency of your choice on an exchange, similar to stocks. There is plenty of volume to meet demand. Tether solves the problem of tying on-chain things to the U.S. dollar, which exists off the blockchain.
And Bitcoin is pretty liquid, at the moment if you market sold $5m million dollars worth of bitcoin on bitstamp you'd drop the price by about 1% and bitstamp is by no means the largest exchange. Obviously not being quite as bone headed as making bulk market order would do better.
... now, how much VTI shares can you sell right now? None. The major equities markets are closed. When the markets are open, sure big equities indexes are very liquid, but many single stocks -- even fairly large ones it would be pretty hard to move $5m in an instant without crushing the price.
I'd argue restrictions on stocks make it less liquid also (though this is as designed).
If you have $3000 in stocks and you want need $100 you can sell the stock and then buy it back on your next paycheck. But unless your account is over a certain size, you can only do this so many times in a specified period.
Since this restriction doesn't exist with crypto, you can sell and buy back the same crypto 1000 times in a day if you want to (and many bot operators do this)
I'm going to buy a bitcoin, and a mining rig for nostalgia once this ride is actually over. It might be months, or years, the market can remain irrational for a very long time.
The funny thing is that a few years ago, I bought a mining ASIC box at a thrift shop for like $10. I realized there was nothing useful in it; the fans were all gunky and the enclosure couldn't be put to much use.
I suspect there's a huge churn of "we bought nth-generation kit, the old n-1 generation stuff is worthless scrap silicon" in that sector, especially with things like BTC-specific ASICs that won't do well on newer hash lagorithms.
That was more true in the earlier days of mining ASICs, as the companies developing them were new and had a long way to catch up to modern processes. Now mining ASICs have essentially caught up to modern processes and development is happening much more slowly.
Remember Tulip-mania? All of a sudden tulip-bulbs became hugely valuable. You could trade them and park you money in them.
Why did they become so valuable? Because people believed in the bigger-fool theory, somebody would be paying even more for the tulip-bulbs you just bought. Or if not more, at least the same price. So you could keep your wealth in a very liquid inflation-protected financial instrument called tulip-bulbs.
The Dutch tulip bubble lasted a few years, really the height was only 6 months or so. Bitcoin has been on an upward trend for the past 12+ years, when does the comparison to tulips break down, in your mind?
They are similar financial instruments, so I think it is a good comparison. Of course the value of one can go up or down much faster than the value of the other. Value of tulips COULD have gone up for six years instead of six months.
Similarly the value of gold can go up or down much faster or slower than the value of oil for instance.
But with gold or oil there is much more "intrinsic value" than with Bitcoin. It seems to me that Bitcoin has zero intrinsic value. You need a bigger or as big a fool to get your money back. Not saying that Bitcoin might not be a good investment, but currently it is down 31.65% in a month. It is not a good "store for money".
Fool me once, shame on you. Fool me twice shame on me :-)
Pretty much, yes (and I'm surprised you haven't heard the analogy before, it is as old as Bitcoin). Another example is the US dollar, whose value is entirely dependent on what a "greater fool" will give it. Without that "greater fool", it is just worth the piece of paper it's printed on. It is the same for Bitcoin and it is the same for tulips. That being said, I'd argue the US dollar and Bitcoin both have properties which make them much more desirable than tulips as a store of value or currency (tulips arguably have the greatest intrinsic value though!).
Having USD can indeed keep you out of jail for tax evasion in some countries. This is also the case for Bitcoin, in at least one country now. That being said, while it could be considered as a "floor" to their value, I don't think it accounts for much of it. I'm sure both USD and Bitcoin would be fine even if taxes were gone.
I am confused by what you mean here. My best interpretation is that your are comparing the US dollar creation process with Bitcoin's? The processes are different indeed but I don't see how it contradicts my original point. Also, the federal reserve creates money out of thin air, there is no labor or production involved (more efficient than Bitcoin mining for sure).
If your meaning instead was that the US dollar is backed by something (e.g. "labor/production"), then I'd argue this is incorrect. In economics, when X is backed by Y, it means that there is a guarantee that X can be converted for some known amount of Y. This is not the case for the US dollar although it's true that in practice, it does behave a lot as if.
It is not a guarantee. I think it as a promise - a loan for the American public to repay it back with real work, thus to heal and grow the economy.
The American work ethic has so far backed this up, but yeah there is always a risk that this will not be fulfilled - ex: "The great resignation"
So bitcoin's "promise" is their marketing?
"The next internet, currency, etc."? I will be careful with this, since the last 2 crises (dotcom and mortgage securities) were similar empty promises hyped by the rich - i.e. lies.
Bitcoin is just a software/protocol, it doesn't have a marketing team. Personally, I think Bitcoin's biggest appeal is that it's decentralized. No one has control over the money supply. It's pseudonymous. Anyone can use it and participate. That is not the case of the US dollar, not even close. Of course, if you don't believe those are desirable properties, Bitcoin is not going to appeal to you. Regarding price, I won't comment about that since it's quite unpredictable and I have no idea.
Can't disagree with that but it's important to draw the distinction between private companies that stand to gain from Bitcoin adoption and Bitcoin itself. Bitcoin does not have a say in how those companies conduct their marketing. It's not Bitcoin's fault if it is sometimes misrepresented.
A Ponzi scheme is an investment scam. How is that related to Bitcoin, a distributed protocol? Who are the victims? Who are the fraudsters? What is the deception? Which element of the scam applies to Bitcoin but not to gold or the US dollar?
The victims are the last people to put USD into the crypto system, the fraudsters the ones who set it all up and collect the USD.
The deception is that BTC is a currency, or an asset, or a technology, or indeed anything other than a complicated way to pay early entrants with money from later players.
If I sold Bitcoin last year, that would make me a fraudster according to your definition? If I plan to hold Bitcoin, am I also a victim? If I have Bitcoin is it more ethical for me to keep it or to sell it? I can't say I was ever deceived though, I understand Bitcoin pretty well down to the lines of code. Also, did you know that the person or group of persons that "set it all up", Satoshi Nakamoto, never sold his Bitcoins?
It has to flow in somewhere, it cannot just disappear from the balance sheet. Money can be created to grow an economy, i.e. it has to be backed up by people's production. Can the fed even destroy money to fix inflation? I am not an economist, but I doubt it.
Smart/rich people are always betting on potential gains on the market - i.e. they are always searching for the next best investment, they key is to find out where that money is going to be parked next.
There is no conservation rule saying that financial assets can never disappear. They don't have to go anywhere.
Financial assets can disappear from a balance sheet when it becomes clear they will never be paid. That's what happens when a debt is written off. Similarly when stock drops and is marked to market.
These assets are essentially predictions of future income. Sometimes that income never materializes. The promise was broken or the prediction was over-optimistic. People discover they're not as rich as they thought.
For a cryptocurrency, the only expected future income is from other people buying when you sell. If other people aren't there to buy at the price you expected, your prediction is just wrong.
Making money appear and disappear from circulation is one of the Fed's primary functions.
> The Fed can influence the money supply by modifying reserve requirements, which generally refers to the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks' reserve requirements, the Fed is able to decrease the size of the money supply.
They lowered reserve requirements to zero at the start of the pandemic. I think most creation is done through open market operations since the housing bubble anyway.
That is the story they like to tell you but the fed has almost no control over money anymore. The best they can do is control treasury yields and do some damage control.
Demurrage currency is designed to have a stable money velocity. Regular currency can simply stop circulating. I. e the fed has no control over money that is being stock piled.
It doesn't really make sense to think of it like that. "Money" is simply the value of what's in everybody's accounts, plus cash but that's a tiny percentage. When a bank makes a loan, new money is created. When a loan is paid off, money is destroyed. The role of the central bank is to keep enough money flowing in the system to create economic activity. Too much money and you get speculative bubbles. Too little money and the economy grinds to a halt.
Yes. That's how they control the money supply via Open Market Operations. They either print money from thin air to buy US Treasuries, or they sell US Treasuries and pocket the money received. The money they pocket basically ceases to exist as far as the productive economy is concerned.
Glad to help with sources - it took me a long time and many different web searches to understand this. And it still seems like kind of a Rube Goldberg machine, but at the end of the day, this is how it works.
Have a look at the following:
> Open market operations (OMO) refers to the Federal Reserve (the Fed) practice of buying and selling U.S. Treasury securities, along with other securities, on the open market in order to regulate the supply of money that is on reserve in U.S. banks. The Fed purchases Treasury securities to increase the supply of money and sells them to reduce the supply of money. The objective of OMOs is to manipulate the short-term interest rate and the supply of base money in an economy. By conducting open market operations, the Federal Reserve can achieve the desired target federal funds rate by providing or removing liquidity to commercial banks by buying or selling government bonds from or to them.
> The Fed buys U.S. Treasuries and other securities from its member banks and replaces them with credit. All central banks have this unique ability to create credit out of thin air. That’s just like printing money.
> ...
> The Fed can also reverse the effects of quantitative easing (QE). It does this by selling Treasuries and mortgage-backed securities to its banks. The Fed removes dollars from the banks' balance sheets and replaces them with these securities. What happens to the dollars? They vanish. In other words, they go back into thin air, where the Fed got them in the first place.
Another insight you can get from these articles: the Fed buys US Treasuries from the US government, also with money from thin air. So it's not really possible for the government to go bankrupt or for treasury interest rates to skyrocket, because (1) the government can always raise more money by issuing treasury bonds, (2) the Fed serves as the treasury buyer of last resort, and (3) the Fed will buy the bonds at whatever interest rate it likes. Since it's the Fed's job to keep the economy stable for the US government, it will always do this if the government needs it to.
As evidence that this structure can work, check out Japan, where national debt is currently over 250% of GDP... but interest rates are extremely low. Because Japan's central bank serves as the treasury buyer of last resort, and keeps interest rates low in service to the government.
The fed does indeed sometime draw in money and park it (to be used the next time they need to increase the money supply, in a sense)
It's also the case that money velocity can always slow to a crawl. If it reaches a point where people figure they are more likely to keep value by just holding the money instead of investing it into something due to falling asset values, that can overcome even the desire to beat inflation. It's all very situational, but sometimes money doesn't get invested, or at least the rate at which it changes hands slows down due to a lack of good investments in the system.
We're talking about marginal changes here. I think plenty of people are still happy to have their money in these speculative assets.
Those taking the money out may have liquidity needs elsewhere due to expected Fed actions, or may have lost confidence that the asset will appreciate at the rate needed to justify the investment at higher interest rates.
Just my speculation. It's interesting to think about!
> plenty of people are still happy to have their money in these speculative assets
Are you sure? All the stocks that got bumped during covid are now down/or on their way to pre-pandemic levels. Even FAANGs that were supposed to fuel the stay at home trend: Amazon, Netflix (-20%). Crypto might be next...
Somebody is making a killing, where will that gain go next?
I sort of get what you mean, but I'm not sure if it makes sense. If I have some FB stock and sell it to you for $303.17 (price as of this moment), I gain $303.17 and you lose $303.17, and a stock changes hands. Is there more money from this transaction that needs to be parked somewhere?
There's only "more money" if you look at one side, and only one side, as "the savvy speculator" who is always looking for a new place to park the money.
The people who move stock prices significantly are usually the ones doing it by volume - i.e. institutional investors (ex: Cathy Wood). Retail investors are a recent phenomenon when in aggregate.
The question still remains, where are they going to park these profits?
I still don't think that a stock price going down means there is excess money in the economy that needs to be parked somewhere. Someone has more money and someone has less.
This is still true when we're talking about institutions. Some institutions profit and others lose. Cathy Wood's record is far from perfect and she is losing big time right now.
Hope the author got a kickback for that ridiculous quote.