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The Bear Case for Crypto, Part II: The Great Bank Run

prestonbyrne.com

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Re: The Bear Case for Crypto, Part II: The Great Bank Run

#71

Post by dg246 »

pjbyrne wrote: post #61
panarky wrote: post #59

Earlier quoted context omitted.

Exactly. Here's a revised "worked example". Day 1: Alice buys 1,000 Bitcoin from Bob for 1 USD on a street corner Day 2: Market price on the street corner is 1 Bitcoin for 1,000 USD Day 3: Alice sells 1,000 Bitcoin to Charlie for 1,000,000 USD on a street corner The street corner doesn't have to borrow 1,000,000 USD from a bank. Charlie brings the USD to the trade.

You just proved my point. For this to keep working you need Charlie to show up with $1,000,000 new dollars. In a panic, you need to flip this scenario on its head. Charlie is not going to show up and Diana, who got into Bitcoin in 2009 and hasn't done anything since, decides to take her profits on 1,000 BTC. So this system has $1,001 to meet $2,000,000 in deposit demand, assuming neither Alice nor Bob has withdrawn t…

Diana can't just "decide to take her profits" at whatever price she'd like. If she wants $1m but Charlie isn't interested, she will have to lower her price until he is. This is how exchanges work, cryptocurrency or otherwise. If a stock falls to zero, do you think that Etrade dips into its own assets to provide an "off ramp" to its customers that weren't able to sell in time?

You're essentially saying that the exchange should artificially prop up the price of bitcoin with its own money during a panic.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#72

Post by coryl »

tradersam wrote: post #65
coryl wrote: post #62

Earlier quoted context omitted.

So wherein lies the liquidity problem? I deposit USD to an exchange...then use that USD to place a Bitcoin buy order. Then I sell some Bitcoin another buyer on the exchange, who was only able to make this transaction happen because they too deposited USD or fiat into their account. I get the money, they get the Bitcoin. Who is getting screwed?

If the banks cut off access to the funds (e.g.: GDAX can no longer accept USD deposits/withdraws, or possibly even the funds in their own accounts) they basically can't be considered an "off ramp" anymore. If all exchanges were barred from doing business from U.S. banks, than there is no way to get money from 1 BTC (or any other denomination/currency). Herein lies the screw. LocalBitcoins would become a seller or buy…

Ok, so the problem is in the legal arena; the government bans banks from allowing cryptocurrency transactions.

This doesn't seem like a fundamental problem due to the structure of Bitcoin or exchanges.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#73

Post by pjbyrne »

coryl wrote: post #57
pjbyrne wrote: post #50

Earlier quoted context omitted.

Bitcoin itself is a fractional reserve system.

Fractional reserve systems have fixed maximum supply of currency? According to the Bitcoin protocol, only a maximum of 21m BTC can exist. And that they are created via mining in a predictable schedule. Respectfully, I think you need to revisit Bitcoin fundamentals.

Nobody thinks of BTC in BTC terms. They think of it in USD terms, and right now the notional amount of BTC is higher than the amount of USD that will be available to meet it in the event of a very sharp correction.

At least, that's my view. We'll see if there's a flight to liquidity when the bubble in Bitcoin's price finally pops.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#74

Post by pjbyrne »

dahdum wrote: post #69
pjbyrne wrote: post #61

Earlier quoted context omitted.

You just proved my point. For this to keep working you need Charlie to show up with $1,000,000 new dollars. In a panic, you need to flip this scenario on its head. Charlie is not going to show up and Diana, who got into Bitcoin in 2009 and hasn't done anything since, decides to take her profits on 1,000 BTC. So this system has $1,001 to meet $2,000,000 in deposit demand, assuming neither Alice nor Bob has withdrawn t…

In this panic, the price of bitcoin drops as Diana dumps her 1k BTC market sell on the book. The USD comes from whomever purchases - there is no liquidity problem.

Call me back after the bubble crashes and we can have a discussion about where the dollars ran off to in the middle of it.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#75

Post by stale2002 »

pjbyrne wrote: post #73
coryl wrote: post #57

Earlier quoted context omitted.

Fractional reserve systems have fixed maximum supply of currency? According to the Bitcoin protocol, only a maximum of 21m BTC can exist. And that they are created via mining in a predictable schedule. Respectfully, I think you need to revisit Bitcoin fundamentals.

Nobody thinks of BTC in BTC terms. They think of it in USD terms, and right now the notional amount of BTC is higher than the amount of USD that will be available to meet it in the event of a very sharp correction. At least, that's my view. We'll see if there's a flight to liquidity when the bubble in Bitcoin's price finally pops.

OK, so in your world Bitcoin is an overpriced bubble.

That's a reasonable position to have. I think it is overpriced too.

It still doesn't make it a 'fractional reserve system'. It instead means that the price is to high.

These are different things, that have nothing to do with each other.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#76

Post by coryl »

pjbyrne wrote: post #74
dahdum wrote: post #69

Earlier quoted context omitted.

In this panic, the price of bitcoin drops as Diana dumps her 1k BTC market sell on the book. The USD comes from whomever purchases - there is no liquidity problem.

Call me back after the bubble crashes and we can have a discussion about where the dollars ran off to in the middle of it.

Why does he need to call you back? Stock market crashes are nothing new. Bitcoins are basically the same thing as stocks in terms of the way they're traded.

No one is saying a price crash isn't possible. But it won't be caused by some liquidity issue, it'll just be people selling off.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#77

Post by georgecarlin »

pedrocr wrote: post #33
georgecarlin wrote: post #24

Earlier quoted context omitted.

No. "stocks/bonds/land/etc" are not actual assets backed by anything OTHER than scarcity. Land has value due to scarcity and utility (everyone needs somewhere to live). Stocks have value almost exclusively due to capital appreciation. You don't get anything for owning non-dividend-paying stocks. And owning dividend paying stocks just means money is not being reinvested (notice that Berkshire Hathaway has never paid d…

>No. Starting replies like this is getting to be a theme online. It adds nothing to the discussion except make people argue in extreme and entrenched ways. >"stocks/bonds/land/etc" are not actual assets backed by anything OTHER than scarcity. I specifically said they were backed by scarcity (land) and by economic activity (stocks and bonds). >Stocks have value almost exclusively due to capital appreciation. You don't…

This doesn't make sense. You don't get anything for the company performing economic activity. The price of a (non-dividend-paying) stock is set strictly by supply and demand. You only get anything when you sell.. i.e. when someone is willing to pay you more than what you paid for your share.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#78

Post by pedrocr »

georgecarlin wrote: post #77
pedrocr wrote: post #33

Earlier quoted context omitted.

>No. Starting replies like this is getting to be a theme online. It adds nothing to the discussion except make people argue in extreme and entrenched ways. >"stocks/bonds/land/etc" are not actual assets backed by anything OTHER than scarcity. I specifically said they were backed by scarcity (land) and by economic activity (stocks and bonds). >Stocks have value almost exclusively due to capital appreciation. You don't…

This doesn't make sense. You don't get anything for the company performing economic activity. The price of a (non-dividend-paying) stock is set strictly by supply and demand. You only get anything when you sell.. i.e. when someone is willing to pay you more than what you paid for your share.

>The price of a (non-dividend-paying) stock is set strictly by supply and demand.

I don't understand what you're arguing against. First there are plenty of stocks that do return dividends (or do stock buybacks which are equivalent). Second, pricing may be suboptimal, maybe non-dividend stocks should be worth less[1] but it's still pricing something. Bitcoin is just pricing digital gold.

You're also going into the pattern of taking a comment and very vehemently discussing a small part of it as if that's what's being discussed. The initial OP assertion was that somehow fiat currencies are "printing wealth" as if printing dollars is somehow printing wealth, it's not. You've then made an even more incredible assertion that Bitcoin is strictly better than land or stocks because it's more "liquid and useful". Care to explain that? Certainly you're not arguing that Bitcoin is more valuable than all the world's stocks/bonds and all the world's land? And certainly you don't think something that struggles to do enough transactions a day to sustain the current network is actually currently more liquid or useful to the world economy than the capital markets that handle several orders of magnitude more transactions and total value?

[1] Almost certainly not 0 but that's a totally different discussion not worth going into here.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#79

Post by georgecarlin »

pedrocr wrote: post #78
georgecarlin wrote: post #77

Earlier quoted context omitted.

This doesn't make sense. You don't get anything for the company performing economic activity. The price of a (non-dividend-paying) stock is set strictly by supply and demand. You only get anything when you sell.. i.e. when someone is willing to pay you more than what you paid for your share.

>The price of a (non-dividend-paying) stock is set strictly by supply and demand. I don't understand what you're arguing against. First there are plenty of stocks that do return dividends (or do stock buybacks which are equivalent). Second, pricing may be suboptimal, maybe non-dividend stocks should be worth less[1] but it's still pricing something . Bitcoin is just pricing digital gold. You're also going into the pa…

I agree printing money != printing wealth, in fact it has the exact opposite effect, it debases wealth. My argument is against the fallacy that since bitcoin's price is set by unregulated supply and demand, it has no value or is somehow less valuable than land or stocks, or is somehow intrinsically value-less. Bitcoin can be seen as the most credible implementation of pure Austrian price theory (notwithstanding some likely pumps at different exchanges etc).

Stock buybacks actually demonstrate my point. You only benefit from a buyback if they pay you more than what you paid for the share. Dividends are a separate issue as they apply to business being undertaken, and few people invest money based solely on dividend rate. IMO land as a speculative asset actually might the most appropriate comparison to Bitcoin.

At any rate, Bitcoin/Ethereum and others are fundamentally new asset classes, they are technologized money. They allow you to do things with value that were never possible before.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#80

Post by decentralised »

pjbyrne wrote: post #27
1053r wrote: post #2

This article appears to be written under the assumption that coinbase and other exchanges are counterparties to the price. They are not. They are market makers. It's impossible to have a run on dollar demand for BTC, because the price floats. If there are sufficient people selling, the price will simply fall, and has done so several times in the past, before recovering when equilibrium returned to the market. Exchang…

Hi, author here. A liquidity crunch is not the same thing as a fall in Bitcoin's price. A liquidity crunch implies that the people who provide the dollars to this market (banks, I'm informed) cease doing so because they don't have confidence that the money they lend to provide USD liquidity to fiat on/offramps will be able to be repaid by their counterparties during whatever the maturity period is of the facility. As…

You are misinformed and you make a terrible contribution to the crypto community by spreading your misunderstanding as truth.

A little less ego and a little bit more self-doubt would do you good since you can't even tell the difference between volume and frequency Preston.

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