Why do so many people who are “experts” think crypto is better than fiat?
or
What is the difference between crypto and fiat?
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Don’t know about crypto, but your fiat currency is backed by the central government. This become very important during economic slumps because the central bank can be counter-cyclical.
DB2
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Why do so many people who are “experts” think crypto is better than fiat?
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Because they are not experts and do not understand a key aspect of how any “currency” acts as a medium of exchange and store of value. In essence, they are being fooled by those touting the ability of cryptographicaly based digital currencies to guarantee the PROVENANCE of a particular “coin” (or token) into thinking that guarantees its WORTH at any given point. Ensuring a means of guaranteeing the provenance of a token can HELP protect its VALUE but sound provenance is not SUFFICIENT to guarantee its VALUE.
What’s the difference?
Parties can agree to adopt nearly any physical object as a symbolic representation of “value” that can be exchanged now (used as a medium of exchange) or exchanged at some point in the future (acting as a store of vaule). Imagine that they choose a piece of paper with a special signature or rune drawn on it to represent 100 units of work that everyone presently would willingly trade for 20 coconuts or 8 fish.
Whether two people or two hundred people are involved, it’s possible for EVERYONE to agree that a pile of paper slips with that special signature or rune all reflect valid “money,” each containing a non-falsified signature or rune that should be exchangeable at the going rate of 20 coconuts or 8 fish (or payment for someone else to put in 100 hours of work).
As long as everyone feels compelled to accept those slips of paper as “payment” any time they want 20 coconuts, 8 fish or 100 more hours of work, we have a medium of exchange and a store of value and we don’t have a provenance problem.
But what if a sizable portion of the larger community decides they will no longer accept the slips of paper with the magic signature or rune on them? They’re not arguing the slips aren’t “real”. They simply refuse to accept them. At that point, unless a means exists to compel acceptance of that paper, the paper becomes worth LESS at a minimum, since SOME may refuse to accept it. The paper might become WORTHLESS if enough refuse to accept it.
Or what if the community wants to trade with some other nearby community that has standardized on a DIFFERENT signature or special rune on its paper? The two communities might begin trading and swapping each other’s slips of paper freely for weeks, months or years. That would extablish some exchange rate between paper A and paper B. But what if Community B suddenly stops accepting paper A? Paper A is still good in Community A and Community B isn’t doubting the provenance of paper A, they have just suddenly decided not to accept it for trades.
At that point, if Community A is holding many slips of paper B as a means of paying for expected future goods and services, Community A has a problem. Those slips of paper B are now either worthless if Community A does nothing to force Community B to accept its prior slips of paper B or Community A is going to have to “force” Community B to honor its old slips of paper. Again, no one is saying the slips of paper B don’t exist in Community A’s hands nor are they doubting those slips were actually originated by Community A.
In this situation, PROVENANCE is not the problem. Community B isn’t refuting the reality that those slips of paper B were not legitimately originated. They are simply – suddenly – rejecting the prior committment to redeem them – at ANY valuation. This could be a problem for the people in Community B if their livelihood depends on the ability to trade with people in Community A holding paper B. The people of Community B must determine if they need to apply force to their collective to ensure paper B keeps getting accepted. This could also be a problem for Community A to determine if their community members are so impacted by this sudden repudiation that A needs to force B to continue honoring paper B in exchanges.
Many countries have updated laws making SOME digitial currencies “legal tender” for some forms of exchange, including sales of goods and services between private parties and tax payments from entities into the government. However, it isn’t clear if any nation-state is willing to go to war with another country if that country decided to suddenly repudiate obligations of private accounts denominated in an arbitrary digital cryptocurrency. Until that is the case, there will always be a perceived gap in security between traditional “fiat” (paper) currencies and new forms of cryptocurrencies.
It is never stated that way but such threats are subliminally part of the underlying commitment made when people talk about the “full faith and credit of the United States” because that underlying military power increases confidence in others holding our currency that its value will not vanish overnight or be repudiated for selected people holding it.
(Brief final aside… Note that none of the above can be construed as fiat currencies being inherently capable of providing a “store of value” over an arbitrary long period of time. Use of fractional reserve banking with fiat currencies virtually GUARANTEES the value of a fiat currence WILL decline over ANY arbitrarily long period of time. The “store of value” attribute is only applicable over short periods of time – days, weeks, maybe and even then not at 100% retention of value).
WTH
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The problem is people confuse the word “fiat” with a cheap Italian sports car. It misleads people.
If you are having a problem with your fiat send it my way.
If your Fiat won’t run scrap it in a junk yard.
The Lira was even worse.
Fix It Again Tony!
I really liked my Fiat but it was flimsy. It was totaled in a hit & run accident that knocked me out. Flimsy likely saved my life. The car was rear ended so hard that the backrest gave way and I landed in the back of the car. It probably saved my neck.
Great handling, almost like running on rails, only surpassed by the Toyota Corolla which was a sturdy built car.
The Captain
Fabbrica Italiana Automobili Torino
Founded 1899
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Feeble Italian Attempt at Transportation. I looked, very seriously, at a 500 Cabrio about six years ago. The car was a hoot, like driving a really fast golf cart. The salesmen were yerks tho, so I left empty handed.
Steve
The salesmen were Stellantis.
The Captain
You didn’t really get an answer, so here’s my best stab:
Crypto - or more specifically Bitcoin - arose as a response to the banking crisis in 2007-2008. The banking system had nearly blown up the economy, so Bitcoin was an effort to create a method of payment that did not rely on banks. This new method of payment was intended to be trustless and decentralized. Transactions would not require “trusted” intermediary financial institutions that would confirm vailidity to be processed. The system would be based on decentralized cryptographic proof instead.
Crypto was thought to bring a number of benefits. Financial transactions would be freed from the risk of “censorship,” since they would be outside the possibility of regulation. The new financial system would be available to people living in areas without developed financial systems or banking services. There would be no risk of third-party custodians or financial institutions engaging in foul play. Etc.
What ended up happening instead is that most crypto just ended up speed-running through all the problems that the modern financial system evolved over time to solve. But that was the idea.
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I had a Fiat 124 Spyder. Fun car, but it didn’t always get you back home.
No. This was in the spring of 2018. It was still FCA, before Peugeot merged with them to form Strabismus.
The car in question was a 2017, that the dealer had used as a service loaner for several months, so it was being sold as a used car. Being a used car, it had a warranty disclosure form on it. The form said no factory warranty, only a 60 day 50/50 dealer warranty. The car should have had about 3 1/2 years of the original Fiat warranty on it, not a jive 60 day thing, so I questioned the form. The salesman said it was covered under the new car warranty. I said “fine, put it in writing”. He wouldn’t. He brought over his sales manager. I repeated my issue with the written form on the car. He said words to the effect “we told you verbally it’s under warranty. sign here. give us money”. Refused to put his assurances wrt the warranty in writing. So, I mosied on my way, empty-handed.
What a bunch of yerks.
This is one of the dealer’s pix of the car. This is a Cabrio, with the opening roof. Really liked that car.
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The promise of crypto is this: It is not controlled by any central government or bank, you can self-custody, and you can make peer-to-peer transactions without going through a third party (like a bank). The supply is fixed and so cannot be inflated away or debased. It is like gold, only you can store it and transfer it digitally. So it is better than gold. This libertarian, egalitarian promise is very attractive to a lot of people and some whole heartedly believe it.
There are scores of cryptocurrencies, but in a practical sense there are really only two: Bitcoin and Ethereum, and mostly just Bitcoin. So my comments are mostly about Bitcoin.
The price of Bitcoin and Ethereum have sky rocketed by an amazing amount since they were created, which has attracted a lot of attention.
Now let’s compare the promise vs. the reality. The reality of Bitcoin is that it completely sucks as a payment system. It is awful. Except for extremely niche transactions (almost always illegal), Bitcoin transactions require a centralized exchange.
A parallel problem is that self-custody is difficult, so many people don’t even bother instead storing their crypto on exchanges. The exchanges are largely unregulated and often located overseas. So the exchange often fail due to poor management or sometimes they simply steal their customer’s crypto. Sam Bankman-Fried and FTX are an example where he stole money but wasn’t able to get out of town before the cops arrived. Many other similar examples.
A lot of people want to get in on the price action, but you can’t trust the exchanges, self-custody is a pain, you don’t care about payments. etc. Enter the Bitcoin ETF. The nice folks at Fidelity or Morgan Stanley will do the messy stuff for you and you can just buy it in your regular brokerage account. Easy peasy.
But compare the ETF to the libertarian promise. There is no self-custody, it is held centrally by a third party, and you can’t make payments at all. The promise is dead. People don’t care about any of that stuff anymore. They just want the price action.
The “experts” are people just trying to pump their bags. Because Bitcoin is useless as a currency, they need to hype it up so more people will buy it, least the price might fall.
If you look at every crypto discussion we’ve on on this forum, the bull case always comes down to “the price went up in the past.”
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Thank you and @ WatchingTheHerd for your responses.
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Thanks for your thoughts.
This is a point I don’t understand. How many golds are there? As far as I can see on the periodic table only one. How many crypto currencies are there? Many and more are created every year. Some have died? What happens to an investor’s crypto when the currency dies?
You could make a reasonable argument that there is network effect with Bitcoin. Bitcoin was the first and the biggest, so that’s the way to participate in crypto.
When it is hacked by a quantum computer it all goes to zero.
Same thing that happened to Weimar Republic bank notes. They’re worthless trash.
Except those Weimar notes eventually had a little value again as a collectible oddity. I haven’t figured out how to frame my Agenor and hang it on the wall.
—Peter
Depends on what you mean, “dies.” If you just mean that the coin becomes valueless, you might still “own” those coins. Many cryptocurrencies - so-called “alt-coins” - run on major blockchain platforms like Ethereum that continue to exist. So even if your coin falls to near-zero (like, say, Terra’s original LUNA coin), you still “own” all your near-zero value coins on the network, and can theoretically be traded with another party should anyone want them.
Some crypto coins trade on their own blockchain platforms, though - and if those coins “die” it usually means that the blockchain network has also stopped functioning. In that scenario, you have literally nothing any more.
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@WatchingTheHerd
What an excellent high level description of BRICS and the problems those countries are having trying to find an acceptable currency.
This is the currency interplay described by Joe Blogs and Peter Zeihan between Russia n China.
And between Russia and lots of other (mostly developing?) countries due to the US/Western sanctions, which deem the ruble as “currency non-grata”.
The ruble supposedly has lost value… Cause nobody “wants” it?
Another real world example is China’s BRI effort to convince a bunch of “developing” Country B, C, D, Sri Lanka, Pakistan, the MEs, and Russia, etc to trade with China in yuan. And if the Country ain’t got no yuan, well “resources” (gold, oil, REEs) or “infrastructure” (Sri Lanka port, or port Chancay Peru) will be acceptable.
WRT cryptocurrency filling a need for the unbanked, NU and STNE are filling that niche in South America, using local currencies.
NU is currently a widely discussed growth stock.
STNE seems to be out of favor?
MELI n SE are also offering fin-tech services in developing country markets.
Jmia is offering inter-Africa fin-tech.
Crypto has to compete with these, too.
ralph
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About the same time Bitcoin was created, Vodaphone created a service called M-Pesa, which allows unbanked users in Kenya to send and receive money on their cellphones. Since then mobile money services have exploded and now over a billion and a half users, mostly in Africa and Asia. There was and is clearly a need in regards to the unbanked population, but crypto didn’t fill that gap.
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About the same time Bitcoin was created, Vodaphone created a service called M-Pesa, which allows unbanked users in Kenya to send and receive money on their cellphones.
Just remember that solutions for providing services to the “unbanked” face issues with fraud as well. I found a story last week regarding an investigation being launched against Bank of America, JP Morgan Chase and Wells Fargo regarding tens of millions of dollars in fraud related to the Zelle app they promote for use as a money app for their customers.
Obviously, the Zelle app involves customers who ARE “banked” (you have to use it with a credit or checking account as the underlying source of funds). However, the problems users are encountering with fraud stems from the fact that the process of soliciting and collecting approval of a withdrawal from a linked account is itself contained within a smartphone / tablet app. That means that ultimately much (all?) of the approval mechanism is tied to an “Identity” derived from either a cellphone number or email address, both of which can be easily hacked through SIM card cloning, email phishing or pure password hacking.
While re-reading this thread a few days ago, someone posed a rhetorical question about “why are there multiple crypto-currencies” if ONE is capable of serving the needs of a typical currency (medium of exchange, store of value, use as legal tender in contracts…). That question triggered a thought…
The existence of multiple crypto-currencies WITHIN a legal / economic “jurisdiction” is a sign that each cyrypto-currency is attempting to serve at least one additional pupose BEYOND that of a traditional government backed currency. Crypo advocates themselves will offer up some of these purposes as justifications for using crypto currencies:
- publicly traceable via block-chains to avoid “printing money”
- yet somehow still providing anonymity to support banking privacy
- acting as an intermediate medium of exchange BETWEEN other cryptocurrencies
- an easy-to-use “app” for monitoring your balances and transferring coins
However, if you think through the impacts of a cryptocurrency attempting to serve any of those additional functions, it becomes apparent those offering that cryptocurrency are actually creating business models that are speculative in nature. They are creating processes that act as market makers or attempt to profit from arbitraging distorted “prices” for different currencies resulting from short term imbalances (pronounced “flaws”) in crypto markets.
Over the past four years or so, more stories have come out about how some of the biggest financial institutions suddenly shed their aversion to cryptocurrencies and began setting up trading desks for cryptocurrencies. Do you think it was because their average banking or brokerage customer was wanting to pay bills in Bitcoin or download an app to transfer Dogecoins to pay their baby sitter? Are thousands of small businesses now hiring employees who want to be paid in Ethereum cuz they cannot afford $12/month for a Bank of America checking account that drops below a $1500 balance?
Hell no. These institutions see volatility in crypto markets and they think they’ve learned enough from prior financial “innovations” like junk bonds, CDOs, etc. to think that volatility in any “commodity” can be exploited by those who have the scale to move markets and generate momentum that they can predict. Crypto is just the next thing they THINK they can commoditize, evaluate continuously with supercomputers watching prices, traders and volumes, then arbitrage to make millions every day for doing nothing.
And do so at scales such that when it works, they look like geniuses and pocket ALL of the winnings…
…and when it fails…
…no one could have foreseen this coming and we simply MUST be bailed out at the expense of those we screwed over.
WTH
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