The cryptocurrency industry sometimes markets itself as an alternative to the traditional financial system and its dependence on the US Federal Reserve, but this week crypto investors are learning how useful it is to have a lender of last resort.
As the industry weathers a bear market that’s destroyed $2 trillion, Bahamas-based crypto exchange FTX gave crypto lender BlockFi a $250 million loan. The head of FTX, Sam Bankman-Fried, also owns quant trading firm Alameda Research which last week extended a revolving line of credit to crypto broker Voyager Digital last week. (Crypto markets are happy with the deal: In the last 24 hours, the FTX token is up nearly 9%).
The Federal Reserve can be the lender of last resort because it has the power to create money out of thin air to lend. Unlimited amounts of money that is pumped into the banks. This causes inflation – inflation of consumer prices if the banks lend it to consumers, asset price inflation if the banks use it to buy assets. Sometimes both.
My understanding is that crypto currencies are voluntarily limited. Otherwise, people would be (rightly) afraid that an infinite amount of crypto currency could be created and that existing crypto values would be diluted to zero. Is that incorrect?
What is backing the FTX loan to BlockFi? Are these real U.S. dollars or crypto currency? If the loans are real U.S. dollars, who is at risk of loss? If they are crypto currency, is this newly created out of thin air (like the Fed or like individual banks in the 1800s before the Fed existed)?
My understanding is that crypto currencies are voluntarily limited. Otherwise, people would be (rightly) afraid that an infinite amount of crypto currency could be created and that existing crypto values would be diluted to zero. Is that incorrect?
I believe so, though I only know a bit about crypto. You can set up a cryptocurrency any way you want. It doesn’t have to be finite.
Bitcoin is finite - there’s a cap on the number of coins. AIUI, Ethereum (the second-biggest cryptocurrency) is not finite. There are so many different cryptocurrencies out there that I would guess (though I don’t know) that they run the gamut on the ease and likelihood of expanding the supply of those coins/tokens.
My understanding is that crypto currencies are voluntarily limited. Otherwise, people would be (rightly) afraid that an infinite amount of crypto currency could be created and that existing crypto values would be diluted to zero. Is that incorrect?
I believe that is mostly correct with the caveat that even finite cryptos like BTC are divided and subdivided, etc. potentially toward the infinite, which may render the term ‘finite’ a little inexact.
I believe that is mostly correct with the caveat that even finite cryptos like BTC are divided and subdivided, etc. potentially toward the infinite, which may render the term ‘finite’ a little inexact.
Cutting a pizza into more slices doesn’t give you more pizza.
If you have a finite amount of a currency, you run the risk of that currency becoming highly deflationary - too few BTC chasing too many goods, so the value of a BTC keeps rising (rather than falling due to inflation). That doesn’t change if you start talking about the currency in Bitcoins or Satoshis or any other fractions of the currency. You can carve the BTC into more manageable subunits (a centi-BTC or a milli-BTC or a Satoshi), but if the money supply can’t be adjusted to expand as the economy it serves expands, you’ll get rampant deflation.
You can carve the BTC into more manageable subunits (a centi-BTC or a milli-BTC or a Satoshi), but if the money supply can’t be adjusted to expand as the economy it serves expands, you’ll get rampant deflation.
Which happened with gold in the last part of the 19th century. It lead to the the famous ‘Cross of Gold’ speech by Williams Jennings Bryan.
Currency terms like “quarters” come from splitting coins. Spanish doubloon cut into eight parts…
Piece of Eight
Back then, coins were valued by their actual weight in silver or gold, not just on what they looked like. Spanish coins were preferred over other currency because they had a milled, or patterned, edge, which prevented dishonest traders from shaving slivers off the coins without being detected. Cutting money was not illegal, like it is now.
In fact, it was expected that, to make change, they literally cut the coins into 8 pieces or “bits.” Hence, the British called the Spanish dollar a “Piece of Eight,” and when they said something cost “two bits,” they meant it cost a quarter of a dollar.
There are so many different cryptocurrencies out there that I would guess (though I don’t know) that they run the gamut on the ease and likelihood of expanding the supply of those coins/tokens.
It’s rather ironic that the selling point is “it’s limited”, but there are - and I am not exaggerating - an infinite number of crypto currencies that can be created.
t’s rather ironic that the selling point is “it’s limited”, but there are - and I am not exaggerating - an infinite number of crypto currencies that can be created.
Frankly, in a world trying to reduce CO2 emissions, crypto funds are a significant source of same from their electricity consumption plus the resulting heat expelled into the atmosphere. Since it’s difficult to see what they contribute, I’m surprised they’re not already banned worldwide.
If you have a finite amount of a currency, you run the risk of that currency becoming highly deflationary - too few BTC chasing too many goods, so the value of a BTC keeps rising (rather than falling due to inflation). That doesn’t change if you start talking about the currency in Bitcoins or Satoshis or any other fractions of the currency. You can carve the BTC into more manageable subunits (a centi-BTC or a milli-BTC or a Satoshi), but if the money supply can’t be adjusted to expand as the economy it serves expands, you’ll get rampant deflation.
The crypto-proponents see deflation as a feature, not a bug. So by simply making BTC incredibly divisible, it can still function as a currency (they say).
Otherwise, people would be (rightly) afraid that an infinite amount of crypto currency could be created and that existing crypto values would be diluted to zero.
There is nothing stopping an infinite amount of crypto from being created. There are thousands of variants already, and the phenomenon has just started. And, in fact, some are saying that the eventual end can only be dilution to zero.