I keep waiting for the Crypto ponzi scheme to burst. It doesn't and I don't understand why. I'm convinced by this that I don't understand economics at all.
> I keep waiting for the Crypto ponzi scheme to burst.
Previously Ponzi schemes were limited in geographic area, so you'd be limited to the number of marks you could go after, either through travel limits or the number of people you could meet through 'friends of friends'. This could grow a bit if you were 'successful' enough and could establish a reputation (e.g., Madoff).
Online schemes do not have geographic limits and so there's always a fresh source of unknowledgeable persons to go after.
Further, most traditional Ponzi schemes are of the form that you'll receive x% returns (e.g., dividends) per year, but Crypto is more akin to:
> In finance and economics, the greater fool theory states that the price of an asset is determined by whether you can sell it for a higher price, at a later point in time. On assets where the theory applies, it is implied that the asset's intrinsic value is less important than the increase in demand, however irrational it might be. The person buying the overpriced asset later on, for a higher price, is deemed the greater fool.[1][2][3][4]
One lesson of the medieval period is that that when the previous society(Rome) breaks down, a period of mysticism sweeps in, from which the new society emerges. This happens on a smaller scale with e.g. "Great Awakenings". Mysticism normalizes a reality, and therefore it doesn't obey the rules of reason, rather, great efforts are made to rationalize its existence from a pragmatic beginning. Philosophers cannot reach agreement on what is good for people, so religious experiences fill in the gap, and that's always been the case with the economy too.
People used to believe that conquests made wealth; gradually they became convinced that productivity made wealth. Productivity is now on the chopping block, since it is seen as something that's killing the planet with inexhaustible resource demand. We're looking for the next way of seeing things. Crypto doesn't make sense now, and I say that as someone deeply invested in it, but it has that kind of potential to change our frame of reference after an awkward transition takes place. Maybe it makes sense if we go further with it. The experiment is in progress, but it's already exceeded the usual bounds of a cult or scam.
It’s only been around for 10-ish years. As someone that is interested in crypto, and actively participates in not only buying, but using it, I think we’re a far ways off from the bubble bursting completely. Market cycles will happen, projects will die, but I think crypto is here to stay. The bigger question is how far does it spread. It works incredibly well at putting money into the hands of people that have never had it before. The number of high school and college drop outs that I know, who now have more money than most people on earth is staggering.
Into the hands of a couple of people. It's an unproductive asset meaning all it can possibly do is redistribute the money that new entrants provide and split it between existing holders and miners.
It is fundamentally negative sum, and the narrative of prosperity is driven by existing holders to attempt to claim a larger stake of fiat.
It is productive in the following ways:
- you don't need anyone's premission to use it (yes, there are downsides)
- you cand lend it out or take a loan much like a bank, but without borders
- you can program it and also not fear your program being meddled with. Most banks don't even have an API to use it for a private person.
- it can be deterministically scarce, so you wont be losing it if you hold it (or you can, if others lose faith. With national currencies they can simply take your money without you having a say by printing more)
You've conflated the role of assets and currencies in a financial system. Even separating that out, that's not a productive asset. The productive asset would be an interest in the lending platform.
Concretely it would be like treating gold as a productive asset because InteractiveBrokers lets you take out a margin loan collateralized by your gold. Gold remains unproductive in this scenario, IBKR shares would productive. Value from lending would accrue to IBKR shares.
I guess I was listing the value of what crypto has.
What does "productive" mean? If something has somekind of value/property that is useful somehow, then isn't this "productive" in the sense that it produces that value?
10 years is also a good point. As most of that in general have been bull market in economy. So we really haven't seen how will crypto do in proper bear market...
You are correct, there are no dividends but this part of the definition applies.
"The scheme leads victims to believe that profits are coming from legitimate business activity, and they remain unaware that other investors are the source of funds"
I believe this holds as I don't think most of the investors understand crypto. It is a magic black box so they don't know where the value comes from.
It's a currency. There is no underlying business activity, only transactions.
Bitcoin failed as a general currency but apparently banks are using it to settle accounts amongst themselves. Sometimes things develop in the most unintuitive ways.
> I believe this holds as I don't think most of the investors understand crypto. It is a magic black box so they don't know where the value comes from.
I don't think this is evidence of any scheme. It's just irrational market behavior.
Crypto still is small enough that a couple billion dollars can bail the system out. It only took a few billions to pump it up to $25k in 2017. At some point the amount it takes to bail them out will be larger than any of the billionaire true believer investors are willing to throw into the pot and will exceed their ability to agree with each other to risk that much to save it.
It isn't really an economic problem, it is more like a poker game.
The next market crash will probably be from a substantially higher peak and will take proportionately more to bail it out, and it is also going to be complicated by governments taking the opportunity to crack down on it so "regulatory risk" will be very high. 2022/2023 are probably going to have a high risk of the game collapsing.
Won't be 100% though so it could come back and another ~4 years from now we could be seeing yet another bubble blowing up in crypto. I wouldn't get too emotionally attached to hating crypto or believing that a sudden regulatory attack on crypto is going to manage to pop crypto in the near term (and what China did recently was the kind of crackdown that everyone believed would kill it, but its dragging itself out of the hole again).
Right now chances of it popping in the short term are probably very low, and nobody is going to seriously take a run at regulating it because they don't want to be responsible for the fallout (similarly to how nobody did shit about Madoff's Ponzi until he went cash insolvent in 2008 due to the financial crisis).
With a corollary, "the stock market can remain irrational long enough for you to profit from something valueless".
It's of course risky, but cruptocurrencies can be a perfectly valid source of money, as long as you just risk spare money. You don't need to trust it to be a valid investment, you just need to trust that enough people will believe it is.
I have a feeling that this market stays up because the previous one has just enough flaws to allow the other to be believable, whether or not crypto will provide something useful.. I don't know.
I'm waiting for whole stock market and everything else to burst... But when you think about how central banks and governments are handling it and all the money around it makes lot more sense how it is still going on.
Well, there's always value in enabling money laundering and purchasing of illegal goods. Bitcoin has lots of uses, I just don't think they're the ones the doe eyed idealists like to talk about.
As long it can be used as a currency it will keep a value above zero. It will die just like any other currency, which is to say the day when the market refuse to take the currency in exchange for goods.
What's the scheme? You can stuff US dollars into your pocket and exchange them for goods and services pretty much anywhere in the world. That's not a ponzi scheme -- that's currency.
> Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything
Fundamentally it's not really any better than cryptocurrencies. We can't easily transact with cryptocurrencies due to cultural reasons. We have coins right now that can be used to transact with complete privacy. People don't do it because culture is slow to change.
Worst case for cryptocurrencies is the whole Tether thing implodes. Not sure it ever will but hey, if the US government will bail out banks when they screw everything up, why not Tether as well?
I never said the USD didn't have value. I said the value of the USD is not backed by anything. The government and banks are free to inflate the USD as much as they want. It's like an unconditional tax on everyone.
Like all currencies before it, its value will diminish over time. When the US ceases to exist, its value will finally become zero. Precisely because tax payments were the only thing keeping it relevant.
USD is backed by the U.S. military force, via a slippery slope: you can only pay taxes in USD, and if the taxes you owe are large enough and you refuse to pay, the U.S. government will send increasingly larger forces to claim those taxes.
