In TradFi if there is ever a situation where the monetary supply needs to expand or contract, the government can, at will, change the rules of the game without any other participants’ agreement. In crypto, the monetary issuance schedule cannot be changed unless the majority of the network agrees. The more parties that provide resources to the network, the harder it is to form agreement, therefore, changes become more difficult the more successful the crypto network becomes.”
“Takeaway
If all banks fail en masse the TradFi system ceases to operate effectively. If all large miners fail en masse the Crypto system will experience a hiccup as difficulty adjusts but value can still be transmitted between parties.”
“Takeaway
The government can print all the necessary fiat currency to cover all bank liabilities should the bank fail. For any crypto intermediary, if the firm cannot make good on its promises, clients are assured to lose some or all of their capital.”
“Leverage in crypto cannot cause a systemic failure of the ecosystem. Any losses would be local and limited to holders of intermediaries’ IOUs and/or individual crypto assets.”
Jackula
2 years ago
Does Powell read your blog lol! Great timing..
mdranias
2 years ago
If bitcoin is the El Salvadore currency it will always be convertable to dollars. Unless you think they will put some form of sanctions on the country. link to thestreet.com
Crypto Enthusiast
2 years ago
Reads like a cheap Elizabeth Warren speech🙄.
yes Im 100 percent aware of whom the author is the of linked article.
“Lazy economists and macro pundits hold the misconception that the crypto markets operate similarly to TradFi. They do not. The value transfer mechanism is divorced from the activities of the financial intermediaries. Therefore, financial intermediaries in the crypto markets live and die by their business models and risk management systems. If they blow up, there is no saviour. Unfortunately, customers lose money, but the network continues to work as outlined by the source code.
Leverage in crypto cannot cause a systemic failure of the ecosystem. Any losses would be local and limited to holders of intermediaries’ IOUs and/or individual crypto assets.”
Jackula
2 years ago
Quite some time ago was going to go into bitcoin, found out about tether and went nah!!!! Great peice of investigative journalism, good research and writing like this is getting hard to come by. Thanks for the hugely informative post!
hhabana
2 years ago
Great article Mish! I was a bull on BTC and some crypto, but have pared that enthusiasm down. I read about Tether initially on a message board and didn’t understand the implications and then you did some good articles on this. I have a small amount of BTC per dollar value and some LTC (Litecoin), but not interested currently at building any meaning investment in it any longer. I sold most of my position at higher prices.
To me it seems like you have no regulatory, objective party (does not have to be governmental) that is watching over this all to avoid corruption and embezzlement. Sort of like the fox watching the chicken coop. Also, I don’t like that there is no policing of the stolen coins! This is like the Wild West! Where the heck did they go??? lol.
Good luck to those longs that are still in. I don’t know what to think about this so better not get involved with things I don’t understand.
RonJ
2 years ago
Mish: “A Word About Fud
Every week I am accused of spreading “FUD” (Fear Uncertainty Doubt) by asking simple questions.”
But Shakespeare says it in such an elegant and beautiful way.
Doug78
2 years ago
I am waiting for the regulated exchanges be set up before playing them. Counterparty risk is the first risk to judge before all others in any commercial transaction.
TCW
2 years ago
Seems to me mining a bitcoin is just generating heat. And all that heat gets removed with a fan and blown back into the environment and then does nothing. At least gold doesn’t just vanish like a fart in the wind.
njbr
2 years ago
Who could have thought that a currency based on a specious scarcity that was developed to evade regulation would attract schemers and scammers.
New one on me…
KidHorn
2 years ago
Bitcoin is for those who think they understand technology because they know how to use an app, but have never actually built a finished product using technology. They convince themselves that they’re technical experts and everyone else just doesn’t understand. They’re all suckers. A perfect example of how a little bit of knowledge can be dangerous.
EWM
2 years ago
Hodlers think that the dollar is going to zero. I agree with them.
Northeaster
2 years ago
There’s so much fraud in our economy, and the politics surrounding it, it’s intentionally made difficult to find where it begins and ends.
It’s also why State AG’s use quick corporate settlements, they simply don’t have the manpower to invest in sophisticated financial criminal cases (see State Street, any Wall Street bank).
After over a decade of suspending mark-to-market and sound economic principles by The Fed and CONgress, it’s starting to pile up on citizens and households. Money & political power is all that’s left.
Eddie_T
2 years ago
Exchanges are completely opaque. Tether is a fraud, and when it goes down it will take down bitcoin. When bitcoin goes down all other cryptos will go down with it. At that point it might make sense to start owning some of the better alt coins, particularly those that have an actual use case. But it will take a long time for them to come back, probably.
I’ve been saying this for some time. 18 months?
Casual_Observer
2 years ago
The free markets can never fail until they cause the next crisis.
I find it is manipulated markets that cause the next crisis.
Dean2020
2 years ago
Massive fraud is evident in financial markets everywhere you look. This interview is nothing shocking, especially since the crypto world is still the wild west.
There are many blockchain projects that are valid and will continue to evolve. This is a difficult arena to comprehend for most people, even those that work in the IT industry.
Innovation continues to move at an extremely fast pace. Yes, many of the projects are fraudulent but there are many more legitimate projects that will transform financial markets.
My advice is not to cherry pick the deficiencies of some crypto assets to understand the technology but dig into some meaningful projects to see the big picture. Blockchain is here to stay but many cryptos will not survive. This is the nature of innovative technology.
As far as investing in the sector… its a casino for now but that will eventually evolve also.
The podcast is great, but they miss perhaps the MOST important point. The critical thing is that the crypto marketspace is built on the foundation of stable coins. Most of the crypto transactions are with stable coins because it is actually quite difficult to trade for those pesky fiat currencies. Crypto investors do most of their trading on dodgy exchanges in strange jurisdictions (like Bolivia) that they can only access over VPN. None of these exchanges allow transactions in US dollars (or any other generally traded fiat currency). Thus, the only way to get “dollars” is to sell for stable coins, which are theoretical dollars.
Unfortunately, ALL stable coins are no better than the bank behind them, or the perceptions of the depositors with those “banks”. We recently saw one stable coin crash to zero in a single day when there was a bank run. These stable coins are NOT crypto currencies, they are just “funds” managed by humans.
Even if tether isn’t a fraud, God only knows how it would behave under stressful market conditions. Likewise with all the other stable coins out there. And without stable coins lubricating the crypto marketsphere, cryptos are toast…
Actually, that was their main point: the crypto marketspace is built on the foundation of stable coins, and so, when it is revealed that the stable coins are stable only in an illusory sense, and actually worthless, the foundation will crumble, leaving a mess behind.
The impression I got was that the podcast focused a lot on the possibility that tether was a fraud. While that might be true, I think it moves the focus away from the problematic way in which the entire crypto market is dependent on stable coins. Even if there is no fraud at all in the stable coin space this is a huge problem.
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“Lazy economists and macro pundits hold the misconception that the crypto markets operate similarly to TradFi. They do not. The value transfer mechanism is divorced from the activities of the financial intermediaries. Therefore, financial intermediaries in the crypto markets live and die by their business models and risk management systems. If they blow up, there is no saviour. Unfortunately, customers lose money, but the network continues to work as outlined by the source code.
Leverage in crypto cannot cause a systemic failure of the ecosystem. Any losses would be local and limited to holders of intermediaries’ IOUs and/or individual crypto assets.”
It’s also why State AG’s use quick corporate settlements, they simply don’t have the manpower to invest in sophisticated financial criminal cases (see State Street, any Wall Street bank).
After over a decade of suspending mark-to-market and sound economic principles by The Fed and CONgress, it’s starting to pile up on citizens and households. Money & political power is all that’s left.
The free markets can never fail until they cause the next crisis.