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. Exchanges are not taking loans to back the dollar value of BTC.
The author appears to lack basic understanding about how markets work in this space.
1) enough coin to satisfy coin withdrawals, even in the middle of a panic run
2) enough fiat to satisfy fiat withdrawals, even in the middle of a panic run
I think maybe that's what the author meant, not sure. But if the exchanges fail to show their customers' assets, they will reinforce any panic feedback loop that might be happening sometime in the future.
"The most obvious way, in my view, that Bitcoin mania will turn into Bitcoin panic is when a Bitcoin depositor goes to sell their BTC for dollars – and there are no dollars available to satisfy that sell request."
coinbase has to have the dollars to let me withdraw those dollars from coinbase to my bank account. They may not have enough on hand.
but that's a different problem. If you want to sell BTC for dollars, you depend on the order book to have enough bids in it to satisfy your request, or you have to make a sell order and hope for someone to take it. Exchanges don't have to show liquidity for that, they have to show liquidity when people want to withdraw their assets (edit: complete truncated sentence).
Very true. That's why a stop loss to market is a total suicide in this market. Better do a stop loss to limit and if the limit fails, keep your coins and wait for better times...
sure, panic selling is possible in INTC, absolutely. Valuing INTC is easier, though, because it actually pays dividends and because it can be compared to other stocks.
But this is only a problem if coinbase or whoever is acting as a fractional reserve system.
As far as I know, every single dollar and Bitcoin that coinbase "says" you have is actually in an account somewhere, dollar for dollar and Bitcoin for Bitcoin.
If this is NOT true, and coinbase is a fractional reserve system, that would be a huge scandal.
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.
here is a more specific scenario. By a confluence of events, a large number of bitcoin holders decides to liquidate at the same time. Price falls, triggering stops, at which point other people with significant bitcoin holdings panic and try to sell their holdings, triggering further stops, etc. Price rapidly falls by 75% or more within 1 or 2 days.
Sure, I am not saying it will be worth zero ever. I am saying it can become worth a lot less than today in a matter of days. Part of the problem that I have is I have no idea how to value bitcoin. I can sort of understand how to roughly value a company. But bitcoin I have no idea.
There's something of a practical floor on price at the cost of the electricity to mine a coin times the lowest rate of electricity available at the moment. (Somewhere in the realm of $500 AFAIK)
Now, since the difficulty changes over time I could imagine that not being as high as people think (e.g. if mining companies abandon bitcoin for other currencies), but there is a real world equivalent to book value.
that argument makes no sense to me personally. For example, if I rented a warehouse, filled up that warehouse with iphones and hired workers to systematically destroy those iphones with hammers, there would be a cost to that activity. but it wouldn't a price floor on anything. The thing itself has to have value, the cost of the thing is not a price floor
You should make a blockchain based on smashing an iPhone taking a picture of it and then hashing the picture. You could probably make a lot of money and drive up the value of old iPhones. Revolutionary new proof of work algorithm.
It's like gold, it's an asset (technically a ledger) not a currency, it's an asset because people want it, and like gold has practically no uses other than being shiny.
If the history of technology is any indication it will become obsolete before becoming devalued as cryptofinance people move on to better scams / technology.
Where else, besides the crypto-currency market itself, is "wealth" being "printed"?
Fiat currencies may be inflationary but they're only used to price wealth not actually hold it. Actual wealth, unlike crypto-curency "wealth", is held in stocks/bonds/land/etc which are actual assets backed by some kind of economic activity or physical scarcity. Comparing "Bitcoin as a store of value" with fiat currencies is a strawman, you need to compare it with gold if that's what you want it for. If you want to compare Bitcoin to fiat currencies you need "Bitcoin as a means of transactions" and at that it's become terribly inefficient and underused compared to expectations.
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 dividends out).
Bitcoin is EXACTLY like land and stocks, except much, much, much more liquid and useful.
I am not against bitcoin but bitcoin is not like stocks and land. stocks in aggregate pay dividends, sometimes in the form of stock buybacks, something that Berkshire does do. Non-dividend paying stocks are priced today due to expected future dividends. In other words, they may not pay dividends now, but they generate expected future profits. Land is physically scarce. Bitcoin is software, so scarcity of software is not the same as physical scarcity.
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 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 dividends out).
I have no idea what you're trying to say. Stocks generate value out of an economic activity. That's the value that underlies them. If the company then has enough opportunities to continuously reinvest or if it just gives up and returns value through share buybacks or dividends is not really important to the point that what makes stocks valuable is that the company has some form of economic activity. If you find a stock that doesn't have an underlying economic activity and is just driving up price through scarcity that's not a company it's a Ponzi scheme like Enron used to run.
>Bitcoin is EXACTLY like land and stocks, except much, much, much more liquid and useful.
Bitcoin is digital gold. Useful yes, but wow, you really think its value dwarfs the asset classes responsible for representing the available physical area of the planet and the current economic activity of the planet?
At least gold has some practical uses (i.e. In electronics). So if people gave up on the idea of holding gold for the sake of holding gold, it would still have some residual value.
Bitcoin, however, seems to have no practical uses whatsoever.
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.
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.
The OP claimed wealth was being printed. Bitcoin didn't exist a few years ago and by your definition it constitutes wealth. So the closest we've had to "printing wealth" is Bitcoin itself. I suggest you study quite a bit more finance before you become so enamored by all this. Stock buybacks and dividends are fully equivalent for example, the only real difference is how they're taxed.
> 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.
This is too breathless to be meaningful. Care to name a few actual uses? There's a long way still for cryptocurrencies to demonstrate they actually bring anything of value to the table. From what I've seen so far Bitcoin may be a slight improvement on gold (an asset that's mostly useless these days) and Ethereum may be a slight improvement on complex financial instruments (things that are often actively harmful). I may be completely wrong of course, time will tell.
Most people that evangelize cryptocurrencies would probably be a lot better served by reading up on the basics of investing and start accumulating traditional baskets of assets. There's a long way to go before cryptocurrencies are validated as actually useful and a lot of risk along the way.
It's certainly possible, it has no practical use, it is not backed by any 'buyer of last resort', its value is solely derived from faith that it will keep increasing in value. If the holders of coin lose this faith, nobody will want to buy it, so it would effectively become worthless.
What about all of the exchanges offering significant margin trading? Where does all that credit come from? How can they guarantee that'll all be covered in a significant price drop if the buy side of the book is cleared?
Polo/Bitfinex are peer to peer lending, so the exchange isn't taking the risk. I'm not sure about Coinbase but I vaguely remember it was outside institutional money funding the margin.
Derivative markets like Bitmex use a form of socialized loss to remove the risk.
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 a result, companies like those on/offramps run out of dollars, and Bitcoin cannot be shifted through those platforms for any price.
This happened to the London interbank lending market during the week of 15 September 2008, when LIBOR jumped to 8% and the banks simply stopped providing loans to each other. The reason? Because they weren't sure the assets their counterparties (other banks) were sitting on were worth anything (resi mortgages) and they didn't want to find themselves an unsecured creditor.
Mortgages during the subprime crisis didn't fall in price so much as they were impossible to price. This made the credit risk of bank borrowers impossible to price. So funding headed for the doors.
Change up the parties a bit and the banks --> offramps, mortgages ---> Bitcoin, and liquidity --> fiat, as in 2008.
There is simply no way that, as Bitcoin goes parabolic, the on/offramps are prepared to handle a change in the weather which results in a huge influx of withdrawals unless their own bank balances rise significantly. My informed supposition is that most such entities should have high-cost liquidity facilities with commercial banks that can step in and address some of that withdrawal demand.
As then, a liquidity shock (availability of dollars) could break the system without needing a precipitous drop in the market price of Bitcoin.
Banks don't provide liquidity to Bitcoin exchanges. Exchanges don't borrow from banks. Exchanges don't trade with their money, or their users' money. Exchange users deposit money to exchanges, and exchanges dumbly execute orders specified by their users. That's it. For example BTC/USD bids on an exchange's order book are 100% backed up by dollars that have already been deposited by users on this exchange's bank account.
No, they aren't, because the price of BTC is growing exponentially without necessarily having dollar deposits grow at the same time. Here's a worked example.
In a closed system:
Day 1: $1 buys 1000 Marmotcoin
Day 2: $1000 buys 1 Marmotcoin
Day 3: 1000 Marmotcoin attempts to sell for $1,000,000
That's what the initial phases of a liquidity shock will look like. I can almost guarantee you that retail operations all have bank liquidity facilities to deal with sudden upswings in withdrawal demand, otherwise they have to commit house money to cover it.
Your article assumes that to sell on Day 3, the exchange has to borrow $1,000,000 from a bank.
That's now how an exchange works.
For the price to be 1,000,000 USD for 1,000 BTC, there must exist buyers with 1,000,000 USD and sellers with 1,000 BTC with orders to trade at that price.
There's no "house money" since exchanges aren't casinos where the players bet against the house. Buyers and sellers are transacting with each other, matching buy orders with sell orders.
The exchange doesn't have to borrow the USD from a bank, the buyers bring the USD to the trade.
There is no "liquidity shock" unless the exchange steals or loses the buyers' USD. And that's a different argument.
You're still missing the point. If the exchange is providing a fiat on/offramp, then it will have to manage the possibility that the amount of USD deposits is massively exceeded by the amount of Bitcoin deposits which may one day call on the USD deposits to be redeemed.
For example. If I bought $1000 for 1 BTC from Coinbase on January 1st 2017 and try to exit that position on Jan 1 2018, once I sell that $10,000 bitcoin to Coinbase I'll be withdrawing $9000 more than I put in. Coinbase has to get the $9000 from somewhere, whether that be from other deposits which are more recent than mine, or from its own trading operations.
If you have a large number of people trying to withdraw a large number of dollars at the same time, your offramp could run out of dollars or, in the alternative, be required to (a) draw down a facility with a bank or (b) sell assets. In an environment where the asset price is falling rapidly it may not be able to avail itself of either option.
Seriously, three comments in a row and he is still repeating the same fundamental misunderstanding. It's not a complicated concept, I don't get the confusion.
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 their USD and some Bitcoin hodlers pile in.
Particularly popular liquidity pools eg BitPesa or Coinbase may then be put under pressure to either cease operations, draw down liquidity facilities to buy BTC, or start selling their own assets in order meet demand of BTC holders who want to get out. Those are not good choices.
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.
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.
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.
Except for the pathological example of Bitfinex (another story), every $1 of coin sold is backed by the $1 that a depositor has made. There cannot be a 'bank run' like you describe unless the exchange is running a fractional fiat reserve. This is not the case is which you describe.
If there a massive withdrawal of billions from coinbase, it means that there is a massive deposit of billion TO coinbase to make the trade.
In the case of bitfinex, they appear to be doing peer to peer bank transfers to get round their own banking problems. (ie: you want 10m out, i want 10m in, we trade A->B, rather than through the exchange as a middle man).
You simply cannot sell it if there is no buyer to take it. You never 'sell' to coinbase -- this is a front for GDAX, their exchange. Every buy is taken from a seller on their market. The money is exchanged between you and their account, and they take fees.
Bids on an exchange's order book are definitely backed by dollars. I don't know why you insist they aren't.
You use strange language. Maybe the scenario you mean to describe is not about lack of deposits or lack of float, but is a classic panic sale (ie. order books not deep enough to absorb all asks). Yes, this could happen with Bitcoin, or basically any financial instrument: stocks, forex, etc.
As someone who has been trading bitcoins since 2010, I will retort that market depths have definitely been growing over time. I don't have precise data to show you, but for example GDAX's BTC/USD order book accounts for 1/20th of the worldwide BTC trading volume. Right now selling 3600 BTC on GDAX would net $30M and dip the price -20%. Assuming the same depth at other exchanges, this means traders could globally sell 72000 BTC at the same instant for $600 million and dip the price by only 20%. That's a pretty decent market depth.
If market depth grew proportionally to Bitcoin's price, it would mean that 7 years ago when Bitcoin was trading at $0.25 (1/36000th its current price: http://bitcoin.zorinaq.com/price/) then a sale of $16k worth of Bitcoins would have dipped the price by 20%. I don't know if we can find archives of MtGox's trading data from 2010, but I roughly remember selling blocks of 1000 BTC at a time on Mtgox for $0.70-1.00/BTC in February 2011 and each of my sale would dip the price by a few percents.
So my (vague) recollection seems to indicate I'm probably right that market depth increased proportionally to Bitcoin's price. Therefore Bitcoin would have been at an equal risk of a panic sale at any point in the last 7 years. And the fact there has never been a long-term panic sale is a testament to Bitcoin's resilience. The markets are deeper and are more resistant than you think.
In what way does an exchange like Coinbase require liquidity through bank loans to operate? If you sell bitcoin for USD you're selling to another buyer who deposited USD. It's just shifting balances around.
> the people who provide the dollars to this market (banks, I'm informed)
You are misinformed. The people who provide the dollars to this market are the customers of the exchanges. It seems like you are not familiar with how a currency exchange works.
A currency exchange does not buy or sell the currencies traded at the exchange. All it does is match buyers with sellers, like an auction house. Buyers must deposit all the dollars that they use to buy before buying, and sellers must deposit all the bitcoins they sell before selling. When someone withdraws dollars after selling, the exchange simply transfers to them the dollars that the buyer deposited earlier. It already has the dollars on hand and does not need to borrow them from a bank, ever.
Now, not all places you can sell Bitcoin for dollars are currency exchanges. There are also brokers that do trade directly with their customers, rather than matching customers together to trade. In fact, Coinbase provides this service. However, they can simply obtain dollars by trading at currency exchanges themselves, and they adjust the price they offer to match the exchange price (plus a fee) so they can't just run out of money. Again, there is no need to borrow dollars from a bank. Furthermore, trading volumes at true currency exchanges absolutely dwarf the volume of any Bitcoin broker.
All that said, nothing prevents a crash in the Bitcoin price. If too many people want to sell and not enough want to buy, the price will go down a lot. But this is true in any market, and it has nothing at all to do with bank lending. Not even a little bit.
> You are misinformed. The people who provide the dollars to this market are the customers of the exchanges. It seems like you are not familiar with how a currency exchange works.
I fear you're misinformed. Besides localBitcoins, how does one get fiat to an exchange?
That's right — a bank. Exchanges like Bitfinex only survive because of things like Tether, which requires other fiat accepting exchanges.
If all exchanges were like Bitfinex, there would be a liquidity crunch, as the OP is saying.
No, that's not what OP is saying at all. Read his posts. He's under the impression that exchanges take out bank loans to pay dollars to their customers, which is false.
When banks refuse to deal with an exchange like Bitfinex, it has nothing to do with liquidity concerns. It's because banks are required by law to verify who they are transferring money to (AML/KYC), and they don't believe Bitfinex abides by those laws (they are right).
BTW, Bitfinex recently reopened bank deposits and withdrawals.
>
No, that's not what OP is saying at all. Read his posts. He's under the impression that exchanges take out bank loans to pay dollars to their customers, which is false.
Although that would be incorrect, there still are valid fears for a liquidity crunch, as I stated. This, regardless of why (be it laws or fund availability) does create a concern due to liquidity.
> BTW, Bitfinex recently reopened bank deposits and withdrawals.
True that US customers are banned from Bitfinex, however they did recently announce that bank deposits and withdrawals are reopened for other countries. If you don't believe them that's fine, I don't trust them either, but they did announce it. https://www.reddit.com/r/BitcoinMarkets/comments/7enpoo/bitf...
The first string of comments says they haven't announced yet (besides on reddit) and nothing on their site claims anything to that affect either.
Also, if the Fed barred any Bitcoin sales/buys with USD (however unlikely) almost all reputable bank would drop those as well, regardless of country. This has been discussed in detail on r/BitcoinMarkets, actually.
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 buyers only recourse, for U.S. customers anyway, which takes a lot of coordination/time, and essentially becomes an obvious form of money laundering.
Not saying you're wrong, but this argument is irresolvable unless you can give evidence that either 1) Coinbase/similar are using bank facilities to provide liquidity, and in essence, being the market makers. Or 2) They're using market makers who might bow-out in a similar fashion.
I think it'll be more of an old fashioned speculative bubble burst.
The smart money will start taking profits by selling their coin, as the price goes down those that bought the high will lose their nerve and sell to stem their losses. Then the rest will start selling shortly after. Eventually there'll be nobody willing to buy at any price, it'll be worthless.
I think you are making a mistake by only looking at cryptos as "coins". There are businesses being run on and around cryptocurrencies and the cryptoeconomics of the blockchain are intended to ensure the perpetuation of the network.
As long as there is value in maintaining public blockchains, their tokens (BTC, BCH, ETH, etc) will hold monetary value.
Found out today you can only take $10,000 a day out of Coinbase. I guess this could be good, because it’s essentially a “bail-in” that forces people to stay in the market and prevents a run, but still I had no idea of the lack of liquidity in bitcoin with the current system.
I think that actually exacerbates the psychological dynamic that the author of this post is talking about. Not being able to get your money out will drive additional panic.
Hacker news has become a terrible discussion forum for new technology relating to cryptocurrencies. It's a shame. Nothing but misinformation, FUD, whataboutism, and naysayers.
This article assumes that depositor money is used for purposes other than backing the amounts of USD a depositor has in their account. I believe he also thinks that it's possible the money is being used in a fractional-reserve fashion and backed by some bank to ensure liquidity if there is a momentary issue, but there is a real panic the bank will stop lending the money to cover for the moment and cause a real problem.
e.g. it's possible, as it has happened before, that a trusted financial institution is playing a dangerous game to make money off sitting cash and uses someone else as a backup.
The real question is: Does Coinbase (or any other exchange) do anything with the money (fiat) and how much is actually reserved? Same with Bitcoin.
We can assume 100% on each side because they make money on fees of the exchange, but that's the real question here.
80 comments
[ 2.6 ms ] story [ 91.6 ms ] threadThe author appears to lack basic understanding about how markets work in this space.
1) enough coin to satisfy coin withdrawals, even in the middle of a panic run
2) enough fiat to satisfy fiat withdrawals, even in the middle of a panic run
I think maybe that's what the author meant, not sure. But if the exchanges fail to show their customers' assets, they will reinforce any panic feedback loop that might be happening sometime in the future.
"The most obvious way, in my view, that Bitcoin mania will turn into Bitcoin panic is when a Bitcoin depositor goes to sell their BTC for dollars – and there are no dollars available to satisfy that sell request."
coinbase has to have the dollars to let me withdraw those dollars from coinbase to my bank account. They may not have enough on hand.
BTC: $160B market cap, ~$5B traded/day
INTC: $200B market cap, ~$1B traded/day
So if there was panic selling of INTC, the stock would presumably dive deeper and lower than a panic sale of BTC...
But this is only a problem if coinbase or whoever is acting as a fractional reserve system.
As far as I know, every single dollar and Bitcoin that coinbase "says" you have is actually in an account somewhere, dollar for dollar and Bitcoin for Bitcoin.
If this is NOT true, and coinbase is a fractional reserve system, that would be a huge scandal.
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.
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.
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.
It's not going to go to 0 ever, unless its replaced by another de facto crypto as the face of the entire industry.
It's a deflationary, uncontrolled currency in a world that prints wealth, its easy to see why people want to hold some money here.
Now, since the difficulty changes over time I could imagine that not being as high as people think (e.g. if mining companies abandon bitcoin for other currencies), but there is a real world equivalent to book value.
Call it Instachain or something.
If the history of technology is any indication it will become obsolete before becoming devalued as cryptofinance people move on to better scams / technology.
Where else, besides the crypto-currency market itself, is "wealth" being "printed"?
Fiat currencies may be inflationary but they're only used to price wealth not actually hold it. Actual wealth, unlike crypto-curency "wealth", is held in stocks/bonds/land/etc which are actual assets backed by some kind of economic activity or physical scarcity. Comparing "Bitcoin as a store of value" with fiat currencies is a strawman, you need to compare it with gold if that's what you want it for. If you want to compare Bitcoin to fiat currencies you need "Bitcoin as a means of transactions" and at that it's become terribly inefficient and underused compared to expectations.
Bitcoin is EXACTLY like land and stocks, except much, much, much more liquid and useful.
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 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 dividends out).
I have no idea what you're trying to say. Stocks generate value out of an economic activity. That's the value that underlies them. If the company then has enough opportunities to continuously reinvest or if it just gives up and returns value through share buybacks or dividends is not really important to the point that what makes stocks valuable is that the company has some form of economic activity. If you find a stock that doesn't have an underlying economic activity and is just driving up price through scarcity that's not a company it's a Ponzi scheme like Enron used to run.
>Bitcoin is EXACTLY like land and stocks, except much, much, much more liquid and useful.
Bitcoin is digital gold. Useful yes, but wow, you really think its value dwarfs the asset classes responsible for representing the available physical area of the planet and the current economic activity of the planet?
Bitcoin, however, seems to have no practical uses whatsoever.
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.
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.
> 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.
This is too breathless to be meaningful. Care to name a few actual uses? There's a long way still for cryptocurrencies to demonstrate they actually bring anything of value to the table. From what I've seen so far Bitcoin may be a slight improvement on gold (an asset that's mostly useless these days) and Ethereum may be a slight improvement on complex financial instruments (things that are often actively harmful). I may be completely wrong of course, time will tell.
Most people that evangelize cryptocurrencies would probably be a lot better served by reading up on the basics of investing and start accumulating traditional baskets of assets. There's a long way to go before cryptocurrencies are validated as actually useful and a lot of risk along the way.
He seems to write to an audience that is less knowledgeable than himself, but lacks factual content and is often cringeworthy.
Derivative markets like Bitmex use a form of socialized loss to remove the risk.
This happened to the London interbank lending market during the week of 15 September 2008, when LIBOR jumped to 8% and the banks simply stopped providing loans to each other. The reason? Because they weren't sure the assets their counterparties (other banks) were sitting on were worth anything (resi mortgages) and they didn't want to find themselves an unsecured creditor.
Mortgages during the subprime crisis didn't fall in price so much as they were impossible to price. This made the credit risk of bank borrowers impossible to price. So funding headed for the doors.
Change up the parties a bit and the banks --> offramps, mortgages ---> Bitcoin, and liquidity --> fiat, as in 2008.
There is simply no way that, as Bitcoin goes parabolic, the on/offramps are prepared to handle a change in the weather which results in a huge influx of withdrawals unless their own bank balances rise significantly. My informed supposition is that most such entities should have high-cost liquidity facilities with commercial banks that can step in and address some of that withdrawal demand.
As then, a liquidity shock (availability of dollars) could break the system without needing a precipitous drop in the market price of Bitcoin.
Banks don't provide liquidity to Bitcoin exchanges. Exchanges don't borrow from banks. Exchanges don't trade with their money, or their users' money. Exchange users deposit money to exchanges, and exchanges dumbly execute orders specified by their users. That's it. For example BTC/USD bids on an exchange's order book are 100% backed up by dollars that have already been deposited by users on this exchange's bank account.
In a closed system:
Day 1: $1 buys 1000 Marmotcoin
Day 2: $1000 buys 1 Marmotcoin
Day 3: 1000 Marmotcoin attempts to sell for $1,000,000
That's what the initial phases of a liquidity shock will look like. I can almost guarantee you that retail operations all have bank liquidity facilities to deal with sudden upswings in withdrawal demand, otherwise they have to commit house money to cover it.
That's now how an exchange works.
For the price to be 1,000,000 USD for 1,000 BTC, there must exist buyers with 1,000,000 USD and sellers with 1,000 BTC with orders to trade at that price.
There's no "house money" since exchanges aren't casinos where the players bet against the house. Buyers and sellers are transacting with each other, matching buy orders with sell orders.
The exchange doesn't have to borrow the USD from a bank, the buyers bring the USD to the trade.
There is no "liquidity shock" unless the exchange steals or loses the buyers' USD. And that's a different argument.
For example. If I bought $1000 for 1 BTC from Coinbase on January 1st 2017 and try to exit that position on Jan 1 2018, once I sell that $10,000 bitcoin to Coinbase I'll be withdrawing $9000 more than I put in. Coinbase has to get the $9000 from somewhere, whether that be from other deposits which are more recent than mine, or from its own trading operations.
If you have a large number of people trying to withdraw a large number of dollars at the same time, your offramp could run out of dollars or, in the alternative, be required to (a) draw down a facility with a bank or (b) sell assets. In an environment where the asset price is falling rapidly it may not be able to avail itself of either option.
As occurred in 2008, with dire consequences.
I place the sell order with my brokerage, and I get fiat USD deposited into my account. This is exactly how Bitcoin is exchanged.
Where exactly lies the fundamental liquidity problem for my brokerage/exchange?
yeah, from the person that just bought BTC for $10,000.
Every dollar that a user withdraws from an exchange is a dollar that was (already!) deposited by another user.
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.
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 their USD and some Bitcoin hodlers pile in.
Particularly popular liquidity pools eg BitPesa or Coinbase may then be put under pressure to either cease operations, draw down liquidity facilities to buy BTC, or start selling their own assets in order meet demand of BTC holders who want to get out. Those are not good choices.
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.
You're essentially saying that the exchange should artificially prop up the price of bitcoin with its own money during a panic.
You simply cannot sell it if there is no buyer to take it. You never 'sell' to coinbase -- this is a front for GDAX, their exchange. Every buy is taken from a seller on their market. The money is exchanged between you and their account, and they take fees.
You use strange language. Maybe the scenario you mean to describe is not about lack of deposits or lack of float, but is a classic panic sale (ie. order books not deep enough to absorb all asks). Yes, this could happen with Bitcoin, or basically any financial instrument: stocks, forex, etc.
As someone who has been trading bitcoins since 2010, I will retort that market depths have definitely been growing over time. I don't have precise data to show you, but for example GDAX's BTC/USD order book accounts for 1/20th of the worldwide BTC trading volume. Right now selling 3600 BTC on GDAX would net $30M and dip the price -20%. Assuming the same depth at other exchanges, this means traders could globally sell 72000 BTC at the same instant for $600 million and dip the price by only 20%. That's a pretty decent market depth.
If market depth grew proportionally to Bitcoin's price, it would mean that 7 years ago when Bitcoin was trading at $0.25 (1/36000th its current price: http://bitcoin.zorinaq.com/price/) then a sale of $16k worth of Bitcoins would have dipped the price by 20%. I don't know if we can find archives of MtGox's trading data from 2010, but I roughly remember selling blocks of 1000 BTC at a time on Mtgox for $0.70-1.00/BTC in February 2011 and each of my sale would dip the price by a few percents.
So my (vague) recollection seems to indicate I'm probably right that market depth increased proportionally to Bitcoin's price. Therefore Bitcoin would have been at an equal risk of a panic sale at any point in the last 7 years. And the fact there has never been a long-term panic sale is a testament to Bitcoin's resilience. The markets are deeper and are more resistant than you think.
You are misinformed. The people who provide the dollars to this market are the customers of the exchanges. It seems like you are not familiar with how a currency exchange works.
A currency exchange does not buy or sell the currencies traded at the exchange. All it does is match buyers with sellers, like an auction house. Buyers must deposit all the dollars that they use to buy before buying, and sellers must deposit all the bitcoins they sell before selling. When someone withdraws dollars after selling, the exchange simply transfers to them the dollars that the buyer deposited earlier. It already has the dollars on hand and does not need to borrow them from a bank, ever.
Now, not all places you can sell Bitcoin for dollars are currency exchanges. There are also brokers that do trade directly with their customers, rather than matching customers together to trade. In fact, Coinbase provides this service. However, they can simply obtain dollars by trading at currency exchanges themselves, and they adjust the price they offer to match the exchange price (plus a fee) so they can't just run out of money. Again, there is no need to borrow dollars from a bank. Furthermore, trading volumes at true currency exchanges absolutely dwarf the volume of any Bitcoin broker.
All that said, nothing prevents a crash in the Bitcoin price. If too many people want to sell and not enough want to buy, the price will go down a lot. But this is true in any market, and it has nothing at all to do with bank lending. Not even a little bit.
I fear you're misinformed. Besides localBitcoins, how does one get fiat to an exchange?
That's right — a bank. Exchanges like Bitfinex only survive because of things like Tether, which requires other fiat accepting exchanges.
If all exchanges were like Bitfinex, there would be a liquidity crunch, as the OP is saying.
When banks refuse to deal with an exchange like Bitfinex, it has nothing to do with liquidity concerns. It's because banks are required by law to verify who they are transferring money to (AML/KYC), and they don't believe Bitfinex abides by those laws (they are right).
BTW, Bitfinex recently reopened bank deposits and withdrawals.
Although that would be incorrect, there still are valid fears for a liquidity crunch, as I stated. This, regardless of why (be it laws or fund availability) does create a concern due to liquidity.
> BTW, Bitfinex recently reopened bank deposits and withdrawals.
Clearly not true. Especially for U.S. customers: https://www.bitfinex.com/posts/227
Also, if the Fed barred any Bitcoin sales/buys with USD (however unlikely) almost all reputable bank would drop those as well, regardless of country. This has been discussed in detail on r/BitcoinMarkets, actually.
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?
LocalBitcoins would become a seller or buyers only recourse, for U.S. customers anyway, which takes a lot of coordination/time, and essentially becomes an obvious form of money laundering.
This doesn't seem like a fundamental problem due to the structure of Bitcoin or exchanges.
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.
The smart money will start taking profits by selling their coin, as the price goes down those that bought the high will lose their nerve and sell to stem their losses. Then the rest will start selling shortly after. Eventually there'll be nobody willing to buy at any price, it'll be worthless.
As long as there is value in maintaining public blockchains, their tokens (BTC, BCH, ETH, etc) will hold monetary value.
Also, that doesn't stop you from selling bitcoin into USD.
e.g. it's possible, as it has happened before, that a trusted financial institution is playing a dangerous game to make money off sitting cash and uses someone else as a backup.
The real question is: Does Coinbase (or any other exchange) do anything with the money (fiat) and how much is actually reserved? Same with Bitcoin.
We can assume 100% on each side because they make money on fees of the exchange, but that's the real question here.