Comment by somewhereoutth
4 years ago
Fiat is created by banks - by originating loans. A bank does not actually need to have that money to create the loan - it is not transferred from somewhere else, it is just that the bank's balance sheet expands. There are rules on how much a bank is allowed to create, as you might imagine.
The BTC system does not create money - you can follow the creation of a coin system to its eventual destruction and discover that exactly the same amount of fiat went into it as came out (less mining). In fact, at any moment in time, the same also holds! If you buy $100 of BTC, somebody somewhere has just sold $100 BTC. No money is ever created or destroyed. Of course (if you were a lunatic), you could get a loan to buy BTC, and so money would be created, but by the banking system, not BTC, and it would go straight to whoever you bought BTC from.
As soon as people decide they don't want to put money in, then no money can come out. You will know this because the 'price' of BTC will be zero.
I completely agree with you, but I’m wondering if you could help me debate the counter argument: “The same is true of stocks, if people decide to stop putting money in, no money comes out”
It comes up whenever I make a point similar to yours above, and I haven’t had a good answer for it
Stocks represent a share of a productive asset - the (presumably successful) underlying business. That business includes capital goods and other assets having intrinsic value themselves, and also the value created by organising them together. The profits can be distributed as dividends, or used to grow the asset (buy more machines or whatever).
Of course speculation muddies the waters, but you can see how important annual accounts etc are - to ensure the business really has the value it is being ascribed.
Right. So exactly the same is true of stocks when it comes to trading existing stock. The key difference is the creation of stock - IPOs. The company uses that money they get from the IPO and invests it into the business, which results in profits, which they give out as dividends. There's no such mechanism in cryptocurrency.
Unfortunately the other side has a good response to this - if the dollar value of buybacks+dividends exceeds the dollar value of IPO's, then you end up with the same problem that Bitcoin is in, where it's a net loss system. That seems to be the case[0]. This is not a well known fact.
Ultimately this comes down to the fact that we don't have a stable velocity of dollars, and an unstable velocity that results in more dollars chasing less more goods produces speculative bubbles that must eventually crash and create recessions.
All investments, including all currency, whether it be stocks or gold or bitcoin or dollars, is inherently valueless. The only time you can calculate the value is when you actually are extracting utility. You can then work back from that to determine who produced that value.
[0, Figure 5/Figure 8]: https://www.yardeni.com/pub/buybackdiv.pdf
Regarding stable velocity. If we had negative interest we would have it. Then all that monetary expansion nonsense could be over and we could get on with our lives without cursing some evil businessmen for being morally reprehensible so we have a scapegoat.
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Your description of banks is correct. Your description of BTC is wrong. You're missing an important fact. The price of BTC can, and does, change. When it changes, the market value of all BTC changes. If the value of all BTC goes up, new value (not money) has been created.
Also, lots of people take loans to buy BTC. This is called "leverage".
Ah but a change in the price of BTC does not in fact create any value - it just means that that $100 now corresponds to less BTC. You can profit from that fluctuation, by being on the right side of the cash exchange at two separate points in time. Somebody else will be on the wrong side of that exchange (well, in aggregate anyway - there will be many somebodies on either side) and will suffer a corresponding loss.
Since BTC is intrinsically worthless, any 'price' that might be ascribed to it is meaningless (aside from the profit/loss action described above).
The same (incorrect) reasoning applies to literally anything you don't physically use including USD, equities, gold, land, etc.
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> You will know this because the 'price' of BTC will be zero.
To be exact in this scenario, the 'price' of BTC will still be the price of the last trade in cryto exchanges. The trading volume however, will be 0, and there will no demand on the bid/ask. Hence you're stuck with BTC you can't offload.