You don't understand money – and it's a good thing for Bitcoin

https://beta.sapien.network/post/z8dAvLCzGywheZFtgLCjcu3hhuv9WrAi5

by cfievet • 7 years ago

54 71 7 years ago

beta.sapien.network

chamawa• 7 years ago

Anyone have book or article recommendations on how money works?

dpc_pw3• 7 years ago

Lombard Street

DavidPiper• 7 years ago

I haven't read it but I've been recommended Debt: The First 5,000 Years by David Graeber numerous times.

miguelmota• 7 years ago

It’s a highly verbose book but worth a read. Graeber makes some solid points such as money didn’t evolve from bartering but instead evolved from debt

skybrian2• 7 years ago

You might try the credit-based explanation by the Bank of England [1] (linked to in the above article).

I think the tricky bit is that when a bank makes a loan, it creates money, but usually in other banks. The loan-making process creates money "out of nowhere" by increasing a bank balance, but since the borrower got the loan for a reason, they will usually withdraw it and pay other people, increasing bank deposits somewhere else.

The bank needs funds to cover the withdrawal, so from their point of view, it doesn't look like free money to them. They need funding to make loans and they only make money on the spread in interest rates.

But there is new money in other banks as a result of them making the loan.

(A technical point: even without funding, the bank has a new asset - the loan itself. They could sell that to raise funds. Banks can "originate" loans they don't keep.)

The end result is that a new loan exists and there is also new money, somewhere. Whichever banks have more deposits will be able to afford to make (or buy) more loans.

[1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

chews• 7 years ago

These ideas aren't permitted because...

"Sapien Logo Sapien is not yet available in your location."

dpc_pw3• 7 years ago

Money is simple. Credit is complicated. And if Bitcoin is going to succeed lending Bitcoin will be normal and lead to similar behavior as in the gold standard.

skybrian2• 7 years ago

I guess you could say that goldsmiths pretending they have more gold than they really do is kinda similar to cryptocurrency exchanges doing the same.

nullc2• 7 years ago

However-- for Bitcoin and essentially no other valuable asset before it, it's perfectly reasonable for an exchange to continuously prove that every bitcoin in your account is uniquely backed by coins that they control.

No major exchange bothers to do it right now because the market doesn't demand it and any exchange that did would hurt themselves by causing their customers to care about the risk of insolvency. If you make the customer worry about solvency they won't necessarily be placated by the protocol that proves they're (bitcoin) solvent, so you're better off not raising the issue.

It's unfortunate because this is one of the areas where Bitcoin has a significant advantage over most other valuable assets.

beefield• 7 years ago

This. I have never heard a remotely sensible discussion from crypto folks around following points:

1. If fractional reserve banking is bad, what or who is going to stop the appearance of that in bitcoin world? You need to understand that literally only thing you need for that is a bunch of people trusting so much one organization that they are willing to use the IOU from that as payment method. (Cough, tether, cough)

2. If fractional reserve banking is good or even okay, first thing you need to accept is that the bitcoin guarantee of fixed monetary supply does not exist. Second, completely unanswered issue is that why the heck bitcoin would be any better from fiat as the base of a fractional reserve banking system.

dpc_pw3• 7 years ago

1. There's nothing to stop fractional reserve banking. Bitcoin is just a more convenient bearer instrument (more portable, divisible, verifiable than gold), so if you don't trust a bank, it would be easier to opt out.

2. Personally I think fractional reserve banking is at very least problematic, because it leads to competitive advantage, but also eventual systemic collapse. (More about it: https://twitter.com/dpc_pw/status/1195932699141103618)

recursivecaveat• 7 years ago

Don't you care to know where your food, your electronics or your clothes are coming from, who made them and how?

This is a pretty strange choice of examples, considering how little most people know about the manufacturing of any of those things. Besides, if bitcoin were to ever reach the masses, we'd start banking in it (because banks and useful and necessary), so M0-M3 doesn't go away. As soon as someone is holding fractional reserves, "how many bitcoins exist" is as relevant as "how many paper dollar bills exist".

Tomte• 7 years ago

Take the questions we mentioned above, and apply them to Bitcoin:

Sure, you can easily answer cherry-picked questions about Bitcoin.

But the important thing is: nobody in his day-to-day life needs to know these answers about real money, nor have they ever wondered about it.

I can buy groceries just fine with my Euros, without wondering how exactly it has been created. Just as I wouldn't tailor my own paragliding chute, because otherwise companies could rip me off. I just trust in sensible regulations, paraglider-making experts and, finally, the social fabric of society.

sedeki6• 7 years ago

Tell that to a Zimbawean.

EDIT: Seriously. Just because our Western bureaucrats are comparatively honest these days, doesn’t mean how it functions doesn’t matter? Things could change, you know, as history repeats itself.

knocte6• 7 years ago

Or a Venezuelan.

joe_the_user5• 7 years ago

"I can buy groceries just fine with my Euros, without wondering how exactly it has been created."

If literally all you know about money is that it is a token that lets you buy stuff at the grocery store, here is trwhat you don't know - how long is that situation going to hold up.

"Just as I wouldn't tailor my own paragliding chute, because otherwise companies could rip me off."

I wouldn't try to sew a normal parachute let alone a paragliding chute. But one thing I know about safety-critical pieces of nylon or related things is that wear and tear is visible. A moderate rip, hole, tear in material, an engine that coughs, a tire that's deformed, all this stuff is a clue that there are problems ahead.

What signs tell you when there's problem in the relationship between your tokens and the grocery store? That's where a bit more understanding of money is useful. And, as the OP say, that understanding is difficult, actually (edit: tbh, that's literally the only worthwhile point in an otherwise terrible article).

not2b3• 7 years ago

The situation will hold up much longer than any cryptocurrency will hold a stable value as compared to the price of basic things like food, clothing, and shelter. If your money is subject to wild swings in value, you can't make plans. It then works more like a highly volatile stock.

ivalm6• 7 years ago

how long is that situation going to hold up.

But you don't actually need to know the internals in order to know how long it will hold up.

You can black box update your probability of fiat currency holding up every month that fiat currency doesn't crash (let's define it as "lose 50% of its value"). In fact, by this metric it's pretty clear that fiat currency probability of holding up is much better then that of most (and all major) cryptos.

If anything, a lot of what ML/data science/quantitative finance has shown us is that hand constructed explanations made by experts typically have bad predictive power and statistical estimates typically have ok predictive power. For things related to money I would trust data over any expert mechanistic explanation.

jussij• 7 years ago

here what you don't know - how long is that situation going to hold up.

And how exactly does Bitcoin help to answer that question?

Just looking at roller coaster ride that is the Bitcoin to USD exchange rate suggests it is an extremely volatile currency.

I would suggest that the last thing you would want in a currency system is extreme volatility.

kd5bjo6• 7 years ago

All of the author’s core questions can be answered just as well for coins and notes as they can for bitcoin— Every greenback has a unique serial number, after all. There must be a central registry of them somewhere.

Money as understood by economists is not physical currency (coins, notes, etc), but an emergent property of the institutional use of IOUs of various kinds, like debts and fractional reserves. These also exist in the bitcoin world, and have already caused problems— How long did MtGox operate without reserves? Does Bitfinex actually have the reserves it claims to? If Bitcoin were immune from the problems of fiat currency, these questions wouldn’t even make sense to ask.

knocte6• 7 years ago

These also exist in the bitcoin world, and have already caused problems— How long did MtGox operate without reserves?

Exchanges are not part of the bitcoin world, they are bridges to it.

Longer version of the above remark: what bitcoin is truly about is financial sovereignty, or, to put it in more layman's terms, lack of counterparty risk. The bitcoins held in a bitcoin exchange are mismanaged funds, you should never leave your cryptofunds in the exchange: "not your keys, not your coins".

PS: These days, you can even find "bridges", i.e. exchanges, that don't have even this problem anymore, e.g. HodlHodl exchange, which doesn't hold customer's funds, so it's impossible to achieve a fractional reserve malpractice.

kd5bjo6• 7 years ago

I’m less concerned with philosophy and how people “should” be managing their assets than I am observing what people actually choose to do. The exchanges exist, their actions affect the value of bitcoin, and the value of bitcoin affects them. Therefore, any analysis of the bitcoin ecosystem must take them into account in one way or another.

Similarly, there’s no fundamental barrier to promising to pay someone bitcoins later that you don’t currently possess. That’s the seed of a credit-based economy, and also the piece of the fiat system that makes things so complicated. It is disingenuous to make a comparison that includes this complexity on one side but not the other without giving justification.

sedeki6• 7 years ago

No, in fact they do not keep track of each individual dollar. At least for aggregate money supply; perhaps they do keep track of M0. I am not sure.

keymone2• 7 years ago

What confidence do you get out of serial numbers and existence of registry if there’s an entity that can freely print few more trillions?

Mtgox was a private enterprise that was managed by incompetent/malicious individuals, why does this always come up in bitcoin discussions? Mtgox is an example why you need to care about owning your money. People who lost money in mtgox didn’t own those money, they gave them away for a promise to have them returned.

deweller• 7 years ago

Every greenback may be registered. But physical currency is only a small amount of the actual circulating money supply.

Due to fractional reserve banking, banks lend money they don't have. Banks are only required to have 10% of the money they loan on reserve.

kd5bjo6• 7 years ago

You loan currency to a bank in the form of deposits, they keep some of that on premises due to the reserve requirement and loan out the rest to their other customers. In exchange for letting the bank use your money, you get insurance and a tiny interest payment.

Other than it being too young and inconsequential for people to bother, what property does bitcoin have that works against this scheme? Banks have worked this way since long before modern fiat currencies were developed, and they’ve always increased the money supply without minting new coinage. Whether it’s gold bullion, federal reserve notes, or bitcoin keys in their vaults doesn’t seem to make much difference.

stillbourne• 7 years ago

Your description of money shows that you still treat it as an elementary system of debits and credits from a global ledger instead of an algebra of transactional commerce.

einpoklum3• 7 years ago

All of the author’s core questions can be answered just as well for coins and notes as they can for bitcoin— Every greenback has a unique serial number, after all.

Most money (specifically, most US dollars) are not in the form of coins or notes. See: https://www.quora.com/How-many-dollars-are-there

~1.4 Trillion USD in notes ~60 Trillion USD total

coins are certainly less than notes, but I'm not sure how much less, so let's guesstimate no more than 0.5 Trillion, and that's a stretch. So, about 97% of money is not in notes and coins.

kd5bjo6• 7 years ago

This is certainly true. My point was that I see no evidence that, should bitcoin become mainstream, the situation would be any different- nothing about bitcoin prevents its use as the basis for a credit economy like notes are now and bullion coins were before them.

And it’s the credit that’s making things complicated, not the central banks.

dagenix• 7 years ago

crypto-currencies are simple and transparent.

beg pardon?

JauntyHatAngle• 7 years ago

I'm not saying you're wrong, but can you please state why this is a statement you find wrong?

There are so many levels to crypto, and my head is a bit too much in the crypto world that I can see a ton of reasons why this statement is correct. I can also see why it can be considered incorrect. What are the parts you take issue with?

r32a_• 7 years ago

Bitcoin is a multi faceted beast like nothing else. It is a cross between computer science/cryptography, governance/game theory and economics.

In my opinion the economics of bitcoin is the core, which is kept in balance and managed with game theory and decentralised governance and it is created with computer science and cryptography.

In order to truly understand what Bitcoin is then you need to fully grasp all these 3 facets. Most people don't, they read the headlines or look at bitcoin from one of the facets and write it off.

semiotagonal• 7 years ago

In the absence of detailed understanding, it turns into a matter of trust.

Who will people trust more, banks and governments, or cryptocurrency nerds with untouchable money on the blockchain?

I think most people will opt for banks and governments, because when the going gets tough, the masses can overthrow them and expropriate from them. Cryptocurrencies put too many mathematical obstacles in the way of redistributing wealth against the owner's wishes.

not2b3• 7 years ago

It is a clever hack, but it can never work as money. The money supply needs to roughly match the size of the economy. If there is too much of it, you have inflation. If there is too little of it, you have deflation, which in many ways is worse. With Bitcoin you have too little of it, because the total amount is limited, and that limit is smaller than economic growth is. That's why Bitcoin's price as compared to major currencies has soared. But people who used Bitcoin years ago to buy pizza feel really stupid because if they had held on to it, they would be much wealthier today. When it works that way, it isn't money. It's a mathematically interesting investment vehicle, perhaps.

not2b3• 7 years ago

This article couldn't be more wrong-headed. The author seems to think that a fixed amount of money, or a money limited by the amount of some arbitrary commodity (like gold) is a good thing. But the gold standard was a disaster, and caused the American economy to explode every 15 to 20 years, complete with bank collapses and widespread hunger, or rampant inflation when a new gold rush occurred. A Bitcoin-based economy would have massive deflation, which would mean that nothing you could spend Bitcoin on, and keep, would be worth as much as just holding your Bitcoin, so people would be reluctant to invest in anything.

Central banks manage the money supply to be reasonably stable. Yes, bank loans create money, and the central banks regulate this process so neither inflation nor unemployment can get out of hand. This process offends libertarians who seem to think that a completely free system could work better, but it can't: you need a mechanism to keep the money supply roughly proportional to the size of an economy, and blockchain can't do that.

joe_the_user5• 7 years ago

Yeah, the only thing the gets right is that few people have much awareness of theories of money.

But the thing with theories of money is that there isn't that much agreement among economists, bankers or government official on them. How much does it matter that the US government doesn't technically own/control the Federal Reserve? Opinions are divided. How bad is budget deficit? How bad is printing money? How exactly does one interpret fractional reserve banking? Opinions are again divided (that doesn't prevent periodic "everyone is ignorant on how money blah, blah..." article).

nabla9• 7 years ago

While this article don't cover everything, it acknowledges the complexity and that money is many things. Starting from coins and going towards things called 'money like'. And the author seems to know that not all bank lending is part of fractional reserve system.

Related to bitcoin one of the most critical and important aspects of fiat money from central banks is the liquidity. Liquidity means that money is available in price that does not fluctuate too much from day to day or month to month. Central banks are lenders of the last resort. Money should be boring and predictable, not exiting like Bitcoin. One of the definitions of money is 'most liquid asset'. If cryptocurrency can't do that, it can't replace money in daily business.

proc0• 7 years ago

As a filthy casual observation, it doesn't seem like the risk of crypto is going away. If money is the abstraction of value, then it seems more intuitive that you will entrust your assets to a group of humans in a direct way (laws, army, etc) rather than an indirect way, by having all your value in crypto that is supported by an infrastructure still controlled by the government and/or companies.

Until there exists a truly decentralized and robust worldwide network, anything built on the current Internet is indirectly owned by a centralized entity of some kind (if not directly).

netsharc• 7 years ago

What a terrible crypto-shilling (is that a new currency?) article. Can I have my time back? Since time is money, I'll take 30 euros please.

One thing that crypto-idiots don't understand is that whatever currency it is, it's not worth anything if no one wants to exchange it with food (or clothes or shelter). If in the upcoming Mad Max future that farmer only takes tea leaves, everyone will be running around trying to find tea leaves.

unnouinceput• 7 years ago

My take from the article is that Bitcoin, as cryptocurrency, is a mechanism that can be used to replace fiat money. It will never be because of exactly the reason the article says: there will be a maximum of 21 millions Bitcoin and that's all. And since the current mechanism behind fiat money is inflation (usually you want to have a slow inflation, not a fast Venezuelan one) is what drives people to spend them and create economy - this will never be applied to Bitcoin ever. Hence you get deflation in case of Bitcoin, which drives people to amass them instead of spending and you get in the end the current purpose of Bitcoin -> art like investment.

The only way to make them a currency is, keeping them limited to 21M, is to create some sort of "bleeding" mechanism where you force the owners to spend them (spend or lose) - which will never be implemented.

einpoklum3• 7 years ago

Two issues with this article:

1. Obscurantism: Yes, money is complicated and most people don't know much about how it's created and what it even means, exactly. However, the leap from there to the claim that you _can't_ know, or that _nobody_ knows simply has no basis.

2. The BitCoin angle: While it is a good thing that you can easily (sort of) understand how BitCoin is created and how much there is, the article ignores the _implications_ of these facts about BitCoin. There can never be a democratic decision to inflate or deflate BitCoin; and - most BitCoin is already in existence and owned (the majority probably by a pretty small group of people), making it a sort of a pyramid scheme, as late-comers to the BitCoin game will be fighting over the scraps.

You don't understand money – and it's a good thing for Bitcoin

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