Author Topic: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)  (Read 3141 times)

kayvent

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Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« on: January 03, 2018, 04:17:42 PM »
Reading MMM's recent blog on bitcoin, changed my outlook on cryptocurrencies. I know a bunch of people who are spending 1000+$ on bitcoins/etherium or are mining a variety of alt-coins and then dumping the proceeds into one of those two. It is frustrating to speak to them. (They treat it more like gambling than an investment but use the investment vernacular.)

Before reading the blog, my general feeling towards Cryptocurrency was fourfold: there are dozens of crytocurrencies, more open cryptocurrencies will come into existence, a few (1-3) will one day be legitimate currencies, and the rest will go to zero. Therefore, my philosophy was that if one was going to "invest" in cryptocurrencies, they should treat it like they would stocks: be broadly diversified because no one knows who the winner(s) will be.

After reading the blog, I've been convinced that 0-2 'open' cryptocurrencies will succeed. "If cryptocurrency does take off, it will be in a government-backed form, like a new 'Fedcoin' or 'G20coin.'" wrote MMM.

What was y'all's opinions before/after reading the blog post?

(I do disagree vehemently on deflation being a negative. But that is an disagreement on economics and not the viability of bitcoin.)
« Last Edit: January 03, 2018, 04:21:14 PM by kayvent »

trollwithamustache

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #1 on: January 03, 2018, 05:15:31 PM »
meh, it was a boring post. Most of the intelligent people on this board chatting BTC/crypto seem to view it as a hobby or game and, whoops we made a ton of money They are not arguing to invest 25% of your 'stache in BTC. They think the technology is interesting, so they are working with BTC as its the most common implementation of this spiffy new thing. Some form of this Crypto will very likely be part of our financial landscape and I'd like to understand that.  I currently hold  BTC because I'm spreading out gains out between last year and this year and yes I think its over valued.

I find it amusing for a blogger who rails so hard for taking responsibility for your self and your financial choices to come down so hard on the libertarianism behind BTC.

That being said, MMM is a financial blogger so the poor bastard is probably getting a ridiculous amount of inbound about the need to invest in BTC. Every major news organization probably wants to talk to the zany early retirement guy about how to retire early with Bitcoin! and he can only handle so much.

EscapeVelocity2020

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #2 on: January 04, 2018, 12:04:42 AM »
The most convincing aspect of Crypto holding significant value is the fact that it is burning such huge fossil fuel now to keep it going and was worth 234B in the article (just Bitcoin, not sure of the whole crypto universe).  Obviously there is some real world demand for this, and Bitcoin is probably worth something.

I'd be more impressed with the article if it ended on some educated guess on where this would normalize.  Ultimately, there won't be 21 million Bitcoins nor will there be 1,000 blockchain competitors. 

So then what is a good valuation for a Bitcoin?

I imagine the price of fossil fuels will increase, inflation on fiat currencies will increase, taxation of transactions will increase (only one has to happen) ... so yeah I see value in holding Bitcoin for the foreseeable future (I just don't know if 'Bitcoin' is the right crypto to hold longer term). 

I read this article and learned nothing new, other than maybe Pete doesn't like the idea of fossil fuels being used to explicitly back a currency.  But that's still implicit in USD as the global standard (since we are the biggest consumer of fossil fuels and have the highest standard of living).

As an aside, wouldn't it be cool if there were a 'Photo' currency that was sustainable because it paid for itself through solar / wind energy.  Every time you wanted to heat your home or drive your car or cook your food, you paid more Photos.  And wouldn't it be even better if the government was smart enough to use limited resources to subsidize this 'currency' to make it available to everyone at reasonable prices. - well, that's what I wish someone like Pete would come up with.

The future is ours and we still seem to be wasting it on a grand scale!

(oh well, sure to be banned again for telling people what to do, but I can't help myself!)
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runbikerun

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #3 on: January 04, 2018, 02:12:29 AM »
I may well be misunderstanding this, but are you arguing that Bitcoin is worth something because it takes energy to run the network? I don't see how the use of fossil fuel makes any difference to the question of whether or not we're looking at a bubble.

trollwithamustache

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #4 on: January 04, 2018, 08:20:10 AM »
what is the fossil fuel cost of our current banking system and credit card system? All those bank branches, all the financial data centers?  BTC isn't the most efficient electrically speaking of the cryptos, but what should we be comparing it too? 

Similarly, with the volatility arguments against BTC, what *should* the volatility be? what is our standard?  I've done some non mustachian dabbling with illiquid NYSE traded stocks and they can have 10-15 % swings in a day quite regularly.  It terms of level of adoption this seems potentially like a reasonable comparison.


ooeei

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #5 on: January 04, 2018, 08:28:16 AM »
I think he hit the nail on the head.

Quote
not because they did anything useful or produced any money and value to society, but solely because they thought they would be able to sell them to someone else for more in the future.

This is the crux of the matter. Bitcoin hasn't become much more useful in the last year, but has increased in price by around 1400%. This increase is almost entirely due to people buying/mining bitcoin with the intention of selling to someone else when the price increases. It's the exact same reason people bought giant houses they couldn't afford in 2007, because the price could only go up, so you might as well buy now and cash out once it's increased in price.

Sure, a few people use it for the occasional transaction for fun, but it has high transaction costs and is accepted in vastly fewer places than dollars or pesos. It's the first big crypto, but as far as becoming a long term currency it is severely handicapped by the transaction complexity.

I've seen a few bitcoin threads around here, and usually the pro-bitcoin folks start talking about how awesome blockchain is, and how it's the future. As was said in the article, that's a totally separate thing from bitcoin's current pricing. There are at least a few hundred "currencies" using blockchain, and plenty of other uses for it. None of those things need bitcoin in order to function. I think the analogy with the cancer cure is exactly right. Bitcoin may have popularized blockchain with the average tech nerd, but blockchain doesn't need bitcoin in order to be useful, the same way social media doesn't need Myspace.

The other argument is usually about how it's untraceable and the government can't get it and all that. Sure, that's great I guess, but in general people don't care about that, especially when it's so inconvenient to do transactions with. I'm betting your ISP (or the government) can at least see you're using Bitcoin if they wanted to (for instance if it's made illegal they can find out if you're using it), although they may not be able to steal it. In any case, bitcoin is more traceable than a physical handoff of gold, and isn't useful in an "end of the world shit hit the fan" scenario so many preppers and gold hoarders are preparing for.

Now when bitcoin will crash is anyone's guess. It could be in a month, or it could be in 5 years and it's up 1400% again. Or maybe it will slowly taper down over a long time. Bubbles can keep rolling for a long time.




ooeei

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #6 on: January 04, 2018, 08:32:09 AM »
Similarly, with the volatility arguments against BTC, what *should* the volatility be? what is our standard?  I've done some non mustachian dabbling with illiquid NYSE traded stocks and they can have 10-15 % swings in a day quite regularly.  It terms of level of adoption this seems potentially like a reasonable comparison.

Usually you want your currency to have low volatility, as that's what's required for people to set prices and regularly exchange them. People don't pay for their gas with shares of stock, and most people don't want to be paid in shares of stock.

If bitcoin is considered an investment, then that's another matter and volatility could be a good thing. Since the actual bitcoins are only useful to trade for money, then it seems more like a currency than an investment like part of a business or real estate.

I know I wouldn't want to be paid with a currency that can swing 1400% in one year.
« Last Edit: January 04, 2018, 08:34:32 AM by ooeei »

trollwithamustache

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #7 on: January 04, 2018, 09:17:57 AM »
Similarly, with the volatility arguments against BTC, what *should* the volatility be? what is our standard?  I've done some non mustachian dabbling with illiquid NYSE traded stocks and they can have 10-15 % swings in a day quite regularly.  It terms of level of adoption this seems potentially like a reasonable comparison.

Usually you want your currency to have low volatility, as that's what's required for people to set prices and regularly exchange them. People don't pay for their gas with shares of stock, and most people don't want to be paid in shares of stock.

If bitcoin is considered an investment, then that's another matter and volatility could be a good thing. Since the actual bitcoins are only useful to trade for money, then it seems more like a currency than an investment like part of a business or real estate.

I know I wouldn't want to be paid with a currency that can swing 1400% in one year.

For those of us in the USA, bitcoin is, per the IRS, property.  What is it long term, really a store of value or means of exchange? I certainly don't know yet.  And its not fully any of those things right now.

Something like 1% of the population has btc holdings, so that's basically a big group of hobbyists and a big group of speculator/gamblers that just hopped in.  (assuming BTC has real value), that means relatively low liquidity and so that volatility seems in many ways to be reasonable.  The open source guys always run their marketing quite a bit  ahead of where they are really at!

Lots of start up guys are paid a substantial amount in dubious stock options all the time... so while I also agree with your risk tolerance decision and don't accept BTC for payment, lots of people are comfortable with this risk level.

Roboturner

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #8 on: January 04, 2018, 09:40:46 AM »
I don't get him complaining about the 'libertarian streak' behind crypto, that's the point. 'Fed-Coin' won't exist because it would be redundant to gold. The entire purpose is to get away from a centralized, controlled currency.   
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Daley

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #9 on: January 04, 2018, 09:44:55 AM »
As an aside, wouldn't it be cool if there were a 'Photo' currency that was sustainable because it paid for itself through solar / wind energy.  Every time you wanted to heat your home or drive your car or cook your food, you paid more Photos.  And wouldn't it be even better if the government was smart enough to use limited resources to subsidize this 'currency' to make it available to everyone at reasonable prices. - well, that's what I wish someone like Pete would come up with.

Maybe if we could get this currency to... grow on trees! Yes! Even more foolproof than Bitcoin, because now all the new currency doubters will be able to trade it in for tangible assets!



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kayvent

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #10 on: January 04, 2018, 11:23:11 AM »
The other argument is usually about how it's untraceable and the government can't get it and all that.

It's untraceable in the sense that if I write on the MMM forum that I'll send you 100$, no one will know that myself sent you money. They'll only know that some vague entity called 'Kayvent' sent 100$ to 'ooeei'. They don't know who we are.

It's like that with the blockchain. Since every transaction is public (the blockchain), every transaction is public. Instead of forum names, it is bitcoin addresses. If the bitcoin address gets deanonymized, you know every transaction that human being made with that address. Just like how we could create new forum accounts for every post, you can (it's suggested) to do this for each Bitcoin transaction. That....doesn't always happen because people are lazy and technologies solutions even moreso.

Deanonymizing a plural number of transactions is possible too. There is a famous story from the StarCraft community about this. There was a tournament with a 1001 BTC award for the winner and 0 for the runner-up. After the tournament, 100 BTC was sent from one address to another. A moment later, 50 BTC was sent from an address to another2. So......very traceable.

1 I forget the number, just using 100 for ease
2 It is not atypical for all-or-nothing pots to be split in the Korean StarCraft scene apparently
« Last Edit: January 04, 2018, 11:24:48 AM by kayvent »

ooeei

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #11 on: January 04, 2018, 02:50:05 PM »
The other argument is usually about how it's untraceable and the government can't get it and all that.

It's untraceable in the sense that if I write on the MMM forum that I'll send you 100$, no one will know that myself sent you money. They'll only know that some vague entity called 'Kayvent' sent 100$ to 'ooeei'. They don't know who we are.

It's like that with the blockchain. Since every transaction is public (the blockchain), every transaction is public. Instead of forum names, it is bitcoin addresses. If the bitcoin address gets deanonymized, you know every transaction that human being made with that address. Just like how we could create new forum accounts for every post, you can (it's suggested) to do this for each Bitcoin transaction. That....doesn't always happen because people are lazy and technologies solutions even moreso.

Deanonymizing a plural number of transactions is possible too. There is a famous story from the StarCraft community about this. There was a tournament with a 1001 BTC award for the winner and 0 for the runner-up. After the tournament, 100 BTC was sent from one address to another. A moment later, 50 BTC was sent from an address to another2. So......very traceable.

1 I forget the number, just using 100 for ease
2 It is not atypical for all-or-nothing pots to be split in the Korean StarCraft scene apparently

I get that, but I'm thinking more if say bitcoin is outlawed, can your ISP or the NSA tell a bitcoin transaction was performed from your IP address? If so, that seems to poke a hole in the "it's just like gold and the government can't effectively outlaw it" perspective.

In any case, that's all a moot point when we're discussing the speculative bubble it's currently in, or the fact that there are many other cryptocurrencies out there that are likely better as a cryptocurrency since they're newer/improved.
« Last Edit: January 04, 2018, 02:52:22 PM by ooeei »

FINate

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #12 on: January 05, 2018, 08:18:24 PM »
I appreciate MMM's clarity of thinking and his philosophy of building wealth, that "You Must Earn Your Money By Creating Value for Everyone." Most people in BTC are banking on the "greater fool" to make them rich, a zero sum game. And hard to argue with the massive amount of energy wasted in the process. Yes, the same is true for gold (energy to extract it), and that's a negative rather than a positive.

He didn't touch much on how cryptocurrencies are not really trustless in practice. Sure, transactions entirely within the system don't require trust as this is built into the algorithms. But if you're actually going to utilize a cryptocurrency for something useful, then trust enters into the equation at the edge of the system and the decentralized/trustless nature of it makes it much riskier. Let's say you decided to exchange 1 BTC (~$16800) for gold. The merchant will not send your gold before the transaction completes (~1 hr to allow for multiple blocks), to do otherwise would be insane on their part. But this leaves you in a precarious situation. What happens if they never send your gold, what recourse do you have? Same goes for cashing out for USD...once the transaction completes it's irreversible even if you get screwed in the process. It's the exact problem with buying or selling a used car between another private party...there's a race condition between the transfer of funds and the physical product. So at some level you end up trusting the person at the other end and/or trust that the government can somehow enforce the contract.  It's why escrow services exist, and why credit cards have ways of tracking fraud and allowing consumers to dispute transactions. A trusted third party is a feature not a bug.

sol

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #13 on: January 06, 2018, 10:28:39 AM »
It's like that with the blockchain. Since every transaction is public (the blockchain), every transaction is public. Instead of forum names, it is bitcoin addresses. If the bitcoin address gets deanonymized, you know every transaction that human being made with that address.

Anybody who owns a bitcoin wallet that takes payments from the public is NOT anonymous, because they have to post their wallet ID publicly.  This is how we identified all of those Nazis.  They asked for donations to their bitcoin wallets on Nazi forums and websites, so it's pretty easy to tell.  The dailystormer (nazi website) posts their bitcoin wallet ID so other Nazis can donate to it, so we have a pretty good idea that the guy behind that wallet ID is the guy behind that website.  This is the sort of transaction web the FBI has always used to investigate financial crimes, so I'm not sure anything has really changed.

And even if you're only transferring bitcoins with one other person, one time, you still have to reveal your ID to that one person and are thus placing your trust in them.  You can try to arrange the payment through other online anonymous agents, but again you're placing your trust in those services.  Criminals get double-crossed all the time, because they can't necessarily trust each other.  I don't think bitcoin changes any of that.

The merchant will not send your gold before the transaction completes (~1 hr to allow for multiple blocks), to do otherwise would be insane on their part. But this leaves you in a precarious situation. What happens if they never send your gold, what recourse do you have?

None.  Bitcoin transactions are completely irreversible, by design.  There is no bank manager arbitrating ownership disputes.  There is no fraud protection, or small claims court.  There is no FDIC insurance in case of theft.  There is no human intervention in the system at all, which is exactly the problem.  I certainly wouldn't buy a house or a car with an irreversible instantaneous transaction.  Our economy is built on trust in the goodwill of all participants.  We need checks and balances to ensure fairness.  Bitcoin undermines that trust.

Quote
A trusted third party is a feature not a bug.

Exactly.  Human commerce requires human trust.  Bitcoin (or another cryptocurrency) is a way to subvert that trust and thus subvert those transactions, which is exactly why it is popular with criminals and fraudsters, and in black markets, and in rogue states under economic sanctions.

The rest of these schmucks are just along for the ride.  US retail "investors" throwing their spare cash at bitcoin are just having their pennies siphoned off superman III style.  They're supporting a large scale fraud perpetrated by people operating outside of civil society (and sometimes profiting along the way as long as the pyramid continues).

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #14 on: January 09, 2018, 05:27:13 AM »
I would never suggest anyone ever put all of their money into crypto but  having some speculation is not the end of your net worth. You just have to keep it reasonable and have it be money you can lose.

Personally I dabble in it but I think of it like being at a casino in Macao, I can easly end up with nothing. I think limited speculation be it art, coins, precious metals or anything else can be good for your net worth and mental sanity.
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Travis

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #15 on: January 09, 2018, 11:16:33 AM »
I may well be misunderstanding this, but are you arguing that Bitcoin is worth something because it takes energy to run the network? I don't see how the use of fossil fuel makes any difference to the question of whether or not we're looking at a bubble.

I think he's saying the dollar is trusted, low-volatile, and powerful because there is a massive energy-consuming economy backing it.  Right now Bitcoin is burning through energy just to exist and not really adding any economic value in return.
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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #16 on: January 09, 2018, 11:26:10 AM »
I don't get him complaining about the 'libertarian streak' behind crypto, that's the point. 'Fed-Coin' won't exist because it would be redundant to gold. The entire purpose is to get away from a centralized, controlled currency.

There may not be a federally-provided crypto-currency in the future, but for it to be anything other than a black market currency, governments will have to recognize it as a legitimate means of satisfying debts.  As Sol and a couple others above stated, currency works because a central authority is backing its value.  Trust is a currency, hope is not.  Right now we're in the hope stage since this currency/technology is still being created and understood.  Once it's understood, it will have to have controls in place for it to be trusted.  No government is going to allow the legal movement of funds without the ability to track or audit.  Businesses will insist on it as well.  There is no consumer protection in an anonymous system.  Call it Big Brother or a reasonable measure for fighting crime and preserving the system's integrity, but it'll have to happen.
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Mannerheim

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #17 on: March 01, 2018, 08:20:59 AM »
Personally I liked the post a lot. I figured MMM would be a big BTC enthusiast since it seems right in his wheelhouse: a gimmicky high-tech boondoggle for obsessives to wonk out over that claims to help people disconnect from The System and be more independent. But instead he made a bunch of great points. To recap a few (and add a few of my own):

- It's been said often, but can't be said often enough: cryptos are just tulips without the tulips (which at least smell nice). They are invisible, intangible tokens with no function whatsoever except being speculated on. They do not represent ownership of any underlying asset, they cannot be used to buy goods and services, and they don't even have a stable value. That's not just a Ponzi scheme, it's almost the Platonic ideal of a Ponzi scheme.

- The built-in limit on the number of bitcoins is not a true protection against inflation, since any idiot can (and does) launch their own crypto and increase the effective supply, since most cryptos are effectively identical in how they work.

- Cryptos are not true currency. They are not a stable store of value, they are not a useful medium of exchange, and they are not a practical unit of account. THEY ARE NOT A TRUE CURRENCY.

- Probably MMM's best point is that zero-sum speculation like this is a stupid waste of time even as a hobby. It's really just glorified gambling, which any Mustachian should know is one of the dumbest, most toxic things you can do with your money. It causes wild emotional swings and makes people focus on things not under their control. Investments should be in enterprises with real economic substance capable of generating good returns over time.

- To the small extent cryptos are actually used for transactions, much of it is related to crime. People who speculatively drive up the price of cryptos are helping to enrich cybercriminals, pornographers, terrorist groups, and rogue regimes. Thanks!

- Cryptos have a COLOSSAL carbon footprint. Nobody who owns a bitcoin has any right to complain about seeing Hummers driving down the road or criticizing the wastefulness of huge McMansions. BTC alone uses more electricity than many small countries, and that's with only a tiny level of adoption. Meanwhile say what you will about the dollar, it doesn't require hyper-intensive GPU farms just to buy a candy bar at the grocery store.

- Blockchain will probably prove to be a useful technology for various purposes, but it's very unlikely that a global decentralized currency will be one of them (countries won't give up control of their currencies, and they definitely do have the power to prevent cryptos from going mainstream).

My only complaints about the post are the rather lame cheerleading for the Federal Reserve (which indisputably played a major role in causing the Great Depression, the 2008 financial crisis, and the current bond/stock/RE bubble. Some "adult supervision"!), and the ignorance about the role of gold as a historical currency, which worked phenomenally well for thousands of years right up until the US abandoned it in 1971, setting off massive inflation and the financialization of the US economy that we are still coping with today.

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #18 on: March 02, 2018, 12:25:12 PM »

 and the ignorance about the role of gold as a historical currency, which worked phenomenally well for thousands of years right up until the US abandoned it in 1971, setting off massive inflation and the financialization of the US economy that we are still coping with today.

You were doing great right up until that point. Gold and silver were great currencies, up until the nations using them stopped finding more.  Economic growth is difficult when the money supply is limited or fixed.  Check out "Panic of    " insert numerous 19th century years into that phrase.  They were recessions or short depressions due to in large part to problems with monetary policy tied to gold and silver during periods of economic expansion.  Deflation was a huge risk back then and it didn't take much to tip the scales.  The Fed is far from perfect, but the number of depressions and recessions that can be traced to its actions are quite limited when compared to what came before it.
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kayvent

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Re: Why Bitcoin is Stupid (Don't Put All Your Eggs In One Basket?)
« Reply #19 on: March 03, 2018, 01:02:25 PM »

 and the ignorance about the role of gold as a historical currency, which worked phenomenally well for thousands of years right up until the US abandoned it in 1971, setting off massive inflation and the financialization of the US economy that we are still coping with today.

You were doing great right up until that point. Gold and silver were great currencies, up until the nations using them stopped finding more.

Or the reverse problem. Finding enough to cause a inflationary spiral. Charles V had such an influx of New World gold and silver that it caused mass inflation. I've read it expressed that because of the inflation, Charles V had to keep importing New World gold/silver. Which caused more inflation. That needed more NW imports. That caused more inflation. etc...