What do you think of adding a low% of crypto allocation

[Telecaster]

You guys are making it way too hard.  The key part that differentiates a Ponzi from other types of fraud is the actual payout.  The high payout is the thing which attracts new money from investors, which is used to provide high rates of return, and the payout is the thing that causes the Ponzi to fail.   

Enron:  They were cooking the books to make the company look more valuable.  Not a Ponzi.

Madoff:  He was taking money from new investors to pay high rates of return to current investors.  Definite Ponzi.

Beanie Babies:  Did not promise a payout.  Price was set by speculators who were hoping for a greater fool.  Not a Ponzi. 

Celsius Network:  Paid high rates of return using money obtained from new investors.  Definite Ponzi.

Bitcoin:  Does not promise a payout.  Price is set by speculators who are hoping for a greater fool.*   Not a Ponzi. 


*I personally think the price is being manipulated, but in general the greater fool thing is what is happening.

[MustacheAndaHalf]

I think it's a fallacy to say "because it once went down X%, it cannot be a Ponzi scheme." If everyone believed this, then it would be easy to run an obvious Ponzi scheme by saying that you lost money in a couple of quarters, and one could be immune from prosecution if your fund went down in a few quarters. A robotic jury would say you were innocent because those quarters of losses violate the rigid definition. The flipside statement, "because it once went up X%, it cannot be a Ponzi scheme" is obviously fallacious, because such a scheme can post positive returns as long as new investors keep putting money in.

You're putting words in my mouth.  Where did I say the words you quoted?

I think you're misinterpreting the following statement I made:

I'm not aware of any Ponzi scheme that has collapsed 95% or more and recovered, because a drop of that magnitude causes a Ponzi scheme to collapse.

Again, "collapsed 95% or more" and then recovered.  Not some other order as you claim, or separating those statements as if I didn't connect them.  Collapse 95% and recover.

Where are these hypothetical Ponzi schemes that claimed to lose money to draw in customers?  I'm describing what happens in actual Ponzi schemes, and you're describing something else.

It sounds like you are proposing a criteria for determining whether a thing is a Ponzi scheme or not. The criteria you specifically stated is if it ever fell 95% and then recovered, it cannot be a Ponzi.

I can come up with examples where historical scams fell by a lower percentage than that, and I can come up with examples where the same person orchestrated a second scheme after the failure or -100% returns of the first, but I am unaware of any other -95% -> +2,000% sequence of return events in the history of Ponzi schemes. Perhaps a scholar of financial fraud could come up with examples, but I am not such a scholar.

My earlier example imagined a Ponzi scheme which lost some amount of money for a couple of quarters, in order to dodge a strict definition and yet still be a Ponzi scheme. I wasn't thinking 95%, but was merely using the thought experiment to show how every other element of a Ponzi could be in place and the reporting of a loss (real or fake) would not change its characteristics or transform it from being a scam to being a legitimate investment.

But why draw the line at 95%? Why not 20% or even 5%? Madoff made up his performance numbers out of thin air for decades, so what does reported performance have to do with the legitimacy of an investment? Would Madoff have become more legitimate if, in a particular year, he reported 10% returns instead of 15%?

I can envision scenarios where a Ponzi scheme reports and maybe actually experiences -95% performance just to convince investors they had obtained six-figure leverage over something, while offering a limited-liability equity product that can only go to zero. Such a lotto ticket would be a great deal - other than being fake - and would attract lots of money after convincing lots of people it couldn't be a scheme because schemes don't ever go down that much.

That's sort of what happened with cryptos. People were reasoning "Why shouldn't I drop $10k into this market? The most I can lose is $10k and it could potentially make me a millionaire if it goes up 100x like it did in the past! These things have more upside leverage than downside."

In the meantime, can we agree that crypto fulfills the other elements of the definition? It's a business model that recruits members who think they'll get a big payment for recruiting others to the scheme rather than supplying the sale of legitimate investments or other products? Can we agree on at least 75-80% of the definition being met?

(Note that price behavior is not part of the definition.)

I don't respond to every element in your posts, but that doesn't mean agreement.  I brought up several authorities including the President of the United States, the US Treasury Secretary, and US Futures markets with all relevant regulators.  And your response, without evidence, is that all of them are being defrauded and don't know it.  If you can assume things without evidence, while I have to dig up authorities for you to ignore, there doesn't seem much point in that discussion.  But it's not agreement.

When a Ponzi scheme collapses, it loses 100%.  I picked 95% drop and recovery because once a Ponzi scheme loses 95%, I'm not aware of any example where it doesn't proceed to a 100% loss.

You mentioned a 5% drop, which is random noise.  Stocks, bonds, gold, crypto, real estate all have dropped 5% and recovered.  In the earlier graph with Enron, it clearly went up and down more than 5%, but once it fell 95% it was a collapse.  When you look at real world events, my 95% crash (and recovery) criteria is evident and your possible 5% criteria doesn't signal anything.

Was GameStop a Ponzi scheme?  People buying to make the price go higher?  I view it as a short squeeze, but maybe in your view that's a Ponzi scheme as well (with FOMO, widespread coverage, etc).

[ChpBstrd]

When a Ponzi scheme collapses, it loses 100%.  I picked 95% drop and recovery because once a Ponzi scheme loses 95%, I'm not aware of any example where it doesn't proceed to a 100% loss.

I looked deeper into the Bernie Madoff scheme because we can all agree it was a Ponzi and because there's lots of easily-accessible info about it. Turns out, investors in the scheme "have recovered 75 cents on the dollar" thanks to the work of a large team of recovery lawyers. They might have done better investing with Madoff than some people did investing in bank stocks since 2008, lol!

https://webreprints.djreprints.com/4743180552220.html
https://www.madofftrustee.com/

With the whole "is it a Ponzi" question, we are probably falling into the same categorization trap as paleontologists sometimes fall into when trying to fit their latest fossil into a list of distinct species. They'll find a fossil which had traits of both species A and species B, get into arguments over which species description best fits the fossil, and then realize the fossil represents the transition between species A and B.

The futility of the argument reveals how nature doesn't have distinct categories and doesn't care about the labels we invent as shorthand for a complex reality. The error is in trying to force a spectrum of changing things into categories we invented. Maybe our inability to agree on old labels applying to cryptocurrencies reflects an error in our categorical thinking process. Schemes like Charles Ponzi's original are rare today, just like the alpha variant of COVID-19, because so many people have immunity. Their descendants are definitely around with a different set of traits. Whether to call them a new species or not is academic. 

[BicycleB]

When a Ponzi scheme collapses, it loses 100%.  I picked 95% drop and recovery because once a Ponzi scheme loses 95%, I'm not aware of any example where it doesn't proceed to a 100% loss.

I looked deeper into the Bernie Madoff scheme because we can all agree it was a Ponzi and because there's lots of easily-accessible info about it. Turns out, investors in the scheme "have recovered 75 cents on the dollar" thanks to the work of a large team of recovery lawyers. They might have done better investing with Madoff than some people did investing in bank stocks since 2008, lol!

https://webreprints.djreprints.com/4743180552220.html
https://www.madofftrustee.com/

With the whole "is it a Ponzi" question, we are probably falling into the same categorization trap as paleontologists sometimes fall into when trying to fit their latest fossil into a list of distinct species. They'll find a fossil which had traits of both species A and species B, get into arguments over which species description best fits the fossil, and then realize the fossil represents the transition between species A and B.

The futility of the argument reveals how nature doesn't have distinct categories and doesn't care about the labels we invent as shorthand for a complex reality. The error is in trying to force a spectrum of changing things into categories we invented. Maybe our inability to agree on old labels applying to cryptocurrencies reflects an error in our categorical thinking process. Schemes like Charles Ponzi's original are rare today, just like the alpha variant of COVID-19, because so many people have immunity. Their descendants are definitely around with a different set of traits. Whether to call them a new species or not is academic.

Well said @ChpBstrd!!!

I mean - in the sense that the arguments have been well thought out and have brought forth competing viewpoints, they've been useful, and expanded my thinking. But I think you're right that the new substance, not the old label, is what's important, and the key factor is that in crypto we're seeing a New Variant.

I don't think crypto is restricted to this, but these Ponzi-like, arguably Ponzi-in-a-new-bottle effects seem to have been the main factor raising prices above those from the original "govt can't track illicit activity" use case.

[StashingAway]

It doesn't have to be *exactly* like Enron, or Madoff, or what have you. No doubt bitcoin is different from those analogies. The mechanics are different, the details are new, the timescale isn't predictable. But they all smell of the same stink from certain perspectives.

... MLMs are "regulated", that doesn't mean they're not a skeezy drain on society. The prez paying credence by making a consumer protections executive order isn't any more than saying that it is a big deal and needs to be looked at. It's not validating it. Covid and payday loans are regulated by the government, that doesn't make them somehow virtuous.

ChpBstrd has a better way of explaining what I was trying to point out yesterday.

[MustacheAndaHalf]

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

For example, 2024-01-19 PUT $80 would cost around $980/contract.  If Coinbase hits zero, that PUT option is worth $80/share x 100 shares = $8,000.  That's how I would play the cynical view of crypto: +7163% return if crypto crashes in 22 months, and -100% return if it doesn't.

Of the people who view crypto as worthless, did any of you invest against it?  Back in March I brought up the way to do that: Coinbase put options with an $80 strike, which was $980 when I posted originally.  Eight months later, that same option is worth $4190 for a +327% profit.
https://finance.yahoo.com/quote/COIN/options?p=COIN&date=1705622400

[MustacheAndaHalf]

When a Ponzi scheme collapses, it loses 100%.  I picked 95% drop and recovery because once a Ponzi scheme loses 95%, I'm not aware of any example where it doesn't proceed to a 100% loss.

I looked deeper into the Bernie Madoff scheme because we can all agree it was a Ponzi and because there's lots of easily-accessible info about it. Turns out, investors in the scheme "have recovered 75 cents on the dollar" thanks to the work of a large team of recovery lawyers. They might have done better investing with Madoff than some people did investing in bank stocks since 2008, lol!

That joke about banks isn't accurate.  SPDR S&P Bank ETF (KBE) has a +50% gain since 2008 until now, which is better than a -24% loss.  It's more fair to compare 2008-2018, where KBE only had a +5% gain.

Keep in mind the Madoff money was unavailble for over a decade.  Someone who invested 3 years before the collapse thought they had a +40% return, only to be told they have zero.  From 2006-2018, the S&P 500 returned +163% while the Madoff recovery fund paid out -24% losses.  The FBI assigns time a value of zero, which creates a huge opportunity cost.

If you're trying to call this an exception to my 95% crash with no recovery, don't you have to claim the Ponzi scheme did not collapse, and was taken over by the FBI?  Did the FBI continue Madoff's Ponzi scheme, or does the general rule I proposed still hold?

[ChpBstrd]

When a Ponzi scheme collapses, it loses 100%.  I picked 95% drop and recovery because once a Ponzi scheme loses 95%, I'm not aware of any example where it doesn't proceed to a 100% loss.

I looked deeper into the Bernie Madoff scheme because we can all agree it was a Ponzi and because there's lots of easily-accessible info about it. Turns out, investors in the scheme "have recovered 75 cents on the dollar" thanks to the work of a large team of recovery lawyers. They might have done better investing with Madoff than some people did investing in bank stocks since 2008, lol!

That joke about banks isn't accurate.  SPDR S&P Bank ETF (KBE) has a +50% gain since 2008 until now, which is better than a -24% loss.  It's more fair to compare 2008-2018, where KBE only had a +5% gain.

Keep in mind the Madoff money was unavailble for over a decade.  Someone who invested 3 years before the collapse thought they had a +40% return, only to be told they have zero.  From 2006-2018, the S&P 500 returned +163% while the Madoff recovery fund paid out -24% losses.  The FBI assigns time a value of zero, which creates a huge opportunity cost.

If you're trying to call this an exception to my 95% crash with no recovery, don't you have to claim the Ponzi scheme did not collapse, and was taken over by the FBI?  Did the FBI continue Madoff's Ponzi scheme, or does the general rule I proposed still hold?

Lehman and AIG stock investments might have left a person with <75% today, depending on timing. Also, the FBI did not seize many of the assets until years later - so some victims probably benefited from the appreciation of stock and bond assets after 2008.

The Madoff example only illustrates how a Ponzi-adjacent scheme does not need to lose 95% of their assets to go bust. Madoff, like FTX and now a couple of other cryptobrokerages, was unable to promptly meet redemption requests because assets that were supposed to be inside the organization had been moved out of the organization. There were massive piles of assets; they were just in the wrong place when customers came in demanding cash the same day. As word spread that the organizations were not promptly meeting redemption requests, the bank runs accelerated.

Maybe the missing piece to the analogy is that we can imagine a world in which Madoff Securities or FTX kept large reserves of actual assets, instead of holding minimal assets to backstop their on-demand accounts.

What if, say, half of customer assets were kept quickly available for redemption and the other half were stolen? That probably would have been enough reserves to stop the bank runs and both schemes could have continued operating to this day. Madoff's error was to move his clients' assets into his personal accounts so that he could live a life of luxury off the personal accounts, when he could have just spent out of the Madoff Securities accounts and been more prepared for the 2008 wave of redemption requests. Likewise, FTX errored by moving a bunch of clients' assets to Alameda, leaving themselves unprepared for a bank run (and perhaps sparking the bank run when people saw them moving the assets). Getting caught amounted to having too many of the assets in an illiquid place, just like with bank runs on legitimate banks. Except with Madoff and FTX, that illiquid place was not a portfolio of loans, it was personal accounts.

Let's do another thought experiment. Suppose Madoff had kept 75% of customer assets in liquid accounts, knowing he was just one bank run away from being discovered, and wisely reasoning that his personal accounts would do him no good if he was ever caught. He could still print false account statements with made-up returns, could still fund redemption requests from new victims' money in normal times, could still run every other aspect of the scheme, and could still live like a king. It would still be a Ponzi, just more conservatively run.

When 2008 happened, suppose customers asked to immediately withdraw 70% of the original deposits in Madoff Securities. Madoff could promptly and immediately pay each account holder from the reserves, and that would have been sufficient to avoid a run (particularly because clients believed Madoff was running a collar strategy, with limited loss potential).

Behind the scenes this hypothetical Madoff Securities would have lost 95% of its clients' cash: 70% from redemptions and 25% from previous theft. The Ponzi scheme would have survived 2008 after losing 95% of its actual funds, might have attracted more money by reporting reasonable performance through the crisis, and might have only been found out after Madoff's death. This hypothetical post-2008 Madoff Securities would have only been as leveraged as Madoff Securities was in reality. The strong market performance after 2009 and low interest rates would have given Madoff cover to report very high earnings, attracting lots more capital, and report a full recovery.

Of course, financial scams are typically set up by greedy and reckless people who are disinclined not to personally use every dollar they pull in. The thought experiment shows it is possible for a Ponzi to lose 95% and come back completely. Madoff wasn't caught by the FBI or SEC after 16 years of on and off investigation; his undoing was a traditional bank run which he could have avoided. I'm sure he spent his last years in prison wondering why he didn't hold more liquidity.

[StashingAway]

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

For example, 2024-01-19 PUT $80 would cost around $980/contract.  If Coinbase hits zero, that PUT option is worth $80/share x 100 shares = $8,000.  That's how I would play the cynical view of crypto: +7163% return if crypto crashes in 22 months, and -100% return if it doesn't.

Of the people who view crypto as worthless, did any of you invest against it?  Back in March I brought up the way to do that: Coinbase put options with an $80 strike, which was $980 when I posted originally.  Eight months later, that same option is worth $4190 for a +327% profit.
https://finance.yahoo.com/quote/COIN/options?p=COIN&date=1705622400

I would like to refer to the response to your proposal when you suggested it. No sense in trying to guess how and when things will pan out when your personal opinion is that they're not making sense currently.

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

The market can stay irrational longer than I can remain liquid.

[JAYSLOL]

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

For example, 2024-01-19 PUT $80 would cost around $980/contract.  If Coinbase hits zero, that PUT option is worth $80/share x 100 shares = $8,000.  That's how I would play the cynical view of crypto: +7163% return if crypto crashes in 22 months, and -100% return if it doesn't.

Of the people who view crypto as worthless, did any of you invest against it?  Back in March I brought up the way to do that: Coinbase put options with an $80 strike, which was $980 when I posted originally.  Eight months later, that same option is worth $4190 for a +327% profit.
https://finance.yahoo.com/quote/COIN/options?p=COIN&date=1705622400

I also view smoking as “worthless”.  Just because I won’t use my money to stockpile cigarettes for an activity I’ll never partake in and frankly think others should’t either, doesn’t mean I’ll straight up gamble my money instead betting against cigarette companies

[FINate]

Yes I have 20%. @Malcat  I plan to rebalance my portfolio annually to keep it at 20% crypto.

Genuinely curious: you stickin' to this plan?

@whywork

*crickets*

The crypto evangelists have gone eerily quiet.

[mistymoney]

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

For example, 2024-01-19 PUT $80 would cost around $980/contract.  If Coinbase hits zero, that PUT option is worth $80/share x 100 shares = $8,000.  That's how I would play the cynical view of crypto: +7163% return if crypto crashes in 22 months, and -100% return if it doesn't.

Of the people who view crypto as worthless, did any of you invest against it?  Back in March I brought up the way to do that: Coinbase put options with an $80 strike, which was $980 when I posted originally.  Eight months later, that same option is worth $4190 for a +327% profit.
https://finance.yahoo.com/quote/COIN/options?p=COIN&date=1705622400

I would like to refer to the response to your proposal when you suggested it. No sense in trying to guess how and when things will pan out when your personal opinion is that they're not making sense currently.

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

The market can stay irrational longer than I can remain liquid.

I'd also like to chime in here as someone who would never invest in crypto, and would also never bet "against" anything.

I do buy individual stocks in addition to ETFs/mutuals - but only for buy and hold, never on short term speculation or shorting or anything like that. And aside from that perspective, many on this board are strictly broad market index investor, as MMM advised.

So the suggest to this particular audience to bet against crypto is an odd one, imo. Betting against anything is risky, collars, etc notwithstanding. It isn't in my wheelhouse and I have no inclination to go down that direction at all. Too much risk for too much uncertain reward.

[GilesMM]

Well put, Misty. There is a huge difference between saying “that is a dumb place to put your money” and saying “I know that thing will decrease in value and I know when so I will bet against it”.

[ChpBstrd]

Yea if I was to bet against all the products I think are horrible ideas, I'd have to buy puts against most automakers, credit card companies, restaurants, tobacco/weed, booze, chemicals, fashion, most of the internet, most broadcast media, homebuilders, casinos, movie studios, etc.

[onecoolcat]

Putting it on the record, like i did in 2018-19.  I am buying. 

[MustacheAndaHalf]

Yea if I was to bet against all the products I think are horrible ideas, I'd have to buy puts against most automakers, credit card companies, restaurants, tobacco/weed, booze, chemicals, fashion, most of the internet, most broadcast media, homebuilders, casinos, movie studios, etc.

You claimed crypto was a Ponzi scheme.  If you believe crypto will not collapse, how can it be a Ponzi scheme?

[MustacheAndaHalf]

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

For example, 2024-01-19 PUT $80 would cost around $980/contract.  If Coinbase hits zero, that PUT option is worth $80/share x 100 shares = $8,000.  That's how I would play the cynical view of crypto: +7163% return if crypto crashes in 22 months, and -100% return if it doesn't.

Of the people who view crypto as worthless, did any of you invest against it?  Back in March I brought up the way to do that: Coinbase put options with an $80 strike, which was $980 when I posted originally.  Eight months later, that same option is worth $4190 for a +327% profit.
https://finance.yahoo.com/quote/COIN/options?p=COIN&date=1705622400

I would like to refer to the response to your proposal when you suggested it. No sense in trying to guess how and when things will pan out when your personal opinion is that they're not making sense currently.

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

The market can stay irrational longer than I can remain liquid.

Which was an incorrect statement which I corrected with the following reply.

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

The market can stay irrational longer than I can remain liquid.

Note that "put options" gives the holder the option, but not the requirement, to sell shares at the given price.  No additional liquidity is required.

I'm mostly exploring the idea that people who dislike crypto will not put money behind their idea.  There's a certainty that crypto is wrong, but not a certainty to invest against it.

Which suggests maybe its a waste of time to correct people's incorrect statements.

A put option (or “put”) is a contract giving the option buyer the right, but not the obligation, to sell—or sell short—a specified amount of an underlying security

https://www.investopedia.com/terms/p/putoption.asp

[seattlecyclone]

Yea if I was to bet against all the products I think are horrible ideas, I'd have to buy puts against most automakers, credit card companies, restaurants, tobacco/weed, booze, chemicals, fashion, most of the internet, most broadcast media, homebuilders, casinos, movie studios, etc.

You claimed crypto was a Ponzi scheme.  If you believe crypto will not collapse, how can it be a Ponzi scheme?

I believe cryptocurrencies have minimal utility and should in the long run be worthless. In the short run? Anything could happen. I'm not interested in taking a bet either way. Same with some of the other things in that @ChpBstrd's list: there are plenty of businesses that I doubt will survive the next decade or two, but I'm not running out to short their stock or buy options because I have no particular reason to believe the collapse is imminent.

Can you understand the distinction here? It seems several people have brought this up when you suggest that everyone who isn't aboard the crypto train should logically buy some puts. Just because I believe the intrinsic value is zero doesn't mean the market is going to agree with me before the option expires.

[Shane]

You guys are making it way too hard.  The key part that differentiates a Ponzi from other types of fraud is the actual payout.  The high payout is the thing which attracts new money from investors, which is used to provide high rates of return, and the payout is the thing that causes the Ponzi to fail.   

Enron:  They were cooking the books to make the company look more valuable.  Not a Ponzi.

Madoff:  He was taking money from new investors to pay high rates of return to current investors.  Definite Ponzi.

Beanie Babies:  Did not promise a payout.  Price was set by speculators who were hoping for a greater fool.  Not a Ponzi. 

Celsius Network:  Paid high rates of return using money obtained from new investors.  Definite Ponzi.

Bitcoin:  Does not promise a payout.  Price is set by speculators who are hoping for a greater fool.*   Not a Ponzi. 


*I personally think the price is being manipulated, but in general the greater fool thing is what is happening.

I thought Telecaster made a good case, in the post above, against labeling crypto as a ponzi scheme, at least in the case of Bitcoin. Does it really matter, though, if crypto currencies are a ponzi or just a scam in search of greater fools? Seems like quibbling over semantics to me.

[GilesMM]

Yea if I was to bet against all the products I think are horrible ideas, I'd have to buy puts against most automakers, credit card companies, restaurants, tobacco/weed, booze, chemicals, fashion, most of the internet, most broadcast media, homebuilders, casinos, movie studios, etc.

You claimed crypto was a Ponzi scheme.  If you believe crypto will not collapse, how can it be a Ponzi scheme?

I believe the correct term is "Pyramid" scheme. This is where the participants understand that new gullible participants are required to boost prices and for them to make money.  Crypto is a pyramid scheme.   Of course, the game may be over now since it may be years before people have faith enough to buy it again, if ever.

In a Ponzi a master schemer is fooling all the participants by offering generous terms which are actually supported mostly by new participants.  FTX was run by an alleged master schemer who was said to be mis-using all participants funds for the overall business and for his personal gain.  Probably not a Ponzi setup, just a sloppy business run by a charismatic genius (people foolishly bought the man instead of the product; some may have bought Gemini for similar reasons).  In fact, the demise may have been driven as much by an angry competitor as by FTX mis-steps.

[Psychstache]

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

For example, 2024-01-19 PUT $80 would cost around $980/contract.  If Coinbase hits zero, that PUT option is worth $80/share x 100 shares = $8,000.  That's how I would play the cynical view of crypto: +7163% return if crypto crashes in 22 months, and -100% return if it doesn't.

Of the people who view crypto as worthless, did any of you invest against it?  Back in March I brought up the way to do that: Coinbase put options with an $80 strike, which was $980 when I posted originally.  Eight months later, that same option is worth $4190 for a +327% profit.
https://finance.yahoo.com/quote/COIN/options?p=COIN&date=1705622400

I would like to refer to the response to your proposal when you suggested it. No sense in trying to guess how and when things will pan out when your personal opinion is that they're not making sense currently.

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

The market can stay irrational longer than I can remain liquid.

Which was an incorrect statement which I corrected with the following reply.

For those certain that crypto will fail, why not buy "put options" on Coinbase stock (COIN)?

The market can stay irrational longer than I can remain liquid.

Note that "put options" gives the holder the option, but not the requirement, to sell shares at the given price.  No additional liquidity is required.

I'm mostly exploring the idea that people who dislike crypto will not put money behind their idea.  There's a certainty that crypto is wrong, but not a certainty to invest against it.

Which suggests maybe its a waste of time to correct people's incorrect statements.

A put option (or “put”) is a contract giving the option buyer the right, but not the obligation, to sell—or sell short—a specified amount of an underlying security

https://www.investopedia.com/terms/p/putoption.asp

Are reasonably priced 20-year puts an option? If so, I will think about it.

[waltworks]

The fact that we're quibbling over whether the best move is to ignore crypto or figure out a way to short it really says it all, doesn't it?

-W

[bwall]

Lehman and AIG stock investments might have left a person with <75% today, depending on timing. Also, the FBI did not seize many of the assets until years later - so some victims probably benefited from the appreciation of stock and bond assets after 2008.

The Madoff example only illustrates how a Ponzi-adjacent scheme does not need to lose 95% of their assets to go bust. Madoff, like FTX and now a couple of other cryptobrokerages, was unable to promptly meet redemption requests because assets that were supposed to be inside the organization had been moved out of the organization. There were massive piles of assets; they were just in the wrong place when customers came in demanding cash the same day. As word spread that the organizations were not promptly meeting redemption requests, the bank runs accelerated.

Maybe the missing piece to the analogy is that we can imagine a world in which Madoff Securities or FTX kept large reserves of actual assets, instead of holding minimal assets to backstop their on-demand accounts.

What if, say, half of customer assets were kept quickly available for redemption and the other half were stolen? That probably would have been enough reserves to stop the bank runs and both schemes could have continued operating to this day. Madoff's error was to move his clients' assets into his personal accounts so that he could live a life of luxury off the personal accounts, when he could have just spent out of the Madoff Securities accounts and been more prepared for the 2008 wave of redemption requests. Likewise, FTX errored by moving a bunch of clients' assets to Alameda, leaving themselves unprepared for a bank run (and perhaps sparking the bank run when people saw them moving the assets). Getting caught amounted to having too many of the assets in an illiquid place, just like with bank runs on legitimate banks. Except with Madoff and FTX, that illiquid place was not a portfolio of loans, it was personal accounts.

Let's do another thought experiment. Suppose Madoff had kept 75% of customer assets in liquid accounts, knowing he was just one bank run away from being discovered, and wisely reasoning that his personal accounts would do him no good if he was ever caught. He could still print false account statements with made-up returns, could still fund redemption requests from new victims' money in normal times, could still run every other aspect of the scheme, and could still live like a king. It would still be a Ponzi, just more conservatively run.

When 2008 happened, suppose customers asked to immediately withdraw 70% of the original deposits in Madoff Securities. Madoff could promptly and immediately pay each account holder from the reserves, and that would have been sufficient to avoid a run (particularly because clients believed Madoff was running a collar strategy, with limited loss potential).

Behind the scenes this hypothetical Madoff Securities would have lost 95% of its clients' cash: 70% from redemptions and 25% from previous theft. The Ponzi scheme would have survived 2008 after losing 95% of its actual funds, might have attracted more money by reporting reasonable performance through the crisis, and might have only been found out after Madoff's death. This hypothetical post-2008 Madoff Securities would have only been as leveraged as Madoff Securities was in reality. The strong market performance after 2009 and low interest rates would have given Madoff cover to report very high earnings, attracting lots more capital, and report a full recovery.

Of course, financial scams are typically set up by greedy and reckless people who are disinclined not to personally use every dollar they pull in. The thought experiment shows it is possible for a Ponzi to lose 95% and come back completely. Madoff wasn't caught by the FBI or SEC after 16 years of on and off investigation; his undoing was a traditional bank run which he could have avoided. I'm sure he spent his last years in prison wondering why he didn't hold more liquidity.

I love the thought experiment. In effect, 'how closely can one court disaster and not go over the edge?' Cliff diving in Acapulco is by comparison a tame sport for old grandmothers.

A problem I see with the outline above is that it doesn't account for the clients' fictitious gains. Presumably, any client looking to redeem their assets would also want to redeem the gains they were led to believe accrued to them. Since these gains were non existent, it'd be impossible for them to be fully redeemed at all, much less with the reserve proportions listed above.

The prospective remedy for Madoff would have been to selectively have accounts crushed at some point along the way. "Oops! One trade went bad, you lost 50%!", or something to this effect. The investor would pull out his remaining balance which would be below the initial investment amount. As you can imagine, this remedy brings another set of problems with it; people aren't going to believe the losses occurred so quickly, demand an investigation, etc. Reporting a fictitious bad year across the board wouldn't solve anything either--just incur more redemptions.

[MustacheAndaHalf]

Yea if I was to bet against all the products I think are horrible ideas, I'd have to buy puts against most automakers, credit card companies, restaurants, tobacco/weed, booze, chemicals, fashion, most of the internet, most broadcast media, homebuilders, casinos, movie studios, etc.

You claimed crypto was a Ponzi scheme.  If you believe crypto will not collapse, how can it be a Ponzi scheme?

I believe cryptocurrencies have minimal utility and should in the long run be worthless. In the short run? Anything could happen. I'm not interested in taking a bet either way. Same with some of the other things in that @ChpBstrd's list: there are plenty of businesses that I doubt will survive the next decade or two, but I'm not running out to short their stock or buy options because I have no particular reason to believe the collapse is imminent.

Can you understand the distinction here? It seems several people have brought this up when you suggest that everyone who isn't aboard the crypto train should logically buy some puts. Just because I believe the intrinsic value is zero doesn't mean the market is going to agree with me before the option expires.

You're putting words in my mouth.  The words "did any of you" does not mean "everyone", which becomes apparent when you actually quote what I said:

Of the people who view crypto as worthless, did any of you invest against it?

My goal was to correct factual misstatements. But instead multiple posters are putting words in my mouth - not even reading what I said accurately.

[MustacheAndaHalf]

Putting it on the record, like i did in 2018-19.  I am buying.

I alternate long and short with crypto.  At the start of this year I sold all my crypto.  I even profitted off short positions as crypto was driven lower by Fed rate hikes.  At the end of October I flipped to buying, but I expect a 3-5 year wait.

[ChpBstrd]

Yea if I was to bet against all the products I think are horrible ideas, I'd have to buy puts against most automakers, credit card companies, restaurants, tobacco/weed, booze, chemicals, fashion, most of the internet, most broadcast media, homebuilders, casinos, movie studios, etc.

You claimed crypto was a Ponzi scheme.  If you believe crypto will not collapse, how can it be a Ponzi scheme?

Regardless of how we categorize them, if there's one thing we know about Ponzi or pyramid or MLM or name-your-name schemes, it's that they can go on for decades. History is full of examples of such things that just keep growing beyond all rationale. Their collapses are hard to predict in a time-bound way.

Second, crypto throws in the added complexity of fake trades and highly manipulated markets. According to investigators, exchanges do "wash sales" to themselves in an attempt to inflate the prices of various coins. This may be what FTX and Alameda were up to - using client assets to corner the market on illiquid coins, including their own, making it appear prices were going "to the moon" in order to attract new investment into those coins.
https://www.forbes.com/sites/javierpaz/2022/08/26/more-than-half-of-all-bitcoin-trades-are-fake/?sh=6a6d46f26681

So even if a person has complete confidence that buttcoin or whatever is going to zero someday, they do not know the schedule of the next wash cycle. This isn't at all like shorting a commodity based on observations of supply and demand, or shorting a stock because you can predict by the store's empty parking lot and unappealing deals that their earnings will disappoint. This is like out-timing somebody else's penny stock pump and dump.

Third, scams or greater-fool-theory investments depend on the ability of the promoters to continue attracting new money - after already doing so for a long time, building up their skills and reputation, etc. If one was to lay down a bet that such a scheme would run out of new investors by time X, one would be making the mirror-image bet as the person buying the asset and assuming they'll find a greater fool to sell it to by time X. Neither bet has any evidence in its favor. It's a gamble on the supply and sentiment of new investors either way, and each bet will be right or wrong at different times, like any bet in roulette. Why play a zero-sum back-alley dice hustle against sophisticated conmen when there's a world full of companies actually creating economic value with their stocks and bonds for sale in more-transparent markets?

[vand]

When a Ponzi scheme collapses, it loses 100%.  I picked 95% drop and recovery because once a Ponzi scheme loses 95%, I'm not aware of any example where it doesn't proceed to a 100% loss.

I looked deeper into the Bernie Madoff scheme because we can all agree it was a Ponzi and because there's lots of easily-accessible info about it. Turns out, investors in the scheme "have recovered 75 cents on the dollar" thanks to the work of a large team of recovery lawyers. They might have done better investing with Madoff than some people did investing in bank stocks since 2008, lol!

That joke about banks isn't accurate.  SPDR S&P Bank ETF (KBE) has a +50% gain since 2008 until now, which is better than a -24% loss.  It's more fair to compare 2008-2018, where KBE only had a +5% gain.

Keep in mind the Madoff money was unavailble for over a decade.  Someone who invested 3 years before the collapse thought they had a +40% return, only to be told they have zero.  From 2006-2018, the S&P 500 returned +163% while the Madoff recovery fund paid out -24% losses.  The FBI assigns time a value of zero, which creates a huge opportunity cost.

If you're trying to call this an exception to my 95% crash with no recovery, don't you have to claim the Ponzi scheme did not collapse, and was taken over by the FBI?  Did the FBI continue Madoff's Ponzi scheme, or does the general rule I proposed still hold?

Lehman and AIG stock investments might have left a person with <75% today, depending on timing. Also, the FBI did not seize many of the assets until years later - so some victims probably benefited from the appreciation of stock and bond assets after 2008.

The Madoff example only illustrates how a Ponzi-adjacent scheme does not need to lose 95% of their assets to go bust. Madoff, like FTX and now a couple of other cryptobrokerages, was unable to promptly meet redemption requests because assets that were supposed to be inside the organization had been moved out of the organization. There were massive piles of assets; they were just in the wrong place when customers came in demanding cash the same day. As word spread that the organizations were not promptly meeting redemption requests, the bank runs accelerated.

Maybe the missing piece to the analogy is that we can imagine a world in which Madoff Securities or FTX kept large reserves of actual assets, instead of holding minimal assets to backstop their on-demand accounts.

What if, say, half of customer assets were kept quickly available for redemption and the other half were stolen? That probably would have been enough reserves to stop the bank runs and both schemes could have continued operating to this day. Madoff's error was to move his clients' assets into his personal accounts so that he could live a life of luxury off the personal accounts, when he could have just spent out of the Madoff Securities accounts and been more prepared for the 2008 wave of redemption requests. Likewise, FTX errored by moving a bunch of clients' assets to Alameda, leaving themselves unprepared for a bank run (and perhaps sparking the bank run when people saw them moving the assets). Getting caught amounted to having too many of the assets in an illiquid place, just like with bank runs on legitimate banks. Except with Madoff and FTX, that illiquid place was not a portfolio of loans, it was personal accounts.

Let's do another thought experiment. Suppose Madoff had kept 75% of customer assets in liquid accounts, knowing he was just one bank run away from being discovered, and wisely reasoning that his personal accounts would do him no good if he was ever caught. He could still print false account statements with made-up returns, could still fund redemption requests from new victims' money in normal times, could still run every other aspect of the scheme, and could still live like a king. It would still be a Ponzi, just more conservatively run.

When 2008 happened, suppose customers asked to immediately withdraw 70% of the original deposits in Madoff Securities. Madoff could promptly and immediately pay each account holder from the reserves, and that would have been sufficient to avoid a run (particularly because clients believed Madoff was running a collar strategy, with limited loss potential).

Behind the scenes this hypothetical Madoff Securities would have lost 95% of its clients' cash: 70% from redemptions and 25% from previous theft. The Ponzi scheme would have survived 2008 after losing 95% of its actual funds, might have attracted more money by reporting reasonable performance through the crisis, and might have only been found out after Madoff's death. This hypothetical post-2008 Madoff Securities would have only been as leveraged as Madoff Securities was in reality. The strong market performance after 2009 and low interest rates would have given Madoff cover to report very high earnings, attracting lots more capital, and report a full recovery.

Of course, financial scams are typically set up by greedy and reckless people who are disinclined not to personally use every dollar they pull in. The thought experiment shows it is possible for a Ponzi to lose 95% and come back completely. Madoff wasn't caught by the FBI or SEC after 16 years of on and off investigation; his undoing was a traditional bank run which he could have avoided. I'm sure he spent his last years in prison wondering why he didn't hold more liquidity.

Although I don't proclaim to be an authority as I recall the only reason that Madoff got "caught" out was that he confessed it to his sons who then reported him to the SEC. 

It could well still be ongoing had he not been so guilt stricken that he made that confession - and the very reason why was that his reported returns were good but not SO good that they raised a red flag.

If you're running a ponzi you don't shout about it from the rooftops - a lesson which SBF despite his massive intellect was too stupid to heed.

[GilesMM]

Although I don't proclaim to be an authority as I recall the only reason that Madoff got "caught" out was that he confessed it to his sons who then reported him to the SEC. 

It could well still be ongoing had he not been so guilt stricken that he made that confession - and the very reason why was that his reported returns were good but not SO good that they raised a red flag.

If you're running a ponzi you don't shout about it from the rooftops - a lesson which SBF despite his massive intellect was too stupid to heed.

No, Madoff confessed because "the gig was up", he could no longer maintain the scheme because he had some redemptions he couldn't pay.  Not enough new blood to support the existing customers.  His hand was forced.

[Telecaster]

Of the people who view crypto as worthless, did any of you invest against it?  Back in March I brought up the way to do that: Coinbase put options with an $80 strike, which was $980 when I posted originally.  Eight months later, that same option is worth $4190 for a +327% profit.
https://finance.yahoo.com/quote/COIN/options?p=COIN&date=1705622400

Coinbase stock is down 25% in just the last five days, so that would have been a good bet.  That said, I occasionally drop by r/Bitcoin and follow Bitcoin maximalists like Michael Saylor on Twitter.  The Bitcoin maxis--many of them anyway--have created an alternate reality complete with alternate histories and alternate economic theories explaining why mass Bitcoin adoption is inevitable.  There are many stories of people who lost huge amounts of money in the Voyager and Celsius implosions, and yet use this alternate reality as motivation to buy more Bitcoin.  The response to any news or event that might be detrimental to Bitcoin is thought stopping shibboleths like this is good for Bitcoin, we're still early, etc.  Fiat inflation is seen as one of the primary evils of mankind, but they don't recognize that Bitcoin's has inflated by about 350% in the past year.  This is explained away by saying "1 BTC = 1 BTC."   Which is technically true, but also nonsensical in context.

Bottom line, there is a hardened cadre of Bitcoin maximalists who have unshakable faith in Bitcoin regardless of evidence to the contrary.   I believe this faith partially explains why the whole space is so shot with fraud and scams.  Regardless, the maxis will always be buying and holding Bitcoin.   So I believe there is a hard floor somewhere.  Don't know where it is.   Not much interested in finding out. 

[ChpBstrd]

That said, I occasionally drop by r/Bitcoin and follow Bitcoin maximalists like Michael Saylor on Twitter.  The Bitcoin maxis--many of them anyway--have created an alternate reality complete with alternate histories and alternate economic theories explaining why mass Bitcoin adoption is inevitable.  There are many stories of people who lost huge amounts of money in the Voyager and Celsius implosions, and yet use this alternate reality as motivation to buy more Bitcoin.  The response to any news or event that might be detrimental to Bitcoin is thought stopping shibboleths like this is good for Bitcoin, we're still early, etc.  Fiat inflation is seen as one of the primary evils of mankind, but they don't recognize that Bitcoin's has inflated by about 350% in the past year.  This is explained away by saying "1 BTC = 1 BTC."   Which is technically true, but also nonsensical in context.

Bottom line, there is a hardened cadre of Bitcoin maximalists who have unshakable faith in Bitcoin regardless of evidence to the contrary.   I believe this faith partially explains why the whole space is so shot with fraud and scams.  Regardless, the maxis will always be buying and holding Bitcoin.   So I believe there is a hard floor somewhere.  Don't know where it is.   Not much interested in finding out.

Sounds like the sort of talk we hear from goldbugs.

Gold has industrial applications that lead to a certain amount of demand regardless of the speculators and collectors. These industrial applications increase demand with the economic cycle (in theory) which means gold should (in theory) appreciate during the times when inflation / monetary velocity is increasing most. People tend to buy electronics and jewelry in boom times.

Bitcoin's native applications include laundering, ransomware, ransoms, drug trades, etc. What does that have to do with inflation? IDK.

But I suppose either Bitcoin or gold could both provide a psychological function for those skeptical of all the mainstream people's businesses, bonds, stocks, etc. and yearning for a simple investment that doesn't require accounting training to understand.

[lifeanon269]

The Bitcoin maxis--many of them anyway--have created an alternate reality complete with alternate histories and alternate economic theories explaining why mass Bitcoin adoption is inevitable.  There are many stories of people who lost huge amounts of money in the Voyager and Celsius implosions, and yet use this alternate reality as motivation to buy more Bitcoin.  The response to any news or event that might be detrimental to Bitcoin is thought stopping shibboleths like this is good for Bitcoin, we're still early, etc.  Fiat inflation is seen as one of the primary evils of mankind, but they don't recognize that Bitcoin's has inflated by about 350% in the past year.  This is explained away by saying "1 BTC = 1 BTC."   Which is technically true, but also nonsensical in context.

Bottom line, there is a hardened cadre of Bitcoin maximalists who have unshakable faith in Bitcoin regardless of evidence to the contrary.   I believe this faith partially explains why the whole space is so shot with fraud and scams.  Regardless, the maxis will always be buying and holding Bitcoin.   So I believe there is a hard floor somewhere.  Don't know where it is.   Not much interested in finding out.

FWIW, if you're a bitcoin maxi who doesn't associate with the many scams across the industry, you're probably not participating in those third-party institutions doing the scamming and likely holding custody of your own bitcoin. After all, that is the entire point of bitcoin.

There was a good article that was just published that talks about the separation bitcoin needs from the industry that has now completely corrupted the original idea of it.

https://www.nbcnews.com/think/opinion/bitcoin-vs-ftx-crypto-king-sam-bankman-fried-problem-rcna57964

Also, if you're someone who believes in bitcoin and the economics behind it, you're not seeing CPI inflation as a primary evil, but rather monetary inflation. Seeing the price of goods fluctuated up and down isn't a bad thing and can be the result of many different market forces. What bitcoin proponents are against is having centralized authorities who attempt to control those market prices via manipulation of the money supply. That is what they are against, not CPI inflation itself. The latter is often just a resultant effect of the primary force of monetary inflation. Bitcoin doesn't and won't prevent the price of goods from ever going up at any point in time. The main point behind their economic beliefs is that bitcoin would provide a stable money supply with which goods can be priced. It is also why bitcoiners don't recognize your claim that bitcoin has "inflated by about 350% in the past year". It is because they're not looking at CPI inflation since that is a secondary effect. They're focused on monetary inflation. In that case, bitcoin has only inflated by 1.5% over the last year.

The problem is that our fiat economy completely dwarfs the economy of bitcoin. So if you're pricing bitcoin in fiat money, then the massive swings in fiat money that can ebb and flow between fiat and bitcoin can greatly fluctuate bitcoin's relative value when priced in fiat money. That is why many proponents say "1 BTC = 1 BTC" even though in reality it makes little sense (because we don't price our goods in bitcoin).

As someone who believes that bitcoin can do our world a lot of good, I am also not oblivious to many of the realities of our world. For example, I don't believe fiat currencies are going away and I don't believe bitcoin will ever be a world reserve currency in my lifetime. That said, just because it isn't widely used as a global reserve doesn't mean it still can't do people a lot of good. Obviously this thought is in the minority here, but I also can't help but think that is odd given the fact that this is a forum full of Mustachian thinkers that for some reason can't realize how bad our centralized inflationary monetary policies are for the economy, saving, the environment, etc.

[waltworks]

Go read Bryan's "Cross of Gold" speech...

There's a reason we collectively decided to have a central authority intervene in the money supply. But nobody alive today experienced it.

-W

[lemonlyman]

Go read Bryan's "Cross of Gold" speech...

There's a reason we collectively decided to have a central authority intervene in the money supply. But nobody alive today experienced it.

-W

+1

The Ascent of Money by Niall Ferguson
And America's Bank by Roger Lowenstein

Are some really good primer's for central banks.

[maizefolk]

Go read Bryan's "Cross of Gold" speech...

There's a reason we collectively decided to have a central authority intervene in the money supply. But nobody alive today experienced it.

-W

Bimetallism is a political cause that has zero relevance today, but learning enough to understand why it was a major political issue at the start of the 20th century definitely helps people understand the financial monetary issues we do face today.

Sort of like how studying a foreign language for a couple of years teaches people (or at least taught me) way more about how the english language worked than years and years of english classes.

[lifeanon269]

Go read Bryan's "Cross of Gold" speech...

There's a reason we collectively decided to have a central authority intervene in the money supply. But nobody alive today experienced it.

-W

I don't know how can you take the Cross of Gold speech as anything other than an indictment against central authorities over money. The entire debate over bimetallism and the policies that preceded and followed the turn of the century (1873-1900) is a shining example of how authorities squabbled over how to set a monetary standard for the economy. It was less about creating a standard monetary policy and more about setting a rigid exchange ratio between gold and silver as opposed to a market driven exchange ratio of the independent gold and silver coins. It is no surprise that the bureaucratic manipulation of a rigid exchange ratio between gold and silver failed. The parallels between the arguments over control of the monetary standard between 1873-1900 and the debates had over today's centralized credit-based monetary policies are immediately apparent. It was and always has been about governments wanting control over money.

[waltworks]

Fair enough. We'll agree to disagree. From my perspective, the inabiity of the government to react to economic contractions due to the gold standard was a major cause of the wild recessions/depressions of the era. The last 80 years or so have been remarkably stable in comparison.

So while there are always problems with what the Fed does, they pale in comparison to the problems involved with NOT doing those things.

-W

[lifeanon269]

Fair enough. We'll agree to disagree. From my perspective, the inabiity of the government to react to economic contractions due to the gold standard was a major cause of the wild recessions/depressions of the era. The last 80 years or so have been remarkably stable in comparison.

So while there are always problems with what the Fed does, they pale in comparison to the problems involved with NOT doing those things.

-W

We can agree to disagree. Especially considering I've already wrote about much of it in this very thread already. Around page 20 I actually specifically talk about the great depression and what lead up to it. IMO, we wouldn't need drastic swings in monetary policy in any given direction if there weren't drastic swings in policy in the opposing direction. There have been numerous times in this very thread where I asked others to name a deflationary economic cycle that wasn't preceded by an economic bubble. No one could name one. Far too often those bubbles (such as the 1920's) were driven by massive amounts of credit and monetary expansion. What goes up always comes down.

[BicycleB]

Go read Bryan's "Cross of Gold" speech...

There's a reason we collectively decided to have a central authority intervene in the money supply. But nobody alive today experienced it.

-W

I don't know how can you take the Cross of Gold speech as anything other than an indictment against central authorities over money. The entire debate over bimetallism and the policies that preceded and followed the turn of the century (1873-1900) is a shining example of how authorities squabbled over how to set a monetary standard for the economy. It was less about creating a standard monetary policy and more about setting a rigid exchange ratio between gold and silver as opposed to a market driven exchange ratio of the independent gold and silver coins. It is no surprise that the bureaucratic manipulation of a rigid exchange ratio between gold and silver failed. The parallels between the arguments over control of the monetary standard between 1873-1900 and the debates had over today's centralized credit-based monetary policies are immediately apparent. It was and always has been about governments wanting control over money.

I can see how your interpretation of Cross of Gold fits in with your overall viewpoint. I don't think it's the most accurate way to view it though.

IIRC, the underlying argument in the speech is that deflation crushes debtors, and that because the economy of the day had a large percentage of the working class operating under a system of loans related to their work (farmers in debt for seed, supplies etc), the working class was being unfairly crushed by deflation that benefited the wealthy. In itself this suggests that a Bitcoin-based system would benefit Bitcoin holders at the expense of everyone else, but is unclear about the effect on the overall economy.

The larger conclusion that most economists draw from that time's events though is that the farmers had a deeper point on their side: that money supply needs to at least expand to the needs of the economy, or else it slows the economy down, damaging the life of the people as a whole. The farmers were arguing that expanding the currency to include silver-backed bills would free them from the crushing fixed gold currency (not a govt argument, a class based argument; in their view the govt was supporting the opposing class) but I think that economists generalize that the overall economy would grow if their suggestion were followed, because the economy of the day had expanded past the size that the gold-backed currency could efficiently serve.

You're no doubt aware of another factor: that a little bit of deflation means you can't just stay rich by holding currency; under deflation, you're losing buying power every year. This may seem unfair if you expect to be rich and want a safe simple way to stay rich. But in the inflation scenario, the safest move is to invest in businesses or conduct economic activity, which increases the overall economy. For this as well as the "sufficient currency" reason, most economists suggest that a deflationary currency is bad and a currency that inflates slightly is better for the overall economy. In this respect, govt isn't the point, it's just a mechanism for establishing the needed currency.   

Heck, if Bitcoin produced a currency that was better at providing slight inflation and other needed characteristics than the dull old dollar,  I imagine that economists would be in favor of it.

[lifeanon269]

Go read Bryan's "Cross of Gold" speech...

There's a reason we collectively decided to have a central authority intervene in the money supply. But nobody alive today experienced it.

-W

I don't know how can you take the Cross of Gold speech as anything other than an indictment against central authorities over money. The entire debate over bimetallism and the policies that preceded and followed the turn of the century (1873-1900) is a shining example of how authorities squabbled over how to set a monetary standard for the economy. It was less about creating a standard monetary policy and more about setting a rigid exchange ratio between gold and silver as opposed to a market driven exchange ratio of the independent gold and silver coins. It is no surprise that the bureaucratic manipulation of a rigid exchange ratio between gold and silver failed. The parallels between the arguments over control of the monetary standard between 1873-1900 and the debates had over today's centralized credit-based monetary policies are immediately apparent. It was and always has been about governments wanting control over money.

I can see how your interpretation of Cross of Gold fits in with your overall viewpoint. I don't think it's the most accurate way to view it though.

IIRC, the underlying argument in the speech is that deflation crushes debtors, and that because the economy of the day had a large percentage of the working class operating under a system of loans related to their work (farmers in debt for seed, supplies etc), the working class was being unfairly crushed by deflation that benefited the wealthy.

Agreed here, but then how do you not see the conclusion that should be drawn from that? You have a credit driven inflationist society that needs more monetary inflation in order to ease those burdens or else experience economic hardship... The only solution to monetary inflation is more monetary inflation in the eyes of proponents. And when that house of cards comes crashing down, they blame anything but monetary inflation.

FWIW, (with obvious hindsight benefit) would not be a proponent of those on the free silver or gold standard side of things back in the late 1800's. But I merely point out the fallacy in arguing for interventionist monetary policy that both adherents were so obviously committed to.

The larger conclusion that most economists draw from that time's events though is that the farmers had a deeper point on their side: that money supply needs to at least expand to the needs of the economy, or else it slows the economy down, damaging the life of the people as a whole.

I wholeheartedly disagree that the money supply needs to expand in order for the economy to grow. In fact, I don't know many economist that would even argue that. The economy can grow just fine with a stable money supply and there is plenty of history to show for that. I'll agree that the economy doesn't grow as quickly as compared with an easy money credit driven one. But that's the point, isn't it? Slower and more stable growth compared to reckless growth rife with malinvestment that inevitably leads to economic crashes, environmental devastation, wealth inequality, etc.

You're no doubt aware of another factor: that a little bit of deflation means you can't just stay rich by holding currency; under deflation, you're losing buying power every year. This may seem unfair if you expect to be rich and want a safe simple way to stay rich. But in the inflation scenario, the safest move is to invest in businesses or conduct economic activity, which increases the overall economy. For this as well as the "sufficient currency" reason, most economists suggest that a deflationary currency is bad and a currency that inflates slightly is better for the overall economy. In this respect, govt isn't the point, it's just a mechanism for establishing the needed currency.

I think you have that backward here, no? Inflation (whether referring to monetary inflation or CPI inflation) means you're losing buying power. Your $1 today will buy you less tomorrow. Either way, my argument isn't for a heavily deflating monetary supply no more than it is for a heavily inflating one. Too much of something is bad, no matter which way you go. My argument is for a stable money supply free from manipulation. In that regard, the economy as it expands or contracts will be free to negotiate value exchanges. So long as you don't have uncontrolled malinvestments rampant throughout the economy (which easy money promotes), you're not going to have drastic fluctuations in the size of the economy, but rather more slower and controlled growth that is naturally brought about by advances in productivity (ie, the Mustachian way). Investing in productive businesses will always be a better way at increasing wealth compared to just holding currency since it is the productive gains yielded from those investments that end up producing more goods in relation to the stable money supply. In other words, the currency can't become more valuable without increases in productivity to begin with. Future productivity increases require investments into the future brought about by savings from today.

Heck, if Bitcoin produced a currency that was better at providing slight inflation and other needed characteristics than the dull old dollar,  I imagine that economists would be in favor of it.

I would argue that those in control of money would never be in favor of releasing that control, regardless of the monetary policy exhibited.

[GuitarStv]

My argument is for a stable money supply free from manipulation.

In what way is crypto free from manipulation?

It's free from planned manipulation by central banks.  But there's heavy influenced by manipulation of other sorts - pump n'dump, wash trading, whale wall spoofing, stop hunting, etc.  Why do you prefer this alternate manipulation?

[lifeanon269]

My argument is for a stable money supply free from manipulation.

In what way is crypto free from manipulation?

It's free from planned manipulation by central banks.  But there's heavy influenced by manipulation of other sorts - pump n'dump, wash trading, whale wall spoofing, stop hunting, etc.  Why do you prefer this alternate manipulation?

You just answered it yourself. Free from central bank manipulation. FWIW, I think central bank manipulation is a strong leader to other forms of monetary scams that come about during times of easy money.

I am not sure what makes you think I am an advocate of "crypto" and any scams that may be associated with the industry. I've long criticized the scams in the industry even in this very thread long ago numerous times.

https://forum.mrmoneymustache.com/investor-alley/what-do-you-think-of-adding-a-low-of-crypto-allocation/msg2972902/#msg2972902

Even just a couple posts above I linked to an article going into depth in the seperation between bitcoin and the rest of the industry it is associated with.

There was a good article that was just published that talks about the separation bitcoin needs from the industry that has now completely corrupted the original idea of it.

https://www.nbcnews.com/think/opinion/bitcoin-vs-ftx-crypto-king-sam-bankman-fried-problem-rcna57964

At the end of the day, the only thing that stops humans from trying to scam other humans is strong enforcement of laws that would provide a disincentive in doing so. That's quite the contrast to what we have today where time and time again wealthy individuals get off free from the devastation the brought upon many. Whether that is financial, environmental, or health devastation, etc. All too often the perpetrators get off without any penalty or the penalty is just a meager cost of doing business. I really hope Sam Bankman-Fried goes to jail for a long time. Saying that I "prefer this alternate manipulation" means to explain that there is actually a difference between the fraud that occurs with third-party institutions in traditional finance versus the fraud that happens with third-parties in this new "crypto" industry. I would argue there isn't much difference. FTX is the same as Lehman, is the same as Enron, is the same as Madoff, etc etc etc. They're all guilty parties that betrayed the trust of those that trusted them with their money.

[bwall]

Fair enough. We'll agree to disagree. From my perspective, the inabiity of the government to react to economic contractions due to the gold standard was a major cause of the wild recessions/depressions of the era. The last 80 years or so have been remarkably stable in comparison.

So while there are always problems with what the Fed does, they pale in comparison to the problems involved with NOT doing those things.

-W

+1.

Keep in mind that since the year 1900 the population of the USA was 75 million, give or take. Today it's 4.5x larger. Thus, in order to keep the money supply exactly the same relative to the population, the USA would have to dig 4.5x more shiny metal out of the earth. If you can't dig enough metal out of the ground to keep up with population growth, then you experience deflation.

We also couldn't have fought WWII on the gold standard. The bad guys would've won simply because we couldn't dig enough shiny metal out of the earth first.

No national highway system either without mining gold first.

Nor could FDR have spent all that money on social programs if we had to dig a specific metal out of the ground first. Which, I suspect is the real reason people today wish for the return of the gold standard. Less spending towards poor people would be a direct result.



 

[achvfi]

So while there are always problems with what the Fed does, they pale in comparison to the problems involved with NOT doing those things.

-W

+1

Between 18th century to early 20th century there was a financial/economic crisis every 3-4 years. Wiping away peoples fortunes time and again. Central banks evolved and came into existence over time to provide stability to the system. It took decades to achieve this.

https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#Free_Banking_Era_to_the_Great_Depression_(1836-1929)

[maizefolk]

I remain really excited about cryptocurrency as a payment medium. But we're in the process of getting to watch the first real financial crisis of the crypto world right now and it is fascinating.

Companies like Genesis made their money by accepting short term loans from companies like BlockFi relatively low interest rates and lending long term at higher interest rates. Now FCX has spooked the whole industry, everyone is calling back their loans to build their liquidity buffers, individual customers are pulling their deposits because they're not sure if the "banks" are solvent, and a lot of institutions are likely to collapse.

That's not an inherent flaw in cryptocurrencies, we've seen the same thing play out over and over again since banking became a thing. But it also indicates that just using cryptocurrency in place of dollars (or gold) doesn't make the problems economic systems without central banks face moot.

[BicycleB]

You're no doubt aware of another factor: that a little bit of deflation means you can't just stay rich by holding currency; under deflation, you're losing buying power every year. This may seem unfair if you expect to be rich and want a safe simple way to stay rich. But in the inflation scenario, the safest move is to invest in businesses or conduct economic activity, which increases the overall economy. For this as well as the "sufficient currency" reason, most economists suggest that a deflationary currency is bad and a currency that inflates slightly is better for the overall economy. In this respect, govt isn't the point, it's just a mechanism for establishing the needed currency.

I think you have that backward here, no?

Yes, I typed deflation instead of inflation.

Feeling a little, ah, deflated about my typing skills. ;)

[BicycleB]

my argument isn't for a heavily deflating monetary supply no more than it is for a heavily inflating one. Too much of something is bad, no matter which way you go. My argument is for a stable money supply free from manipulation. In that regard, the economy as it expands or contracts will be free to negotiate value exchanges. So long as you don't have uncontrolled malinvestments rampant throughout the economy (which easy money promotes), you're not going to have drastic fluctuations in the size of the economy, but rather more slower and controlled growth that is naturally brought about by advances in productivity (ie, the Mustachian way). Investing in productive businesses will always be a better way at increasing wealth compared to just holding currency since it is the productive gains yielded from those investments that end up producing more goods in relation to the stable money supply. In other words, the currency can't become more valuable without increases in productivity to begin with. Future productivity increases require investments into the future brought about by savings from today.

Thanks for clarifying; that helps. The now-bolded does raise the question of which aspect of the money supply should be stable, though (as well as how to create that stability).

If the currency is Fixcoins and you have a fixed number of Fixcoins, the value of a given good is unstable whenever the supply of goods changes. If you seek a fixed price for a given good, the number of Fixcoins would have to be unstable, adjusting to varied supply of goods. What's more important? Is it the number of Fixcoins that should be stable, or the price of goods in terms of Fixcoin?

Anecdotally, people scream about inflation whenever the price of goods changes in terms of the dominant coin. Wouldn't such price changes be a guaranteed fixture (no pun intended) of a system with a fixed number of coins as the currency? Wouldn't most people prefer steady prices of goods? Wouldn't economic decisions be made most neutrally and efficiently under stable prices of goods?

[lifeanon269]

Keep in mind that since the year 1900 the population of the USA was 75 million, give or take. Today it's 4.5x larger. Thus, in order to keep the money supply exactly the same relative to the population, the USA would have to dig 4.5x more shiny metal out of the earth. If you can't dig enough metal out of the ground to keep up with population growth, then you experience deflation.

To put it another way, higher population means more productivity (more workers and more goods). Not all deflation is created equal in the same way that not all inflation is. Deflation as a result of higher productivity is a good thing. It is why the cost of many technologies goes down over time or the cost of a food crop goes down as yields increase. Those are good reasons for deflation and having a stable money supply over the course of those changes is not a bad thing. It means people can afford more things and the standard of living for people goes up.

We also couldn't have fought WWII on the gold standard. The bad guys would've won simply because we couldn't dig enough shiny metal out of the earth first.

First off, funding wars should be the last thing on your list of "reasons to have central banking". Second, it seems like a disingenuous argument to make to say that the US (I'm assuming the "we" refers to the US here) couldn't have fought WWII without acknowledging the fact that European countries came off the gold standard prior to both WWI and WWII.

Yes, no government control of money means that governments must fund their military industrial complexes the old fashioned way, with tax revenue. That's a good thing, IMO. As we see with so many corrupt nations around the world, wherever there is abuse of military power, there is almost always an abuse of the country's money supply as well.

No national highway system either without mining gold first.

Nor could FDR have spent all that money on social programs if we had to dig a specific metal out of the ground first. Which, I suspect is the real reason people today wish for the return of the gold standard. Less spending towards poor people would be a direct result.

Expanding the money supply doesn't mean you can't fund social programs or projects. It just means you need to actually have a plan to pay for it as opposed to being able to inflate away the incurred debt. I'm not sure why you say you need to "mine gold first" here (assuming you're referring to a gold backed currency). You still have credit within the system and governments can still sell bonds, for example. It just means that more responsibility must be taken to ensure those bonds can be paid for in the future. It doesn't prevent you from having insurance programs either. If you're concerned about poor people, I would argue that the massive increases in CPI inflation over time as a result of inflationary monetary policy have robbed far more poor people of their wealth.

That's not an inherent flaw in cryptocurrencies, we've seen the same thing play out over and over again since banking became a thing. But it also indicates that just using cryptocurrency in place of dollars (or gold) doesn't make the problems economic systems without central banks face moot.

Yup, anyone touting something like bitcoin as a solution to all our problems in our fiscal (and non-fiscal) world is probably talking all hype. Institutional problems like we've seen with FTX will still be around and requires real effort by our governments to help enforce laws strictly and regulate industries responsibly to protect consumers. But I think the argument from bitcoin proponents you'll see is that without easy money in our credit based money system, many of the scams and malinvestments we see take place will become much less common. To commit fraud, you'd need to risk your own hard-earned money instead of "risking" fake leveraged money that appeared out of thin air.

[lifeanon269]

Thanks for clarifying; that helps. The now-bolded does raise the question of which aspect of the money supply should be stable, though (as well as how to create that stability).

If the currency is Fixcoins and you have a fixed number of Fixcoins, the value of a given good is unstable whenever the supply of goods changes. If you seek a fixed price for a given good, the number of Fixcoins would have to be unstable, adjusting to varied supply of goods. What's more important? Is it the number of Fixcoins that should be stable, or the price of goods in terms of Fixcoin?

Anecdotally, people scream about inflation whenever the price of goods changes in terms of the dominant coin. Wouldn't such price changes be a guaranteed fixture (no pun intended) of a system with a fixed number of coins as the currency? Wouldn't most people prefer steady prices of goods? Wouldn't economic decisions be made most neutrally and efficiently under stable prices of goods?

I don't think under either system you will ever achieve a stable price of goods. I don't think any economist would argue that and even under basic scrutiny that idea falls apart. After all, you only have one supply of money and massive amounts of different goods each with their own varying supply. Even if you attempt to control the supply of money for one single good, every other single good out there will have their own independent supply as well that can't be controlled for as a result.

The price of goods should be determined by the market, not the money supply. If supply of a good decreases and demand stays the same, then the price should go up. If the supply of a good increases (maybe as a result of increased production), then the cost of that good should come down. That's basic economic theory. I'm not sure why anyone would think that controlling the money supply is a solution to these natural market forces.

[maizefolk]

That's not an inherent flaw in cryptocurrencies, we've seen the same thing play out over and over again since banking became a thing. But it also indicates that just using cryptocurrency in place of dollars (or gold) doesn't make the problems economic systems without central banks face moot.

Yup, anyone touting something like bitcoin as a solution to all our problems in our fiscal (and non-fiscal) world is probably talking all hype. Institutional problems like we've seen with FTX will still be around and requires real effort by our governments to help enforce laws strictly and regulate industries responsibly to protect consumers. But I think the argument from bitcoin proponents you'll see is that without easy money in our credit based money system, many of the scams and malinvestments we see take place will become much less common. To commit fraud, you'd need to risk your own hard-earned money instead of "risking" fake leveraged money that appeared out of thin air.

Cryptocurrency definitely removes the ability for central banks to create new real money out of thin air. But does it actually prevent "fake leveraged money that appeared out of thin air"? What we are seeing in many of the active crypto exchanges are indeed leveraged futures products that are/were funded by interest paying customer deposits.

You could envision a world where everyone only used their own wallets and no one ever borrowed or lent bitcoin (or other cryptos). But it seems like the world we actually find ourselves in is that the fractional reserve banking business model reemerges, will all its attendant benefits and risks, even in these new currencies (just like it did with both fiat and gold-backed currencies).

[lifeanon269]

Cryptocurrency definitely removes the ability for central banks to create new real money out of thin air. But does it actually prevent "fake leveraged money that appeared out of thin air"? What we are seeing in many of the active crypto exchanges are indeed leveraged futures products that are/were funded by interest paying customer deposits.

You could envision a world where everyone only used their own wallets and no one ever borrowed or lent bitcoin (or other cryptos). But it seems like the world we actually find ourselves in is that the fractional reserve banking business model reemerges, will all its attendant benefits and risks, even in these new currencies (just like it did with both fiat and gold-backed currencies).

No, bitcoin would not remove the ability for "false credit" as it is called to exist within the economic system. My criticism with central banking is that essentially we have trillions of "sanctioned" false credit wide spread throughout our system that gives rise to malinvestments that only leads to systemic collapse throughout. You can't have widespread false credit throughout the economy without the existence of our central banks and their expansive monetary policies. Credit expansion starts and ends with the central bank, full stop.

It is one thing for an individual institution to issue false credit to borrowers only for that institutions' house of cards to collapse and for people involved to lose money. But without the wide spread sanctioned false credit issued top-down throughout the economy, the repercussions of that collapse would be fairly self contained and you wouldn't have situations where an institution is "too big to fail."

At the end of the day, true credit would (should) be the dominant form of credit that would exist that is simply the transfer of real capital between savers and borrowers. True credit can expand and contract as needed, but it is always backed by real capital and doesn't present systemic risk in the same way that false credit does. Furthermore, the ability that bitcoin would allow for individuals to take full custody of their funds at any time would provide a further check and balance against false credit throughout the system.