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Bitcoin crashes and dips all the time. It's lost over 80% of its value at least four times since it launched, plus the recent big 50% drawdown. It slows the c

Bitcoin crashes and dips all the time. It's lost over 80% of its value at least four times since it launched, plus the recent big 50% drawdown. It slows the cryptoeconomy for a year or so, but doesn't stop it, and then there's another bubble again ~2yrs later. Bitcoin's high but natural volatility is not the same thing as the price collapsing due to the system itself fundamentally breaking. For example, the Global Financial Crisis was the result of the system itself fundamentally breaking, not natural volatility, and its blast radius was immense. Tether or other major stablecoin collapsing due to being exposed as a fraud, or a fractional reserve with no reserves, or similar, would be more analogous to the GFC. And the blast radius could be worse than any of Bitcoin's 80% drawdowns, both economically and wrt to regulatory and legal attention.

BenoitEssiambre 5y ago
While tether is shady as hell, the fact that it is not deflationary, that the weaknesses in its balance sheets are more visible and that it is tied to a monetary policy that doesn't encourage hoarding makes it tamer than deflationary coins in many ways. Yeah if it collapses, some other cryptocoins are going to be more volatile than usual but even Musk tweets can do that (and this volatility may actually help prevent these coins from becoming systemically important and dangerous). Deflationary coins on the other hand are super insidious, they can get hoarded on a wider scale to the point of displacing productive investment in the economy. With deflationary coins it's not the volatility that's dangerous, it's the lack of it creating gridlocks in other investment markets. This happened before when there was attempts at stabilizing gold and it caused the Great Depression: https://benoitessiambre.com/specter.html https://benoitessiambre.com/specter.html
- SkyMarshal 5y ago
  > Deflationary coins on the other hand are super insidious, they can get hoarded on a wider scale to the point of displacing productive investment in the economy. With deflationary coins it's not the volatility that's dangerous, it's the lack of it creating gridlocks in other investment markets. I worry about this too. Essentially, new money creation can go toward financing three objectives - production (manufacturing & innovation), consumption, or asset speculation. If you have a financial system that’s financing mainly production, and somewhat consumption, you achieve widespread and equitable growth without inflation. This is the ideal. It’s how the Japanese rebuilt their economy after WWII, based on the theories of Osamu Shimomura, focusing new money creation on production. But if your financial system is financing mainly consumption, you get inflation without growth. And if it’s financing mainly asset speculation, you get financial instability and crisis, wealth concentration, and inflation. This is all from Richard Werner’s work and research [1][2]. Deflationary cryptocurrency, at least in its early days, is financing mostly asset speculation. However, that may be an unavoidable part of bootstrapping a new kind of money technology. But as your blog mentions, at some time in the future it will reach a steady state, no more rapid appreciation, and then what. One of the big public debates is about whether transaction fees alone will be enough to finance mining and thus security of the network, after both the mining subsidy ends and the price appreciation levels off. Another less public debate is how “HODLers” may then need to reinvest more of their gains into building value-adding services for the network to continue economic growth, despite the individual incentive being to hoard. I don’t think the story has been completely written on deflationary cryptocurrencies, and am still watching to see how they deal with this eventual problem. But the sound money religion surrounding some of them is preventing an honest assessment of these problems. [1]:https://professorwerner.org/ https://professorwerner.org/ [2]: https://www.researchgate.net/profile/Richard-Werner https://www.researchgate.net/profile/Richard-Werner
  - BenoitEssiambre 5y ago
    That's a great reply. I learned things.
    - SkyMarshal 5y ago
      Likewise. Thanks for your blog post and your links in it!
Tenoke 5y ago
I just don't see it being worse. There are plenty of replacements in place - USDC is also in the top 10. BTC crashing 80% is at least similarly drastic (many losing 'faith' or all their savings in crypto) and I don't expect the recovery from a Tether crash (which is also a much smaller part of the market and again, has replacements) to be worse or take longer.
catlifeonmars 5y ago
What is the difference between natural volatility and the system fundamentally breaking?
- dboreham 5y ago
  The mean value as t approaches infinity.
- SkyMarshal 5y ago
  In the GFC, the financial system locked up because banks stopped lending to each other, which is otherwise a primary activity in a working financial system. They stopped because the collapse of Bear Sterns and Lehman Brothers made them realize that anyone could be next and they all had massive counterparty risk with each other. Why lend to someone who could be bankrupt literally the next day? They all had taken on massive leverage, collateralized with mortgage-backed securities the ratings agencies said were high quality. But those MBO's weren't and began defaulting en-masse, correlated in ways both the ratings agencies and the banks either didn't understand or willfully ignored. If central banks and governments hadn't stepped in to provide emergency liquidity support, interbank loans would have defaulted en-masse and the entire system gone bankrupt and collapsed. That's what it looks like when a financial system breaks - it literally stops working, activity ceases, like a core dump or blue screen of death. Natural volatility happens all the time even when the financial system is not broken or breaking. It's just the price discovery process in action, where different buyers and sellers with different views on the future value of the things are trying to find the best deal. Price shocks can be part of it, abrupt movements in price due to some event, but as long as the underlying mechanics of the system continue working smoothly, it's not an example of the system breaking.
  - WanderPanda 5y ago
    Maybe the banks should upgrade to trustless systems then? On the otherhand they just should face that they trusted the wrong parties and go bankrupt otherwise the incentive system gets rigged (thats where we ended up nowadays)

BenoitEssiambre 5y ago

While tether is shady as hell, the fact that it is not deflationary, that the weaknesses in its balance sheets are more visible and that it is tied to a monetary policy that doesn't encourage hoarding makes it tamer than deflationary coins in many ways. Yeah if it collapses, some other cryptocoins are going to be more volatile than usual but even Musk tweets can do that (and this volatility may actually help prevent these coins from becoming systemically important and dangerous). Deflationary coins on the other hand are super insidious, they can get hoarded on a wider scale to the point of displacing productive investment in the economy. With deflationary coins it's not the volatility that's dangerous, it's the lack of it creating gridlocks in other investment markets. This happened before when there was attempts at stabilizing gold and it caused the Great Depression: https://benoitessiambre.com/specter.html https://benoitessiambre.com/specter.html

SkyMarshal 5y ago
> Deflationary coins on the other hand are super insidious, they can get hoarded on a wider scale to the point of displacing productive investment in the economy. With deflationary coins it's not the volatility that's dangerous, it's the lack of it creating gridlocks in other investment markets. I worry about this too. Essentially, new money creation can go toward financing three objectives - production (manufacturing & innovation), consumption, or asset speculation. If you have a financial system that’s financing mainly production, and somewhat consumption, you achieve widespread and equitable growth without inflation. This is the ideal. It’s how the Japanese rebuilt their economy after WWII, based on the theories of Osamu Shimomura, focusing new money creation on production. But if your financial system is financing mainly consumption, you get inflation without growth. And if it’s financing mainly asset speculation, you get financial instability and crisis, wealth concentration, and inflation. This is all from Richard Werner’s work and research [1][2]. Deflationary cryptocurrency, at least in its early days, is financing mostly asset speculation. However, that may be an unavoidable part of bootstrapping a new kind of money technology. But as your blog mentions, at some time in the future it will reach a steady state, no more rapid appreciation, and then what. One of the big public debates is about whether transaction fees alone will be enough to finance mining and thus security of the network, after both the mining subsidy ends and the price appreciation levels off. Another less public debate is how “HODLers” may then need to reinvest more of their gains into building value-adding services for the network to continue economic growth, despite the individual incentive being to hoard. I don’t think the story has been completely written on deflationary cryptocurrencies, and am still watching to see how they deal with this eventual problem. But the sound money religion surrounding some of them is preventing an honest assessment of these problems. [1]:https://professorwerner.org/ https://professorwerner.org/ [2]: https://www.researchgate.net/profile/Richard-Werner https://www.researchgate.net/profile/Richard-Werner
- BenoitEssiambre 5y ago
  That's a great reply. I learned things.
  - SkyMarshal 5y ago
    Likewise. Thanks for your blog post and your links in it!

Tenoke 5y ago

I just don't see it being worse. There are plenty of replacements in place - USDC is also in the top 10. BTC crashing 80% is at least similarly drastic (many losing 'faith' or all their savings in crypto) and I don't expect the recovery from a Tether crash (which is also a much smaller part of the market and again, has replacements) to be worse or take longer.

catlifeonmars 5y ago

What is the difference between natural volatility and the system fundamentally breaking?

dboreham 5y ago
The mean value as t approaches infinity.
SkyMarshal 5y ago
In the GFC, the financial system locked up because banks stopped lending to each other, which is otherwise a primary activity in a working financial system. They stopped because the collapse of Bear Sterns and Lehman Brothers made them realize that anyone could be next and they all had massive counterparty risk with each other. Why lend to someone who could be bankrupt literally the next day? They all had taken on massive leverage, collateralized with mortgage-backed securities the ratings agencies said were high quality. But those MBO's weren't and began defaulting en-masse, correlated in ways both the ratings agencies and the banks either didn't understand or willfully ignored. If central banks and governments hadn't stepped in to provide emergency liquidity support, interbank loans would have defaulted en-masse and the entire system gone bankrupt and collapsed. That's what it looks like when a financial system breaks - it literally stops working, activity ceases, like a core dump or blue screen of death. Natural volatility happens all the time even when the financial system is not broken or breaking. It's just the price discovery process in action, where different buyers and sellers with different views on the future value of the things are trying to find the best deal. Price shocks can be part of it, abrupt movements in price due to some event, but as long as the underlying mechanics of the system continue working smoothly, it's not an example of the system breaking.
- WanderPanda 5y ago
  Maybe the banks should upgrade to trustless systems then? On the otherhand they just should face that they trusted the wrong parties and go bankrupt otherwise the incentive system gets rigged (thats where we ended up nowadays)