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I keep waiting for the Crypto ponzi scheme to burst. It doesn't and I don't understand why. I'm convinced by this that I don't understand economics at all.

by xupybd 5y ago

Hamuko 5y ago
I think the quote "the stock market can remain irrational longer than you can remain solvent" can be very much applied to cryptocurrency as well.
- kace91 5y ago
  With a corollary, "the stock market can remain irrational long enough for you to profit from something valueless". It's of course risky, but cruptocurrencies can be a perfectly valid source of money, as long as you just risk spare money. You don't need to trust it to be a valid investment, you just need to trust that enough people will believe it is.
  - Hamuko 5y ago
    >You don't need to trust it to be a valid investment, you just need to trust that enough people will believe it is. This is called the greater fool theory. https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory
dboreham 5y ago
Because if you draw the boundary around the ponzi scheme wide enough nobody realizes it's a scheme. E.g US$
- jrockway 5y ago
  What's the scheme? You can stuff US dollars into your pocket and exchange them for goods and services pretty much anywhere in the world. That's not a ponzi scheme -- that's currency.
  - matheusmoreira 5y ago
    USD is backed by nothing. This isn't some random statement, it literally says so on the US treasury website. https://www.treasury.gov/resource-center/faqs/Currency/Pages/legal-tender.aspx https://www.treasury.gov/resource-center/faqs/Currency/Pages... > Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything Fundamentally it's not really any better than cryptocurrencies. We can't easily transact with cryptocurrencies due to cultural reasons. We have coins right now that can be used to transact with complete privacy. People don't do it because culture is slow to change. Worst case for cryptocurrencies is the whole Tether thing implodes. Not sure it ever will but hey, if the US government will bail out banks when they screw everything up, why not Tether as well?
    - rsync 5y ago
      You cannot pay US taxes with anything other than US dollars. No matter what you have - the Mona Lisa, gold bars, the hope diamond - they will not accept it. You must sell it to buy dollars. That is not a coincidence - it is the entire point … and it means there will always be buyers for dollars and they will always have value.
      - matheusmoreira 5y ago
        I never said the USD didn't have value. I said the value of the USD is not backed by anything. The government and banks are free to inflate the USD as much as they want. It's like an unconditional tax on everyone. Like all currencies before it, its value will diminish over time. When the US ceases to exist, its value will finally become zero. Precisely because tax payments were the only thing keeping it relevant.
      - frankenst1 5y ago
        > dollars [...] will always have value The US dollar has lost - ~30% of its value in the last 10 years - ~84% of its value in the last 50 years - ~97% of its value since 1900 (Value here refers to purchasing power) Reason for this is that the US dollar is continually being inflated by the US government, precisely because it has no robust backing.
agumonkey 5y ago
I have a feeling that this market stays up because the previous one has just enough flaws to allow the other to be believable, whether or not crypto will provide something useful.. I don't know.
NicoJuicy 5y ago
Yeah me too, it should be clear with the whole tether thing by now that it's way way overrated. But noon-techies i know bought an experiment with it and i was kinda suprised. I guess they are going for too big to fail. A lot of "big money" had joined the crypto thing and it's making themv curious: "eg. all these big corporations can't be wrong". I don't blame that they try now though, although I warn them. It's really getting surreal. Note : I left crypto behind me in late 2017 at 18 k. Didn't trust it anymore and nothing changed.
ryanSrich 5y ago
It’s only been around for 10-ish years. As someone that is interested in crypto, and actively participates in not only buying, but using it, I think we’re a far ways off from the bubble bursting completely. Market cycles will happen, projects will die, but I think crypto is here to stay. The bigger question is how far does it spread. It works incredibly well at putting money into the hands of people that have never had it before. The number of high school and college drop outs that I know, who now have more money than most people on earth is staggering.
- arcticbull 5y ago
  Into the hands of a couple of people. It's an unproductive asset meaning all it can possibly do is redistribute the money that new entrants provide and split it between existing holders and miners. It is fundamentally negative sum, and the narrative of prosperity is driven by existing holders to attempt to claim a larger stake of fiat.
  - kreetx 5y ago
    It is productive in the following ways: - you don't need anyone's premission to use it (yes, there are downsides) - you cand lend it out or take a loan much like a bank, but without borders - you can program it and also not fear your program being meddled with. Most banks don't even have an API to use it for a private person. - it can be deterministically scarce, so you wont be losing it if you hold it (or you can, if others lose faith. With national currencies they can simply take your money without you having a say by printing more)
    - deleted 5y ago
      [deleted]
    - arcticbull 5y ago
      You've conflated the role of assets and currencies in a financial system. Even separating that out, that's not a productive asset. The productive asset would be an interest in the lending platform. Concretely it would be like treating gold as a productive asset because InteractiveBrokers lets you take out a margin loan collateralized by your gold. Gold remains unproductive in this scenario, IBKR shares would productive. Value from lending would accrue to IBKR shares.
throw0101a 5y ago
> I keep waiting for the Crypto ponzi scheme to burst. Previously Ponzi schemes were limited in geographic area, so you'd be limited to the number of marks you could go after, either through travel limits or the number of people you could meet through 'friends of friends'. This could grow a bit if you were 'successful' enough and could establish a reputation (e.g., Madoff). Online schemes do not have geographic limits and so there's always a fresh source of unknowledgeable persons to go after. Further, most traditional Ponzi schemes are of the form that you'll receive x% returns (e.g., dividends) per year, but Crypto is more akin to: > In finance and economics, the greater fool theory states that the price of an asset is determined by whether you can sell it for a higher price, at a later point in time. On assets where the theory applies, it is implied that the asset's intrinsic value is less important than the increase in demand, however irrational it might be. The person buying the overpriced asset later on, for a higher price, is deemed the greater fool.[1][2][3][4] * https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory
Animats 5y ago
Because we haven't had a recession yet which caused a major net outflow from cryptocurrencies. Some cryptocurrencies can survive a major net outflow, but some, especially the stablecoins with weak backing, (i.e. Tether) cannot. The big lesson of cryptocurrencies is that the market for money laundering services is much larger than previously supposed.
temptemptemp111 5y ago
Because fiat currencies are collapsing and people are dumping into various investments including crypto.
Ekaros 5y ago
I'm waiting for whole stock market and everything else to burst... But when you think about how central banks and governments are handling it and all the money around it makes lot more sense how it is still going on.
overgard 5y ago
Well, there's always value in enabling money laundering and purchasing of illegal goods. Bitcoin has lots of uses, I just don't think they're the ones the doe eyed idealists like to talk about.
matheusmoreira 5y ago
It doesn't burst because it's not actually a ponzi scheme.
- xupybd 5y ago
  You are correct, there are no dividends but this part of the definition applies. "The scheme leads victims to believe that profits are coming from legitimate business activity, and they remain unaware that other investors are the source of funds" I believe this holds as I don't think most of the investors understand crypto. It is a magic black box so they don't know where the value comes from.
  - matheusmoreira 5y ago
    It's a currency. There is no underlying business activity, only transactions. Bitcoin failed as a general currency but apparently banks are using it to settle accounts amongst themselves. Sometimes things develop in the most unintuitive ways. > I believe this holds as I don't think most of the investors understand crypto. It is a magic black box so they don't know where the value comes from. I don't think this is evidence of any scheme. It's just irrational market behavior.
    - pushingice 5y ago
      Which banks are using bitcoin to settle anything?
      - matheusmoreira 5y ago
        I don't remember. I read that on some news site a while ago. Can't seem to find the source anymore unfortunately.
      - danans 5y ago
        GP is probably referring to Ripple, which is not Bitcoin, but rather another crypto currency targeting interbank settlements.
belorn 5y ago
As long it can be used as a currency it will keep a value above zero. It will die just like any other currency, which is to say the day when the market refuse to take the currency in exchange for goods.
megameter 5y ago
One lesson of the medieval period is that that when the previous society(Rome) breaks down, a period of mysticism sweeps in, from which the new society emerges. This happens on a smaller scale with e.g. "Great Awakenings". Mysticism normalizes a reality, and therefore it doesn't obey the rules of reason, rather, great efforts are made to rationalize its existence from a pragmatic beginning. Philosophers cannot reach agreement on what is good for people, so religious experiences fill in the gap, and that's always been the case with the economy too. People used to believe that conquests made wealth; gradually they became convinced that productivity made wealth. Productivity is now on the chopping block, since it is seen as something that's killing the planet with inexhaustible resource demand. We're looking for the next way of seeing things. Crypto doesn't make sense now, and I say that as someone deeply invested in it, but it has that kind of potential to change our frame of reference after an awkward transition takes place. Maybe it makes sense if we go further with it. The experiment is in progress, but it's already exceeded the usual bounds of a cult or scam.
lamontcg 5y ago
Crypto still is small enough that a couple billion dollars can bail the system out. It only took a few billions to pump it up to $25k in 2017. At some point the amount it takes to bail them out will be larger than any of the billionaire true believer investors are willing to throw into the pot and will exceed their ability to agree with each other to risk that much to save it. It isn't really an economic problem, it is more like a poker game. The next market crash will probably be from a substantially higher peak and will take proportionately more to bail it out, and it is also going to be complicated by governments taking the opportunity to crack down on it so "regulatory risk" will be very high. 2022/2023 are probably going to have a high risk of the game collapsing. Won't be 100% though so it could come back and another ~4 years from now we could be seeing yet another bubble blowing up in crypto. I wouldn't get too emotionally attached to hating crypto or believing that a sudden regulatory attack on crypto is going to manage to pop crypto in the near term (and what China did recently was the kind of crackdown that everyone believed would kill it, but its dragging itself out of the hole again). Right now chances of it popping in the short term are probably very low, and nobody is going to seriously take a run at regulating it because they don't want to be responsible for the fallout (similarly to how nobody did shit about Madoff's Ponzi until he went cash insolvent in 2008 due to the financial crisis).

I keep waiting for the Crypto ponzi scheme to burst. It doesn't and I don't understand why. I'm convinced by this that I don't understand economics at all.

by xupybd 5y ago

I keep waiting for the Crypto ponzi scheme to burst. It doesn't and I don't understand why. I'm convinced by this that I don't understand economics at all.

Hamuko 5y ago

I think the quote "the stock market can remain irrational longer than you can remain solvent" can be very much applied to cryptocurrency as well.

kace91 5y ago
With a corollary, "the stock market can remain irrational long enough for you to profit from something valueless". It's of course risky, but cruptocurrencies can be a perfectly valid source of money, as long as you just risk spare money. You don't need to trust it to be a valid investment, you just need to trust that enough people will believe it is.
- Hamuko 5y ago
  >You don't need to trust it to be a valid investment, you just need to trust that enough people will believe it is. This is called the greater fool theory. https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory

dboreham 5y ago

Because if you draw the boundary around the ponzi scheme wide enough nobody realizes it's a scheme. E.g US$

jrockway 5y ago
What's the scheme? You can stuff US dollars into your pocket and exchange them for goods and services pretty much anywhere in the world. That's not a ponzi scheme -- that's currency.
- matheusmoreira 5y ago
  USD is backed by nothing. This isn't some random statement, it literally says so on the US treasury website. https://www.treasury.gov/resource-center/faqs/Currency/Pages/legal-tender.aspx https://www.treasury.gov/resource-center/faqs/Currency/Pages... > Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything Fundamentally it's not really any better than cryptocurrencies. We can't easily transact with cryptocurrencies due to cultural reasons. We have coins right now that can be used to transact with complete privacy. People don't do it because culture is slow to change. Worst case for cryptocurrencies is the whole Tether thing implodes. Not sure it ever will but hey, if the US government will bail out banks when they screw everything up, why not Tether as well?
  - rsync 5y ago
    You cannot pay US taxes with anything other than US dollars. No matter what you have - the Mona Lisa, gold bars, the hope diamond - they will not accept it. You must sell it to buy dollars. That is not a coincidence - it is the entire point … and it means there will always be buyers for dollars and they will always have value.
    - matheusmoreira 5y ago
      I never said the USD didn't have value. I said the value of the USD is not backed by anything. The government and banks are free to inflate the USD as much as they want. It's like an unconditional tax on everyone. Like all currencies before it, its value will diminish over time. When the US ceases to exist, its value will finally become zero. Precisely because tax payments were the only thing keeping it relevant.
    - frankenst1 5y ago
      > dollars [...] will always have value The US dollar has lost - ~30% of its value in the last 10 years - ~84% of its value in the last 50 years - ~97% of its value since 1900 (Value here refers to purchasing power) Reason for this is that the US dollar is continually being inflated by the US government, precisely because it has no robust backing.

agumonkey 5y ago

I have a feeling that this market stays up because the previous one has just enough flaws to allow the other to be believable, whether or not crypto will provide something useful.. I don't know.

NicoJuicy 5y ago

Yeah me too, it should be clear with the whole tether thing by now that it's way way overrated. But noon-techies i know bought an experiment with it and i was kinda suprised. I guess they are going for too big to fail. A lot of "big money" had joined the crypto thing and it's making themv curious: "eg. all these big corporations can't be wrong". I don't blame that they try now though, although I warn them. It's really getting surreal. Note : I left crypto behind me in late 2017 at 18 k. Didn't trust it anymore and nothing changed.

ryanSrich 5y ago

It’s only been around for 10-ish years. As someone that is interested in crypto, and actively participates in not only buying, but using it, I think we’re a far ways off from the bubble bursting completely. Market cycles will happen, projects will die, but I think crypto is here to stay. The bigger question is how far does it spread. It works incredibly well at putting money into the hands of people that have never had it before. The number of high school and college drop outs that I know, who now have more money than most people on earth is staggering.

arcticbull 5y ago
Into the hands of a couple of people. It's an unproductive asset meaning all it can possibly do is redistribute the money that new entrants provide and split it between existing holders and miners. It is fundamentally negative sum, and the narrative of prosperity is driven by existing holders to attempt to claim a larger stake of fiat.
- kreetx 5y ago
  It is productive in the following ways: - you don't need anyone's premission to use it (yes, there are downsides) - you cand lend it out or take a loan much like a bank, but without borders - you can program it and also not fear your program being meddled with. Most banks don't even have an API to use it for a private person. - it can be deterministically scarce, so you wont be losing it if you hold it (or you can, if others lose faith. With national currencies they can simply take your money without you having a say by printing more)
  - deleted 5y ago
    [deleted]
  - arcticbull 5y ago
    You've conflated the role of assets and currencies in a financial system. Even separating that out, that's not a productive asset. The productive asset would be an interest in the lending platform. Concretely it would be like treating gold as a productive asset because InteractiveBrokers lets you take out a margin loan collateralized by your gold. Gold remains unproductive in this scenario, IBKR shares would productive. Value from lending would accrue to IBKR shares.

throw0101a 5y ago

> I keep waiting for the Crypto ponzi scheme to burst. Previously Ponzi schemes were limited in geographic area, so you'd be limited to the number of marks you could go after, either through travel limits or the number of people you could meet through 'friends of friends'. This could grow a bit if you were 'successful' enough and could establish a reputation (e.g., Madoff). Online schemes do not have geographic limits and so there's always a fresh source of unknowledgeable persons to go after. Further, most traditional Ponzi schemes are of the form that you'll receive x% returns (e.g., dividends) per year, but Crypto is more akin to: > In finance and economics, the greater fool theory states that the price of an asset is determined by whether you can sell it for a higher price, at a later point in time. On assets where the theory applies, it is implied that the asset's intrinsic value is less important than the increase in demand, however irrational it might be. The person buying the overpriced asset later on, for a higher price, is deemed the greater fool.[1][2][3][4] * https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory

Animats 5y ago

Because we haven't had a recession yet which caused a major net outflow from cryptocurrencies. Some cryptocurrencies can survive a major net outflow, but some, especially the stablecoins with weak backing, (i.e. Tether) cannot. The big lesson of cryptocurrencies is that the market for money laundering services is much larger than previously supposed.

temptemptemp111 5y ago

Because fiat currencies are collapsing and people are dumping into various investments including crypto.

Ekaros 5y ago

I'm waiting for whole stock market and everything else to burst... But when you think about how central banks and governments are handling it and all the money around it makes lot more sense how it is still going on.

overgard 5y ago

Well, there's always value in enabling money laundering and purchasing of illegal goods. Bitcoin has lots of uses, I just don't think they're the ones the doe eyed idealists like to talk about.

matheusmoreira 5y ago

It doesn't burst because it's not actually a ponzi scheme.

xupybd 5y ago
You are correct, there are no dividends but this part of the definition applies. "The scheme leads victims to believe that profits are coming from legitimate business activity, and they remain unaware that other investors are the source of funds" I believe this holds as I don't think most of the investors understand crypto. It is a magic black box so they don't know where the value comes from.
- matheusmoreira 5y ago
  It's a currency. There is no underlying business activity, only transactions. Bitcoin failed as a general currency but apparently banks are using it to settle accounts amongst themselves. Sometimes things develop in the most unintuitive ways. > I believe this holds as I don't think most of the investors understand crypto. It is a magic black box so they don't know where the value comes from. I don't think this is evidence of any scheme. It's just irrational market behavior.
  - pushingice 5y ago
    Which banks are using bitcoin to settle anything?
    - matheusmoreira 5y ago
      I don't remember. I read that on some news site a while ago. Can't seem to find the source anymore unfortunately.
    - danans 5y ago
      GP is probably referring to Ripple, which is not Bitcoin, but rather another crypto currency targeting interbank settlements.

belorn 5y ago

As long it can be used as a currency it will keep a value above zero. It will die just like any other currency, which is to say the day when the market refuse to take the currency in exchange for goods.

megameter 5y ago

One lesson of the medieval period is that that when the previous society(Rome) breaks down, a period of mysticism sweeps in, from which the new society emerges. This happens on a smaller scale with e.g. "Great Awakenings". Mysticism normalizes a reality, and therefore it doesn't obey the rules of reason, rather, great efforts are made to rationalize its existence from a pragmatic beginning. Philosophers cannot reach agreement on what is good for people, so religious experiences fill in the gap, and that's always been the case with the economy too. People used to believe that conquests made wealth; gradually they became convinced that productivity made wealth. Productivity is now on the chopping block, since it is seen as something that's killing the planet with inexhaustible resource demand. We're looking for the next way of seeing things. Crypto doesn't make sense now, and I say that as someone deeply invested in it, but it has that kind of potential to change our frame of reference after an awkward transition takes place. Maybe it makes sense if we go further with it. The experiment is in progress, but it's already exceeded the usual bounds of a cult or scam.

lamontcg 5y ago

Crypto still is small enough that a couple billion dollars can bail the system out. It only took a few billions to pump it up to $25k in 2017. At some point the amount it takes to bail them out will be larger than any of the billionaire true believer investors are willing to throw into the pot and will exceed their ability to agree with each other to risk that much to save it. It isn't really an economic problem, it is more like a poker game. The next market crash will probably be from a substantially higher peak and will take proportionately more to bail it out, and it is also going to be complicated by governments taking the opportunity to crack down on it so "regulatory risk" will be very high. 2022/2023 are probably going to have a high risk of the game collapsing. Won't be 100% though so it could come back and another ~4 years from now we could be seeing yet another bubble blowing up in crypto. I wouldn't get too emotionally attached to hating crypto or believing that a sudden regulatory attack on crypto is going to manage to pop crypto in the near term (and what China did recently was the kind of crackdown that everyone believed would kill it, but its dragging itself out of the hole again). Right now chances of it popping in the short term are probably very low, and nobody is going to seriously take a run at regulating it because they don't want to be responsible for the fallout (similarly to how nobody did shit about Madoff's Ponzi until he went cash insolvent in 2008 due to the financial crisis).