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I've always found this excerpt from a Doomberg article sums the whole thing up nicely: > We distinctly recall drawing two circles on a piece of paper. In the c

by rcarr 4y ago

I've always found this excerpt from a Doomberg article sums the whole thing up nicely: > We distinctly recall drawing two circles on a piece of paper. In the circle on the left, we wrote "Real Economy"; while in the circle on the right we wrote "Crypto Universe". We drew two pipes between the circles - one flowing into the crypto universe and the other flowing back to the real economy - and labeled both pipes with fiat currencies. While we understood how fiat currencies from investors could flow in, we failed to grasp what could be occurring within the crypto universe that would create more fiat currency for investors to take out at a later date.

JumpCrisscross 4y ago
There are a lot of people who have bet their resumes on crypto. Easy money put cash in their accounts. Until that’s depleted we’ll be stuck with this side show, a reality unlikely to rear for at least another decade (barring a deep recession).
chii 4y ago
A casino is an analogue to crypto. The house takes in money, and produces entertainment. Some people also leave with more money than they go in, but most lose it all.
- AlexandrB 4y ago
  Crypto differs in that the people getting the most entertainment are not the ones putting in the money.
  - nafey 4y ago
    That could be true for real casinos as well if you get really lucky while playing slots.
  - saalweachter 4y ago
    Now I'm imagining a new casino, wired to the gills with cameras like all casinos, where you can view live streams of the casinos or edited cuts that follow individual story lines as people win and lose money, complete with camera confessionals after someone loses their home. How would the ad revenue compare to the casino revenue?
- bell-cot 4y ago
  Yes - but any decently-managed casino is extremely careful in managing their cash, cashflow, and fiat money supply (chips), to make sure that: (1) they make real money, and (2) their chips hold their value against real money. Crypto, on the other hand...
  - phyalow 4y ago
    You might be familiar with Jump Capital, Jane Street, DRW, Hudson River Trading etc all deal in crypto and act in the way you describe.
    - bell-cot 4y ago
      I have seen a bit of the "management side" of a modest-size American casino or two. Those guys are hard-core about accounting for every dollar and chip. Every day. Plus thinking three steps ahead of any "tempted" employees, who might imagine that they could get away with something, in spite of the security cameras. Vs. I have zero behind-the-scenes knowledge of any crypto firms. Comparing the casinos to the juicy gossip that comes out with each crypto collapse...my gut feel is that the crypto folks do not even know that such a culture & controls exist. Otherwise, more crypto folks would at least be pantomiming bits of that stuff, to look good. And yelling about specific violations of accepted industry norms & standards after each big bust, to at least give the appearance that crypto has & cares about such things.
- noxer 4y ago
  But there is no "house" in crypto this analogue make no sense.
  - yucky 4y ago
    Wouldn't the major exchanges be similar to "the House"?
    - noxer 4y ago
      Exchanges if run properly do not have the function of "the house". You dont play against them and the odds are in their favor you instead play against everyone else on the same exchange and there are no odds against anyone. The exchange gets a fee for the service it provides so it does in fact always win but by providing a service people are willing to pay for and not by favorable odds. Also you dont need to use a centralized exchange, DEX exists too.
vitiral 4y ago
Now imagine the "Real Economy" bubble moved from fiat to crypto. Imagine how rich you'd be! You're a trillionare because you invested your $7,000 you earned at McDonald's while you were a teenager in Bitcoin. The fundamentals aren't there since (at minimum) crypto can't deliver the QPS at low enough energy needed. But this is the crazy dream.
wakamoleguy 4y ago
What part of that diagram would break down for a company within the 'real economy'? Naively, if I am running a SaaS company, I receive fiat in and pay fiat out. It's the same two pipes. It's just that some of the fiat coming out is going to shareholders. The 'value' that the service is providing only justifies who the fiat is going to, not how much there is.
- wakamoleguy 4y ago
  I suppose one answer is that the diagram does still work for non-crypto companies. Reading the analysis that way, the simple conclusion is that they didn't see the value being created. However, it's not impossible that it could have been created.
- colmmacc 4y ago
  The real point being made here is that a 'real company' can generate value in the form goods or services, which hopefully makes the out pipe bigger than the in pipe. This could be true of crypto; maybe the voting system in a DAO, or the art in an NFT, or the peer to peer trust, has intrinsic value that people will sustain a profit margin for. But with the simple empty circle they are making the point that the main reason folks invest is just to make money, and in that regard crypto is mostly just moving it around and that's not a value add. You could say that regular finance is the same, but it brings intrinsic values like insurance on deposits and investments to the table, and invests in 'real-growth' businesses that produce goods and services.
pontus 4y ago
Isn't that true of anything that doesn't include the fed? I mean unless you can print money, you can't change the amount of fiat in any subset of the economy. You can still add value though which would be evident by more people wanting a piece of whatever pie there is, driving more fiat into the subset and/or creating paper gains which is a sort of money in itself, but this is true for crypto as well. For example, I can draw a circle around Google and make the same argument: "I can see how fiat can flow into Google (investments, debt, advertiser dollars, ...) but I can't see how Google can create new fiat to flow back to the rest of the economy." The best I can see is that higher demand for a share of Google creates paper gains but then that's true for crypto as well.
- paulryanrogers 4y ago
  Because Google can sell the attention of billions of people, albeit only in small ad slots. That's quite an asset. Then they have DCs, mountains of computers, and office buildings. So worst case those can be sold off. Crypto has some NFTs no one really wants.
- JumpCrisscross 4y ago
  > unless you can print money, you can't change the amount of fiat in any subset of the economy Credit is money. Anyone who can create credit can create money.
  - mannerheim 4y ago
    But only banks do this, not Google itself (although I guess they do lend money so maybe?). Ultimately more fiat at the end of the day doesn't matter either - what matters are real goods and services produced. Of course, crypto has not been good with respect to this either... Financial services only produce value insomuch as they enable people to access goods and services in the 'real economy'. Houses and cars for consumers, and for those who produce goods/services, capital that enables them to produce, whether that be loans for equipment, salaries, whatever, as long as something comes out at the end that there's somebody willing to buy (and for that to be sustainable, there should be a reason to own it more than selling to somebody else). Money is only useful insomuch as it enables exchange that leads to more real things people want. So there is some value in the exchange of cryptocurrency, if nowhere near enough to justify its valuation - after all, it does enable people to purchase all sorts of illegal drugs, which is a real good people want. Other than that, financial speculation (pretty much every other application we usually see of cryptocurrency) is all well and good, but the question at the end of the day is what's the underlying stuff being speculated upon, and how does it correspond to stuff people actually want? Financial instruments on housing and corn at least have some relation to things people want, after all.
noxer 4y ago
If you would make the same circles but with different fiat currency on one side and difference fiat currency on the other side you would figure out that exchanging different fiat currency isn't generating any value therefore the Forex markets should not exists. And extending on that knowledge any currency from a country that produced more debts each year should be worthless. Reality check: Nope, both not true in the "real economy". Buffet is know for not liking stuff that does not "produce goods" like Gold. However trading any kind of asset does actually produce something it produces market liquidity which s the oil in the financial system that make the economy run smother.
- rcarr 4y ago
  Not sure I agree with this. If you're trading fiat currencies as investment rather than out of travel necessity, you're essentially saying that you think that the governance of one country is over or undervalued in relation to another and you can profit from identifying that discrepancy. It doesn't matter if the country is creating more debt as long as you have faith in the governance of the country and their reasoning for taking out that debt is that it will lead to net value added in the long term. This was very clearly illustrated recently in the UK. Kwarteng and Truss announced a budget that was going to increase the debt of the UK and allow them to give tax cuts to the rich. The markets didn’t see this as adding net long term value to the UK and the currency tanked as a result allowing a lot of people to profit from the forex trade. The value added in a foreign exchange trade is security which is based on the real economic growth of the country behind the currency. If a country is well governed the value of your investment is safe and will grow. If it isn’t, then it will decline. Obviously you also have to be aware that some well governed countries may choose to purposely devalue their currencies as the US historically did (and may do again).
  - noxer 4y ago
    I think you misunderstand my post, I made a case AGAINST the logic of the parent story. I'm fully aware that forex trading is essential for the economy and that people make huge profits doing it. BTW if you trade fiat you are not investing you are speculating same with trading crypt. But people keep comparing it to an investment. See my other post about the distinction here https://news.ycombinator.com/item?id=33654983 https://news.ycombinator.com/item?id=33654983

by rcarr 4y ago

JumpCrisscross 4y ago

There are a lot of people who have bet their resumes on crypto. Easy money put cash in their accounts. Until that’s depleted we’ll be stuck with this side show, a reality unlikely to rear for at least another decade (barring a deep recession).

chii 4y ago

A casino is an analogue to crypto. The house takes in money, and produces entertainment. Some people also leave with more money than they go in, but most lose it all.

AlexandrB 4y ago
Crypto differs in that the people getting the most entertainment are not the ones putting in the money.
- nafey 4y ago
  That could be true for real casinos as well if you get really lucky while playing slots.
- saalweachter 4y ago
  Now I'm imagining a new casino, wired to the gills with cameras like all casinos, where you can view live streams of the casinos or edited cuts that follow individual story lines as people win and lose money, complete with camera confessionals after someone loses their home. How would the ad revenue compare to the casino revenue?
bell-cot 4y ago
Yes - but any decently-managed casino is extremely careful in managing their cash, cashflow, and fiat money supply (chips), to make sure that: (1) they make real money, and (2) their chips hold their value against real money. Crypto, on the other hand...
- phyalow 4y ago
  You might be familiar with Jump Capital, Jane Street, DRW, Hudson River Trading etc all deal in crypto and act in the way you describe.
  - bell-cot 4y ago
    I have seen a bit of the "management side" of a modest-size American casino or two. Those guys are hard-core about accounting for every dollar and chip. Every day. Plus thinking three steps ahead of any "tempted" employees, who might imagine that they could get away with something, in spite of the security cameras. Vs. I have zero behind-the-scenes knowledge of any crypto firms. Comparing the casinos to the juicy gossip that comes out with each crypto collapse...my gut feel is that the crypto folks do not even know that such a culture & controls exist. Otherwise, more crypto folks would at least be pantomiming bits of that stuff, to look good. And yelling about specific violations of accepted industry norms & standards after each big bust, to at least give the appearance that crypto has & cares about such things.
noxer 4y ago
But there is no "house" in crypto this analogue make no sense.
- yucky 4y ago
  Wouldn't the major exchanges be similar to "the House"?
  - noxer 4y ago
    Exchanges if run properly do not have the function of "the house". You dont play against them and the odds are in their favor you instead play against everyone else on the same exchange and there are no odds against anyone. The exchange gets a fee for the service it provides so it does in fact always win but by providing a service people are willing to pay for and not by favorable odds. Also you dont need to use a centralized exchange, DEX exists too.

vitiral 4y ago

Now imagine the "Real Economy" bubble moved from fiat to crypto. Imagine how rich you'd be! You're a trillionare because you invested your $7,000 you earned at McDonald's while you were a teenager in Bitcoin. The fundamentals aren't there since (at minimum) crypto can't deliver the QPS at low enough energy needed. But this is the crazy dream.

wakamoleguy 4y ago

What part of that diagram would break down for a company within the 'real economy'? Naively, if I am running a SaaS company, I receive fiat in and pay fiat out. It's the same two pipes. It's just that some of the fiat coming out is going to shareholders. The 'value' that the service is providing only justifies who the fiat is going to, not how much there is.

wakamoleguy 4y ago
I suppose one answer is that the diagram does still work for non-crypto companies. Reading the analysis that way, the simple conclusion is that they didn't see the value being created. However, it's not impossible that it could have been created.
colmmacc 4y ago
The real point being made here is that a 'real company' can generate value in the form goods or services, which hopefully makes the out pipe bigger than the in pipe. This could be true of crypto; maybe the voting system in a DAO, or the art in an NFT, or the peer to peer trust, has intrinsic value that people will sustain a profit margin for. But with the simple empty circle they are making the point that the main reason folks invest is just to make money, and in that regard crypto is mostly just moving it around and that's not a value add. You could say that regular finance is the same, but it brings intrinsic values like insurance on deposits and investments to the table, and invests in 'real-growth' businesses that produce goods and services.

pontus 4y ago

Isn't that true of anything that doesn't include the fed? I mean unless you can print money, you can't change the amount of fiat in any subset of the economy. You can still add value though which would be evident by more people wanting a piece of whatever pie there is, driving more fiat into the subset and/or creating paper gains which is a sort of money in itself, but this is true for crypto as well. For example, I can draw a circle around Google and make the same argument: "I can see how fiat can flow into Google (investments, debt, advertiser dollars, ...) but I can't see how Google can create new fiat to flow back to the rest of the economy." The best I can see is that higher demand for a share of Google creates paper gains but then that's true for crypto as well.

paulryanrogers 4y ago
Because Google can sell the attention of billions of people, albeit only in small ad slots. That's quite an asset. Then they have DCs, mountains of computers, and office buildings. So worst case those can be sold off. Crypto has some NFTs no one really wants.
JumpCrisscross 4y ago
> unless you can print money, you can't change the amount of fiat in any subset of the economy Credit is money. Anyone who can create credit can create money.
- mannerheim 4y ago
  But only banks do this, not Google itself (although I guess they do lend money so maybe?). Ultimately more fiat at the end of the day doesn't matter either - what matters are real goods and services produced. Of course, crypto has not been good with respect to this either... Financial services only produce value insomuch as they enable people to access goods and services in the 'real economy'. Houses and cars for consumers, and for those who produce goods/services, capital that enables them to produce, whether that be loans for equipment, salaries, whatever, as long as something comes out at the end that there's somebody willing to buy (and for that to be sustainable, there should be a reason to own it more than selling to somebody else). Money is only useful insomuch as it enables exchange that leads to more real things people want. So there is some value in the exchange of cryptocurrency, if nowhere near enough to justify its valuation - after all, it does enable people to purchase all sorts of illegal drugs, which is a real good people want. Other than that, financial speculation (pretty much every other application we usually see of cryptocurrency) is all well and good, but the question at the end of the day is what's the underlying stuff being speculated upon, and how does it correspond to stuff people actually want? Financial instruments on housing and corn at least have some relation to things people want, after all.

noxer 4y ago

If you would make the same circles but with different fiat currency on one side and difference fiat currency on the other side you would figure out that exchanging different fiat currency isn't generating any value therefore the Forex markets should not exists. And extending on that knowledge any currency from a country that produced more debts each year should be worthless. Reality check: Nope, both not true in the "real economy". Buffet is know for not liking stuff that does not "produce goods" like Gold. However trading any kind of asset does actually produce something it produces market liquidity which s the oil in the financial system that make the economy run smother.

rcarr 4y ago
Not sure I agree with this. If you're trading fiat currencies as investment rather than out of travel necessity, you're essentially saying that you think that the governance of one country is over or undervalued in relation to another and you can profit from identifying that discrepancy. It doesn't matter if the country is creating more debt as long as you have faith in the governance of the country and their reasoning for taking out that debt is that it will lead to net value added in the long term. This was very clearly illustrated recently in the UK. Kwarteng and Truss announced a budget that was going to increase the debt of the UK and allow them to give tax cuts to the rich. The markets didn’t see this as adding net long term value to the UK and the currency tanked as a result allowing a lot of people to profit from the forex trade. The value added in a foreign exchange trade is security which is based on the real economic growth of the country behind the currency. If a country is well governed the value of your investment is safe and will grow. If it isn’t, then it will decline. Obviously you also have to be aware that some well governed countries may choose to purposely devalue their currencies as the US historically did (and may do again).
- noxer 4y ago
  I think you misunderstand my post, I made a case AGAINST the logic of the parent story. I'm fully aware that forex trading is essential for the economy and that people make huge profits doing it. BTW if you trade fiat you are not investing you are speculating same with trading crypt. But people keep comparing it to an investment. See my other post about the distinction here https://news.ycombinator.com/item?id=33654983 https://news.ycombinator.com/item?id=33654983