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First time hearing about Zero coupon bonds and Perpetual bonds... Nonetheless, wouldn't author's description of perpetual zero coupon bond apply to many (most?

First time hearing about Zero coupon bonds and Perpetual bonds... Nonetheless, wouldn't author's description of perpetual zero coupon bond apply to many (most? all?) fiat currencies as well, since these are not really backed by anything anymore?

maxbond 3y ago
You can think of currency as a negative coupon bond, even - if you hold onto cash you generally expect it to lose value. In order to function properly as a currency, an asset needs to be the least volatile liquid asset available in the economy (or at least to be competitive along this axis). The expectation the asset will slowly depreciate is compatible with this requirement. The expectation that your currency is a highly deflationary lottery ticket to be traded on 100x margin (and the kicker is that your collateral is some other highly volatile cryptoasset) - not so much. That's why the price of goods and services are almost never set in Bitcoin (rather, the price is set in dollars and floating in Bitcoin). It's too volatile to fulfill all of the roles of a currency, but if you're quick about it you can use it as a medium of exchange. This is more or less a summary of Taleb's argument that the net present value of Bitcoin is zero. https://arxiv.org/abs/2106.14204 https://arxiv.org/abs/2106.14204 https://youtube.com/watch?v=XeG0FzPxSh4 https://youtube.com/watch?v=XeG0FzPxSh4
- zhte415 3y ago
  Cash does not have a negative coupon. Cash has no coupon. I feel introducing quasi terminology helps confuse rather than help. Index linked bonds, I think you're getting at the concept by talking about inflation, are linked to price changes. Check the actual price index (CPI, RPI, etc) of linkage for what price changes. Most bonds are not index linked, not hedged against inflation, and have a fixed coupon. Whether or not that fixed coupon is or isn't above inflation depends on what inflation is. That's why bonds are classed as 'fixed income', or in alternate terminology 'financial assets' (not 'real' where 'real' has some link to inflation, or nominal incomes). Further, bonds vary widely in terms of coupon, can be stripped of coupons, etc. So rather than coupon, yield to maturity might be more useful to look at vis inflation.
  - FabHK 3y ago
    Cash has no coupon, so it has negative coupon as soon as you switch your analysis to real terms. In fact, in the context of the fundamental theorem of asset pricing (every asset discounted by a suitable numeraire is a martingale under the probability measure induced by that numeraire), cash isn’t even an asset (instead, the interest bearing bank account is one).
  - imtringued 3y ago
    Inflation is a necessary evil because paper is static and can't display real values. People who expect money to store value directly must be insane. I mean think about Roman empire currency being valid today. That is impossible. Money is only valuable within an economy that accepts it. Money from the past is no longer in the economy that is used to be accepted in. Every time period could be considered its own economy. Storing value or carrying value into the future can only happen in the real world, not with money itself, which is just a managerial system. In the real world, objects degrade, expire, require maintenance or constant energy inputs. Once humans are gone, nature will simply take over. The disconnect between money and the real world must manifest itself as inflation.
    - throw0101b 3y ago
      > Inflation is a necessary evil because paper is static and can't display real values. In some way (low) inflation is a feature and not bug: having money just sit around unproductively Scrooge McDuck-style is a waste of resources. Having cash (slowly) lose its value incentivizes its investment into productive assets and help move the economy around. Why does anyone expect / 'deserve' to earn returns on money that just sits around doing nothing?
- Zpalmtree 3y ago
  I don't understand claims like this, if the net present value is zero, why is the price not zero? You have to convince yourself that everybody trading or holding the cryptocurrency is deluded and just playing a ponzi scheme with each other, but even if you believe this, those participants itself believe it has value. Who is value set by, if not the market?
  - maxbond 3y ago
    You don't need to believe they're deluded, they can rationally and correctly believe that their particular trading activity will be be profitable. All it implies is that some of them will be wrong and that their losses will the the other trader's gain, and that the overall sum is zero or negative. NPV, price, and value are each distinct [1]. Individuals judge value according to their own idiosyncratic needs and views, the market determines price, and a valuation model determines NPV - market forces will tend to align these, but there's no guarantee they will and no contradiction if they don't. (Note that NPV might be better termed "net present cash flow," it's more like a price than a value.) The S&P can go to zero on Monday and a million the next day - it's not likely (presumably the exchanges would halt trading long before that happened) but there's nothing to stop it. It's not like a physical system which is constrained by the universe to behave a certain way, it's closer to a series of independent dice rolls. It seems to me like many people engage with this market for ideological reasons. I don't mean to say that's an illegitimate choice. But it can surely push the price past the NPV, if there's a contingent that's insensitive to the NPV. (This is why it's important to separate price from value. People investing for ideological reasons have a view about the value of Bitcoin, not the price.) And then there's stuff like this. https://youtube.com/watch?v=wIhTGB3wqV0 https://youtube.com/watch?v=wIhTGB3wqV0 (Apologies that this is a meme, it was the first instance of the clip I found & I didn't feel like looking for a non meme version.) Tl;Dw this is Saylor encouraging people to mortgage their house to buy Bitcoin. I think Saylor is some mixture of con artist and true believer, but I would call that close to unhinged. So yeah, some participants might be delusional (not a doctor). But I assume it's a minority. [1] If you'd like me to define these terms, please see these previous comments of mine. https://news.ycombinator.com/item?id=32857769 https://news.ycombinator.com/item?id=32857769 There's some debate in this thread about whether price and value are actually equivalent. https://news.ycombinator.com/item?id=33321321 https://news.ycombinator.com/item?id=33321321
ourmandave 3y ago
From OP link: The value of cryptocurrencies, in spite of a collapse in value, is stopped from falling to their natural value, i.e. zero, by a combination of market manipulation, investor ignorance and a tsunami of lies on social media from those paid to promote these worthless frauds. Which isn't how the US government backing the USD works at all.
- sroussey 3y ago
  The US backs it’s currency will a military.
  - drexlspivey 3y ago
    What does this even mean? How about the euro, is that backed by a military?
- bandrami 3y ago
  It's not a Ponzi scheme if you have aircraft carriers (people think I'm joking but that difference is real and important).
  - ChainOfFools 3y ago
    This is the real reason the Bitcoin maxis - in contradiction to the narrative of government controlled money being evil - were so stoked about getting El salvador, or any sovereign government with aterritorial boundary recgnized by international convention and defended by men with guns, to adopt Bitcoin as a currency. " backed by math" doesn't amount to much when there are mortars aimed at the middle of your mining farm complex.
  - maxbond 3y ago
    It's not a Ponzi scheme if you have a real economy generating real economic activity. The military isn't really the important part, it's the ability to tax a massive economy and then invest that money in eg infrastructure projects that help the economy grow. Ponzi schemes fail because the money isn't invested anywhere, it's just moved around. This makes it impossible for Ponzi schemes to be positive sum, so they're inherently unstable because when they are stressed everyone is forced to turn on each other because they're not all gunnuh make it.
imtringued 3y ago
Cash is a bearer bond. It represents a liability against the central bank but what does the central bank owe you? It owes you another bill of the same type but in good condition. So yes, paper bill currency is just as speculative as cryptocurrency. The difference is that nowadays most money is created with a contractual obligation to get rid of it eventually, which means its value is stable(=opposite of volatile) over time.

maxbond 3y ago

You can think of currency as a negative coupon bond, even - if you hold onto cash you generally expect it to lose value. In order to function properly as a currency, an asset needs to be the least volatile liquid asset available in the economy (or at least to be competitive along this axis). The expectation the asset will slowly depreciate is compatible with this requirement. The expectation that your currency is a highly deflationary lottery ticket to be traded on 100x margin (and the kicker is that your collateral is some other highly volatile cryptoasset) - not so much. That's why the price of goods and services are almost never set in Bitcoin (rather, the price is set in dollars and floating in Bitcoin). It's too volatile to fulfill all of the roles of a currency, but if you're quick about it you can use it as a medium of exchange. This is more or less a summary of Taleb's argument that the net present value of Bitcoin is zero. https://arxiv.org/abs/2106.14204 https://arxiv.org/abs/2106.14204 https://youtube.com/watch?v=XeG0FzPxSh4 https://youtube.com/watch?v=XeG0FzPxSh4

zhte415 3y ago
Cash does not have a negative coupon. Cash has no coupon. I feel introducing quasi terminology helps confuse rather than help. Index linked bonds, I think you're getting at the concept by talking about inflation, are linked to price changes. Check the actual price index (CPI, RPI, etc) of linkage for what price changes. Most bonds are not index linked, not hedged against inflation, and have a fixed coupon. Whether or not that fixed coupon is or isn't above inflation depends on what inflation is. That's why bonds are classed as 'fixed income', or in alternate terminology 'financial assets' (not 'real' where 'real' has some link to inflation, or nominal incomes). Further, bonds vary widely in terms of coupon, can be stripped of coupons, etc. So rather than coupon, yield to maturity might be more useful to look at vis inflation.
- FabHK 3y ago
  Cash has no coupon, so it has negative coupon as soon as you switch your analysis to real terms. In fact, in the context of the fundamental theorem of asset pricing (every asset discounted by a suitable numeraire is a martingale under the probability measure induced by that numeraire), cash isn’t even an asset (instead, the interest bearing bank account is one).
- imtringued 3y ago
  Inflation is a necessary evil because paper is static and can't display real values. People who expect money to store value directly must be insane. I mean think about Roman empire currency being valid today. That is impossible. Money is only valuable within an economy that accepts it. Money from the past is no longer in the economy that is used to be accepted in. Every time period could be considered its own economy. Storing value or carrying value into the future can only happen in the real world, not with money itself, which is just a managerial system. In the real world, objects degrade, expire, require maintenance or constant energy inputs. Once humans are gone, nature will simply take over. The disconnect between money and the real world must manifest itself as inflation.
  - throw0101b 3y ago
    > Inflation is a necessary evil because paper is static and can't display real values. In some way (low) inflation is a feature and not bug: having money just sit around unproductively Scrooge McDuck-style is a waste of resources. Having cash (slowly) lose its value incentivizes its investment into productive assets and help move the economy around. Why does anyone expect / 'deserve' to earn returns on money that just sits around doing nothing?
Zpalmtree 3y ago
I don't understand claims like this, if the net present value is zero, why is the price not zero? You have to convince yourself that everybody trading or holding the cryptocurrency is deluded and just playing a ponzi scheme with each other, but even if you believe this, those participants itself believe it has value. Who is value set by, if not the market?
- maxbond 3y ago
  You don't need to believe they're deluded, they can rationally and correctly believe that their particular trading activity will be be profitable. All it implies is that some of them will be wrong and that their losses will the the other trader's gain, and that the overall sum is zero or negative. NPV, price, and value are each distinct [1]. Individuals judge value according to their own idiosyncratic needs and views, the market determines price, and a valuation model determines NPV - market forces will tend to align these, but there's no guarantee they will and no contradiction if they don't. (Note that NPV might be better termed "net present cash flow," it's more like a price than a value.) The S&P can go to zero on Monday and a million the next day - it's not likely (presumably the exchanges would halt trading long before that happened) but there's nothing to stop it. It's not like a physical system which is constrained by the universe to behave a certain way, it's closer to a series of independent dice rolls. It seems to me like many people engage with this market for ideological reasons. I don't mean to say that's an illegitimate choice. But it can surely push the price past the NPV, if there's a contingent that's insensitive to the NPV. (This is why it's important to separate price from value. People investing for ideological reasons have a view about the value of Bitcoin, not the price.) And then there's stuff like this. https://youtube.com/watch?v=wIhTGB3wqV0 https://youtube.com/watch?v=wIhTGB3wqV0 (Apologies that this is a meme, it was the first instance of the clip I found & I didn't feel like looking for a non meme version.) Tl;Dw this is Saylor encouraging people to mortgage their house to buy Bitcoin. I think Saylor is some mixture of con artist and true believer, but I would call that close to unhinged. So yeah, some participants might be delusional (not a doctor). But I assume it's a minority. [1] If you'd like me to define these terms, please see these previous comments of mine. https://news.ycombinator.com/item?id=32857769 https://news.ycombinator.com/item?id=32857769 There's some debate in this thread about whether price and value are actually equivalent. https://news.ycombinator.com/item?id=33321321 https://news.ycombinator.com/item?id=33321321

ourmandave 3y ago

From OP link: The value of cryptocurrencies, in spite of a collapse in value, is stopped from falling to their natural value, i.e. zero, by a combination of market manipulation, investor ignorance and a tsunami of lies on social media from those paid to promote these worthless frauds. Which isn't how the US government backing the USD works at all.

sroussey 3y ago
The US backs it’s currency will a military.
- drexlspivey 3y ago
  What does this even mean? How about the euro, is that backed by a military?
bandrami 3y ago
It's not a Ponzi scheme if you have aircraft carriers (people think I'm joking but that difference is real and important).
- ChainOfFools 3y ago
  This is the real reason the Bitcoin maxis - in contradiction to the narrative of government controlled money being evil - were so stoked about getting El salvador, or any sovereign government with aterritorial boundary recgnized by international convention and defended by men with guns, to adopt Bitcoin as a currency. " backed by math" doesn't amount to much when there are mortars aimed at the middle of your mining farm complex.
- maxbond 3y ago
  It's not a Ponzi scheme if you have a real economy generating real economic activity. The military isn't really the important part, it's the ability to tax a massive economy and then invest that money in eg infrastructure projects that help the economy grow. Ponzi schemes fail because the money isn't invested anywhere, it's just moved around. This makes it impossible for Ponzi schemes to be positive sum, so they're inherently unstable because when they are stressed everyone is forced to turn on each other because they're not all gunnuh make it.

imtringued 3y ago

Cash is a bearer bond. It represents a liability against the central bank but what does the central bank owe you? It owes you another bill of the same type but in good condition. So yes, paper bill currency is just as speculative as cryptocurrency. The difference is that nowadays most money is created with a contractual obligation to get rid of it eventually, which means its value is stable(=opposite of volatile) over time.