6 ms·

> The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. That is just one of the pur

by FabHK 3y ago

> The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. That is just one of the purposes; others are: - time-shifting of consumption: borrow when you study or build a house, then invest and save during work years, then live of retirement portfolio - maturity transformation enabling investment: extra cash goes in the bank (and can be redeemed on demand), is bundled and lent (long-term) to fund construction or businesses [1] - allocative function: send capital to its most productive use. For that, you need accurate prices, supported by equity research and markets. So, in real financial markets, all the arbitrage games etc. [2] at least support actual productive purposes. In crypto, it's just a pure cargo cult copy of financial markets without any underlying productive purpose. [1] that whole banking business is somewhat precarious, but reasonably well understood (since Bagehot) and regulated/insured, though in recent times obviously hasn't worked great. Alternative models (narrow banks + private credit) are conceivable. [2] and to be clear: the amount finance skims of the economy is way too large. Similarly, building a somewhat straighter fibre (and then microwave towers) from Chicago to NY has no societal benefit I can discern. (But the solution to that is fintech and regulation, not crypto.)

agentgumshoe 3y ago
> So, in real financial markets, all the arbitrage games etc. [2] at least support actual productive purposes. So without all those games, what would be substantially different?
- lxgr 3y ago
  You‘d probably see much larger spreads and lower liquidity when buying and selling stocks or commodities/currencies; you’d often overpay on insurance etc. (All assuming a properly working market without collusion, illegal usage of non-public information etc. – which is unfortunately not always the case.)
- MrMan 3y ago
  [dead]
- pembrook 3y ago
  By referring to arbitrage as “games” OP’s comment has poisoned the well for this entire chain of responses. So to get an understanding, first we need to fix. A “game” implies non-productive or zero sum. By definition, an arbitrage is not that. Any arbitrage is the result of an inefficiency in prices or the economy. When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! But the question of what would be substantially different is easy. No arbitrage = no markets = top-down command economy. Check out North Korea, Cuba, USSR, the former Yugoslavia, etc. for what would be different.
  - less_less 3y ago
    > When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! While I agree that finance serves a useful purpose, I don't understand this bit. Suppose hypothetically that arbitrage gives some social utility, but not in proportion to the amount of money it makes for arbitrageurs, and thus not in proportion to the effort put into it. Suppose that society is overproducing finance -- that most people would be better off if the world had slightly worse pricing information, fewer financial datacenters and low-latency microwave links, less human effort devoted to banking, and more of something else that could be built with those resources and that effort. Maybe this creates another arbitrage opportunity -- maybe in an idealized free market (where there are no barriers to entry) more people would work in finance, and their competition would reduce profits. But it seems to me that this would only worsen the overproduction problem. Or is there something I'm missing here? Why isn't this really an "opportunity" to (carefully) increase taxes on finance, so that it won't be overproduced by as much?
    - nsvd 3y ago
      I don't think it's the case that finance is over produced. If it were, then the value of financial services would drop. Rather, because the gain produced by financial instruments is proportional to the wealth someone has, the returns of finance disproportionately benefit those with large amounts of wealth. One man can only make so much plumbing or being a mechanic, but can make an arbitrary about by investing in ETFs. In other words, if the financial sector was largely a collection of small businesses run by middle class people, no one would think it was a problem that they make money. That would be great! But in reality it's a smaller amount of companies and smaller amount of wealthy people that benefit from it. That problem isn't unique to finance, it affects many parts of our society.
MrPatan 3y ago
> But the solution to that is fintech and regulation, not crypto Why? Now we have a trustless, decentralized, tech solution, why do you still want the "guys with guns" solution?
- croes 3y ago
  There is no such thing as trustless
  - earnesti 3y ago
    But there is varying degrees of trust required. Also the quality of trust.
  - MrPatan 3y ago
    Where's the trust in a bitcoin tx?
    - Breza 3y ago
      You have to trust that the restaurant where you're having lunch will accept BTC as payment. In reality, using Bitcoin requires the same trust-based infrastructure as everything else because the only way to buy anything with it is to trade it for fiat.
    - croes 3y ago
      That Bitcoins still have a value when you sell them
      - MrPatan 3y ago
        1 BTC = 1 BTC
        croes 3y ago
        https://www.coinopsy.com/dead-coins/abandoned/ https://www.coinopsy.com/dead-coins/abandoned/
norswap 3y ago
I was nodding my head along (fantastic answer) until the stab at crypto. Let me offer a (partial) defense of crypto if I can: Broadly, crypto is divided into crypto-currencies and applications. Let's tackled currencies first, some of which some are reputable and some of which are grifts, but which viewed in their most favorable light attempt to be a form of currency or asset that is decentralized. This means that no single party may unilateraly devalue them, or restrict their trade in any way. (No I understand if that doesn't excite a lot of people, but this is clearly valued by some people!) As may be obvious, crypto-currencies are too volatile to serve as actual "currencies", so they are at best "assets". But it is possible to use these assets as collateral for the minting of stablecoins. I'm not sure this is quite risk transfer, but it essentially relies on the willingness of some to hold speculative assets to enable the creation of a stable assets. In turn, these assets are not typically useless — they hold value because there is demand for them to pay for transaction costs on blockchain. Blockchains themselves are not useless. We may not think much of the difficulties of transferring money, but it is a real challenge in LARGE swaths of the world, where people are unbanked or live under tyrannical governments. I would argue that even in the west, the need becomes is becoming more pressing (Trudeau freezing trucker supporter bank accounts, banks imposing tons of restriction on cash withdrawals and "large" bank transfers). Beyond transfer, they also serve to run decentralized applications. People are quick to dismiss those, and true it doesn't enable to do anything dazzingly new. It simply enables you to do things you could already do, but in a way where no single party (or even colluding parties) can shut it down. This may seem silly, but I think the world would truly be better if we for instance had a YouTube where copyright trolls couldn't strike down / demonetize legimate content. Applications then. In reality, we're still far from decentralized YouTube (but we will get there). Most applications today are financial. And I think they're quite useful. The financial infrastructure being built is genuinely novel and useful. The problem is that it is navel-gazing at the moment: that infrastructure is mostly used to perform financial operations on crypto tokens themselves. But there is no reason that they couldn't be used for other assets. In fact this is starting to happen: you can now invest in real estate and US treasuries on the blockchain. We're still a way from mainstream adoption, and that has mostly to do with legal uncertainties that prevents established players from diving in (though many of them are experimenting). There are also entrenched interests there, it must be said. So if anything else, crypto helps build a better financial infrastructure. It's somewhat ridiculous that when you buy some stock, the trade is routed through three intermediaries and is only really settled 7 days later. The abstraction on top of this is actually leaky, with each intermediary coming with some risk and some agency to throw a wrench in the works. As in fact happened between Robinhood and its clearinghouse (or some such intermediary) during the GameStop frenzy.

by FabHK 3y ago

agentgumshoe 3y ago

> So, in real financial markets, all the arbitrage games etc. [2] at least support actual productive purposes. So without all those games, what would be substantially different?

lxgr 3y ago
You‘d probably see much larger spreads and lower liquidity when buying and selling stocks or commodities/currencies; you’d often overpay on insurance etc. (All assuming a properly working market without collusion, illegal usage of non-public information etc. – which is unfortunately not always the case.)
MrMan 3y ago
[dead]
pembrook 3y ago
By referring to arbitrage as “games” OP’s comment has poisoned the well for this entire chain of responses. So to get an understanding, first we need to fix. A “game” implies non-productive or zero sum. By definition, an arbitrage is not that. Any arbitrage is the result of an inefficiency in prices or the economy. When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! But the question of what would be substantially different is easy. No arbitrage = no markets = top-down command economy. Check out North Korea, Cuba, USSR, the former Yugoslavia, etc. for what would be different.
- less_less 3y ago
  > When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! While I agree that finance serves a useful purpose, I don't understand this bit. Suppose hypothetically that arbitrage gives some social utility, but not in proportion to the amount of money it makes for arbitrageurs, and thus not in proportion to the effort put into it. Suppose that society is overproducing finance -- that most people would be better off if the world had slightly worse pricing information, fewer financial datacenters and low-latency microwave links, less human effort devoted to banking, and more of something else that could be built with those resources and that effort. Maybe this creates another arbitrage opportunity -- maybe in an idealized free market (where there are no barriers to entry) more people would work in finance, and their competition would reduce profits. But it seems to me that this would only worsen the overproduction problem. Or is there something I'm missing here? Why isn't this really an "opportunity" to (carefully) increase taxes on finance, so that it won't be overproduced by as much?
  - nsvd 3y ago
    I don't think it's the case that finance is over produced. If it were, then the value of financial services would drop. Rather, because the gain produced by financial instruments is proportional to the wealth someone has, the returns of finance disproportionately benefit those with large amounts of wealth. One man can only make so much plumbing or being a mechanic, but can make an arbitrary about by investing in ETFs. In other words, if the financial sector was largely a collection of small businesses run by middle class people, no one would think it was a problem that they make money. That would be great! But in reality it's a smaller amount of companies and smaller amount of wealthy people that benefit from it. That problem isn't unique to finance, it affects many parts of our society.

MrPatan 3y ago

> But the solution to that is fintech and regulation, not crypto Why? Now we have a trustless, decentralized, tech solution, why do you still want the "guys with guns" solution?

croes 3y ago
There is no such thing as trustless
- earnesti 3y ago
  But there is varying degrees of trust required. Also the quality of trust.
- MrPatan 3y ago
  Where's the trust in a bitcoin tx?
  - Breza 3y ago
    You have to trust that the restaurant where you're having lunch will accept BTC as payment. In reality, using Bitcoin requires the same trust-based infrastructure as everything else because the only way to buy anything with it is to trade it for fiat.
  - croes 3y ago
    That Bitcoins still have a value when you sell them
    - MrPatan 3y ago
      1 BTC = 1 BTC
      - croes 3y ago
        https://www.coinopsy.com/dead-coins/abandoned/ https://www.coinopsy.com/dead-coins/abandoned/

norswap 3y ago

I was nodding my head along (fantastic answer) until the stab at crypto. Let me offer a (partial) defense of crypto if I can: Broadly, crypto is divided into crypto-currencies and applications. Let's tackled currencies first, some of which some are reputable and some of which are grifts, but which viewed in their most favorable light attempt to be a form of currency or asset that is decentralized. This means that no single party may unilateraly devalue them, or restrict their trade in any way. (No I understand if that doesn't excite a lot of people, but this is clearly valued by some people!) As may be obvious, crypto-currencies are too volatile to serve as actual "currencies", so they are at best "assets". But it is possible to use these assets as collateral for the minting of stablecoins. I'm not sure this is quite risk transfer, but it essentially relies on the willingness of some to hold speculative assets to enable the creation of a stable assets. In turn, these assets are not typically useless — they hold value because there is demand for them to pay for transaction costs on blockchain. Blockchains themselves are not useless. We may not think much of the difficulties of transferring money, but it is a real challenge in LARGE swaths of the world, where people are unbanked or live under tyrannical governments. I would argue that even in the west, the need becomes is becoming more pressing (Trudeau freezing trucker supporter bank accounts, banks imposing tons of restriction on cash withdrawals and "large" bank transfers). Beyond transfer, they also serve to run decentralized applications. People are quick to dismiss those, and true it doesn't enable to do anything dazzingly new. It simply enables you to do things you could already do, but in a way where no single party (or even colluding parties) can shut it down. This may seem silly, but I think the world would truly be better if we for instance had a YouTube where copyright trolls couldn't strike down / demonetize legimate content. Applications then. In reality, we're still far from decentralized YouTube (but we will get there). Most applications today are financial. And I think they're quite useful. The financial infrastructure being built is genuinely novel and useful. The problem is that it is navel-gazing at the moment: that infrastructure is mostly used to perform financial operations on crypto tokens themselves. But there is no reason that they couldn't be used for other assets. In fact this is starting to happen: you can now invest in real estate and US treasuries on the blockchain. We're still a way from mainstream adoption, and that has mostly to do with legal uncertainties that prevents established players from diving in (though many of them are experimenting). There are also entrenched interests there, it must be said. So if anything else, crypto helps build a better financial infrastructure. It's somewhat ridiculous that when you buy some stock, the trade is routed through three intermediaries and is only really settled 7 days later. The abstraction on top of this is actually leaky, with each intermediary coming with some risk and some agency to throw a wrench in the works. As in fact happened between Robinhood and its clearinghouse (or some such intermediary) during the GameStop frenzy.