Seems to me that it will always be possible for new forms of cryptocurrency to be introduced...what will determine the relative value of these currencies? If someone introduces, say, something called 'Bytecoin', which has (or at least seems to have) some advantages over Bitcoin, and quickly becomes popular, what does this do to the value of Bitcoin holdings? The situation might wind up similar to those periods in the 1800s when many forms of bank-issued 'currency' coexisted in the US.
Jan 30, 2022·edited Jan 30, 2022Liked by Jeffrey Carter
In 1863, the US gov't passed the National Banking Act that allowed what were called "national banks" to issue National Bank Notes subject to oversight from the Office of the Comptroller of the Currency -- notice the name. This is where the name came from.
From 1863 until 1935 this system existed. The system was well secured.
A bank deposited bonds with the US Treasury and could then issue National Bank Notes equal to 90% of the value of the deposited bonds.
This created a weird system based on what is called "seigneurage" which means the right of the lord, the seigneur, to mint money. In this instance, the issuing bank still collected the interest on its deposited bonds.
A bank collected interest on its bonds whilst also issuing the banknotes -- perhaps in the form of loans upon which they also collected interest.
Banks were developed to take deposits and make loans and collect interest.
The Feds killed the system in 1935 by -- wait for it -- enacting a tax of 2% which became 10% and then 20%. All the National Banks cashed in their outstanding bank notes and the system died.
Prior to 1863 when private banks issued currency it was often fully secured by superior bank specie (like USD today) or gold/silver. It was often used very locally or regionally. People weren't as mobile in those days.
The Feds intervened in 1863 because of fraud. There were operators who were called "wildcat bankers" who were crooks.
Oddly, these are the same issues that crypto is facing today proving once again when it comes to money there is not much new under this sun of ours.
I do not have sufficient time to respond to your entire lecture, a damn good lecture, Prof Carter. I agree with virtually all of it.
A couple of points:
1. Derivatives did have a bad impact on markets and triggered an enormous financial emergency while also being exactly as you described.
"A pinch of spice makes the soup more savory whilst a handful of spice ruins the same soup."
It's all about proportion.
When 26-year old kids with mousse in their hair with freshly minted Ivy League MBAs and two years of experience are designing financial products and investment banks are creating them on Floor 8, stuffing them into institutional accounts on Floor 10, and shorting them on Floor 12 -- you will eventually have a day of reckoning.
2. There is a huge difference between securities and currencies that sit upon the blockchain and the blockchain itself.
The blockchain is a better more authoritative trustless spreadsheet. It is software.
The securities and the currencies? Meh.
3. There is a clear difference between a sovereign nation's digital currency which is just a digital form of its national currency with whatever backing that national currency enjoys (full faith and credit of the United States of America ain't shabby) and cryptocurrencies propagated by private individuals with specious or unknown, if any, support.
If a stable coin is backed by USD, bravo. If it is backed by Commercial Paper and you can't underwrite the CP, WTF?
4. Of course sovereign nations are going to oppose cryptocurrencies when they begin to understand them -- crime, tax evasion, unfettered money movement, control, sponsorship, national borders.
These are things that sovereign nations are supposed to control though the Chinese and the American approaches are wildly different because the underlying governing philosophy is different.
China does everything it can to control its citizens, to identify the trouble makers, and to eliminate those who oppose the regime.
The US used to be the bastion of individual freedoms, not so much anymore, but that will swing back.
While the whole crypto world -- currency and blockchain -- is complex and a massive undertaking, the battle between good v evil, right v wrong is often elegantly simple. We have to remember to look at the simple things first.
I think that blockchain cannot be separated and independent from the crypto token associated with it. If you do that, you have a centralized clearing operation, not a network. The central clearing operation can charge outsize rents to the people trying to use the blockchain (See CME Clearinghouse)
Man, I am still having trouble with this. I WANT to believe, and WANT to get into it but here's the thing: I still see crypto as a form of the greater fool theory and can't seem to get past that. I understand the arguments in its favor but ALL of those arguments rely on widespread adoption by market participants. Like you, I'm a Chicago Booth alum (back when it was just the "GSB"). My penchant for understanding the underlying economic value of everything (either from cash flow, future value in anticipation of cash flow or in the case of commodities, limited quantities of something widely valued like real estate, grain or minerals) gets in the way of embracing crypto. In evaluating cryptocurrencies, none of these factors hold. Every argument for the value of crypto relies on someone else valuing it later on down the road. It goes against every fiber of my economic being.
Both of my sons have taken to investing in it in small amounts and my younger son is just starting to get into mining etherium. I'm trying. And that's part of the issue. Jr. can't mine gold. The resources needed are too capital intensive for a college kid to go out and dig up a significant find. Sure, he could become a panner. He would just need to move to Alaska and give up his life as he knows it in hopes that spending his days knee deep in freezing cold water will yield him a subsistence level lifestyle. Crypto-mining, on the other hand, just requires free electricity, compliments of his college, and a graphics card powerful enough to do the job. Done and done.
Perhaps our backgrounds lend themselves to belief vs skepticism. As a trader, you get the exchange mechanism instinctively. You made your living on it. My background, before I worked in wealth management, was in M&A and leveraged finance of middle market PE deals. So everything I did involved DCF analysis and evaluating cashflows and stability. I'm now wired that way.
Finally, the matter of the "stroke of the pen" risk on the part of the government is very real. If the last two years have taught us anything, it is that the government doesn't like to be challenged. And crypto is a BIG challenge to the best form of control they have: access to live one's life through decisions on what to buy and sell.
I was one of the last "GSB" classes! I think the appeal of Helium in the beginning was it was so easy to set up and mine. It takes very little electricity. But, it's designed to be a low-fi network. Bitcoin is different. I don't actually know what use Bitcoin has yet. It's certainly not a hedge against inflation. It has speculative appeal. But, what can it do? At least with gold (which is not a hedge either), you can make stuff out of it. Ethereum, Solana, Cardano are cryptos that are programmable so you can build things on top of them. Initially, ETH was used for smart contracts which eventually could replace OTC derivatives. A lot more efficient way to settle and distribute. No central clearing mechanism needed. No investment bank needed. No lawyers or accountants needed.
Your point about Ethereum and those others trying to supplant it is one of the things I find intriguing about it: a purpose beyond simply trying to be a store of value. I have to learn more, however.
The practical window for crypto has passed and gone. After this many years I should be able to get into a Lyft or Uber and pay with crypto, buy groceries, plane tickets, or take my wife out for dinner and the theater and pay with my wallet neatly stored on my USB drive, and except in the most rare cases that is not possible.
Maybe the biggest fail in crypto is that it all resolves into dollars, anyway. Those who have played poker often play with chips; the green chips are $1 each, the blue chips are $5 and the reds are $20. (just an example)
Nobody aspires to win lots of chips. We play and win so that we can cash chips out into dollars. Until BTC, or Ether, or even the lowly poker chip has intrinsic value, they are just another highly speculative proxy for hard currency.
Seems to me that it will always be possible for new forms of cryptocurrency to be introduced...what will determine the relative value of these currencies? If someone introduces, say, something called 'Bytecoin', which has (or at least seems to have) some advantages over Bitcoin, and quickly becomes popular, what does this do to the value of Bitcoin holdings? The situation might wind up similar to those periods in the 1800s when many forms of bank-issued 'currency' coexisted in the US.
In 1863, the US gov't passed the National Banking Act that allowed what were called "national banks" to issue National Bank Notes subject to oversight from the Office of the Comptroller of the Currency -- notice the name. This is where the name came from.
From 1863 until 1935 this system existed. The system was well secured.
A bank deposited bonds with the US Treasury and could then issue National Bank Notes equal to 90% of the value of the deposited bonds.
This created a weird system based on what is called "seigneurage" which means the right of the lord, the seigneur, to mint money. In this instance, the issuing bank still collected the interest on its deposited bonds.
A bank collected interest on its bonds whilst also issuing the banknotes -- perhaps in the form of loans upon which they also collected interest.
Banks were developed to take deposits and make loans and collect interest.
The Feds killed the system in 1935 by -- wait for it -- enacting a tax of 2% which became 10% and then 20%. All the National Banks cashed in their outstanding bank notes and the system died.
Prior to 1863 when private banks issued currency it was often fully secured by superior bank specie (like USD today) or gold/silver. It was often used very locally or regionally. People weren't as mobile in those days.
The Feds intervened in 1863 because of fraud. There were operators who were called "wildcat bankers" who were crooks.
Oddly, these are the same issues that crypto is facing today proving once again when it comes to money there is not much new under this sun of ours.
JLM
www.themusingsofthebigredcar.com
The value will be determined by what they do, who their "customers" are, and how big their network is.
I do not have sufficient time to respond to your entire lecture, a damn good lecture, Prof Carter. I agree with virtually all of it.
A couple of points:
1. Derivatives did have a bad impact on markets and triggered an enormous financial emergency while also being exactly as you described.
"A pinch of spice makes the soup more savory whilst a handful of spice ruins the same soup."
It's all about proportion.
When 26-year old kids with mousse in their hair with freshly minted Ivy League MBAs and two years of experience are designing financial products and investment banks are creating them on Floor 8, stuffing them into institutional accounts on Floor 10, and shorting them on Floor 12 -- you will eventually have a day of reckoning.
2. There is a huge difference between securities and currencies that sit upon the blockchain and the blockchain itself.
The blockchain is a better more authoritative trustless spreadsheet. It is software.
The securities and the currencies? Meh.
3. There is a clear difference between a sovereign nation's digital currency which is just a digital form of its national currency with whatever backing that national currency enjoys (full faith and credit of the United States of America ain't shabby) and cryptocurrencies propagated by private individuals with specious or unknown, if any, support.
If a stable coin is backed by USD, bravo. If it is backed by Commercial Paper and you can't underwrite the CP, WTF?
4. Of course sovereign nations are going to oppose cryptocurrencies when they begin to understand them -- crime, tax evasion, unfettered money movement, control, sponsorship, national borders.
These are things that sovereign nations are supposed to control though the Chinese and the American approaches are wildly different because the underlying governing philosophy is different.
China does everything it can to control its citizens, to identify the trouble makers, and to eliminate those who oppose the regime.
The US used to be the bastion of individual freedoms, not so much anymore, but that will swing back.
While the whole crypto world -- currency and blockchain -- is complex and a massive undertaking, the battle between good v evil, right v wrong is often elegantly simple. We have to remember to look at the simple things first.
JLM
www.themusingsofthebigredcar.com
I think that blockchain cannot be separated and independent from the crypto token associated with it. If you do that, you have a centralized clearing operation, not a network. The central clearing operation can charge outsize rents to the people trying to use the blockchain (See CME Clearinghouse)
Man, I am still having trouble with this. I WANT to believe, and WANT to get into it but here's the thing: I still see crypto as a form of the greater fool theory and can't seem to get past that. I understand the arguments in its favor but ALL of those arguments rely on widespread adoption by market participants. Like you, I'm a Chicago Booth alum (back when it was just the "GSB"). My penchant for understanding the underlying economic value of everything (either from cash flow, future value in anticipation of cash flow or in the case of commodities, limited quantities of something widely valued like real estate, grain or minerals) gets in the way of embracing crypto. In evaluating cryptocurrencies, none of these factors hold. Every argument for the value of crypto relies on someone else valuing it later on down the road. It goes against every fiber of my economic being.
Both of my sons have taken to investing in it in small amounts and my younger son is just starting to get into mining etherium. I'm trying. And that's part of the issue. Jr. can't mine gold. The resources needed are too capital intensive for a college kid to go out and dig up a significant find. Sure, he could become a panner. He would just need to move to Alaska and give up his life as he knows it in hopes that spending his days knee deep in freezing cold water will yield him a subsistence level lifestyle. Crypto-mining, on the other hand, just requires free electricity, compliments of his college, and a graphics card powerful enough to do the job. Done and done.
Perhaps our backgrounds lend themselves to belief vs skepticism. As a trader, you get the exchange mechanism instinctively. You made your living on it. My background, before I worked in wealth management, was in M&A and leveraged finance of middle market PE deals. So everything I did involved DCF analysis and evaluating cashflows and stability. I'm now wired that way.
Finally, the matter of the "stroke of the pen" risk on the part of the government is very real. If the last two years have taught us anything, it is that the government doesn't like to be challenged. And crypto is a BIG challenge to the best form of control they have: access to live one's life through decisions on what to buy and sell.
I was one of the last "GSB" classes! I think the appeal of Helium in the beginning was it was so easy to set up and mine. It takes very little electricity. But, it's designed to be a low-fi network. Bitcoin is different. I don't actually know what use Bitcoin has yet. It's certainly not a hedge against inflation. It has speculative appeal. But, what can it do? At least with gold (which is not a hedge either), you can make stuff out of it. Ethereum, Solana, Cardano are cryptos that are programmable so you can build things on top of them. Initially, ETH was used for smart contracts which eventually could replace OTC derivatives. A lot more efficient way to settle and distribute. No central clearing mechanism needed. No investment bank needed. No lawyers or accountants needed.
Your point about Ethereum and those others trying to supplant it is one of the things I find intriguing about it: a purpose beyond simply trying to be a store of value. I have to learn more, however.
https://www.notboring.co/p/braintrust-fighting-capitalism-with?token=eyJ1c2VyX2lkIjo4ODM2MjQsInBvc3RfaWQiOjQ3OTU5NTIyLCJfIjoiS0JTaDQiLCJpYXQiOjE2NDM2NDM0ODgsImV4cCI6MTY0MzY0NzA4OCwiaXNzIjoicHViLTEwMDI1Iiwic3ViIjoicG9zdC1yZWFjdGlvbiJ9.Z65ZkUxq3gobyseCZO_C_gLhrHFfBwPR9xHViKD_McM for those that are looking for use cases.
https://cointelegraph.com/news/nfl-star-s-massive-tax-bill-highlights-problems-with-btc-salaries Odell made a short term mistake. Remember when the model Giselle Bundchen wanted Euros instead of US Dollars?
Thanks for improving my understanding.
The practical window for crypto has passed and gone. After this many years I should be able to get into a Lyft or Uber and pay with crypto, buy groceries, plane tickets, or take my wife out for dinner and the theater and pay with my wallet neatly stored on my USB drive, and except in the most rare cases that is not possible.
Maybe the biggest fail in crypto is that it all resolves into dollars, anyway. Those who have played poker often play with chips; the green chips are $1 each, the blue chips are $5 and the reds are $20. (just an example)
Nobody aspires to win lots of chips. We play and win so that we can cash chips out into dollars. Until BTC, or Ether, or even the lowly poker chip has intrinsic value, they are just another highly speculative proxy for hard currency.
https://twitter.com/LasVegasLocally/status/1487884349005459456?s=20&t=Vot4-D5lwTrnMlhk0PcNGQ you never know how things get started