Ask HN: What sort of systemic risk to crypto is Paul Graham referring to? There does not seem to be much exposition for the recent tweets from @paulg. Based on the tweets, however, we can assemble the following facts: 1) He's known his friend since at least 2012. 2) He (@paulg) didn't write that. 3) He is trustworthy. 4) He is convinced the "cryptocurrency economy" will shortly experience a "systemic risk." How should we interpret these tweets from @paulg? |
> A person I have known for more than ten years, who I consider trustworthy, is convinced the cryptocurrency economy will shortly experience a systemic risk. I don’t know anything concrete, but if I were exposed, I would be concerned.
https://twitter.com/paulg/status/1594446009010212865
> I didn't write that. He did. Since I don't know any details, I didn't feel I should edit it. And because I don't know any details, it's no use asking me what he means. If you've read the preceding tweet, you know as much as I do.
I mean,the out-of-context mainstream media headline writes itself:
“Early Coinbase investor says Crypto ecosystem facing systemic risk.”
As someone who would want to do right by the founders that he invested in, I can’t imagine he didn’t run this tweet by Brian Armstrong, the CEO of Coinbase.
As liquidity tightens, it's just simply that there's not enough in the cryptoverse and all the centralized entities like Tether etc are gonna implode.
[1] - https://news.ycombinator.com/item?id=31012462
[2] - https://www.justice.gov/usao-sdny/pr/three-charged-first-eve...
"A friend of mine who is basically never wrong about financial questions converted 80% of his Bitcoin into Ethereum."
- Paul Graham tweet from Aug 13, 2021
Of course if it was seriously proposed, then the holder of said wallets might rush to cash some of them in.
After the repeated huge insolvencies of the last few months, everyone in crypto knows there's massive systemic risk, and new risk from ill thought out new regulation. Everyone has their own list of which companies they guess will be next.
It's very hard to take the tweet seriously. It's like walking around in the California hills predicting a forest fire, during a super dry summer, while orange glows from nearby hills light up the smoke that is choking the air, and ash rains down.
So you're saying it's not something that's going to happen in the future but instead happening right now? Well that's reassuring.
I think the humor comes from the tweet being phrased as secret insider knowledge, when it's something that has already been happening, and obvious to anyone watching.
(I tend to enjoy both PG's writing and tweets, but this one is a bit of an outlier.)
1. To pay rent
2. To buy food
1. Facilitating illicit transactions (crime)
2. Exfiltrating money out of China (crime)
3. Ponzi scheme substrate (investment tool, but also kind of crime)
4. Alternative to corrupted local currency (not quite crime, but crime-y)
It's important to ask how money enters and exits into the crypto-sphere.
I buy crypto -> I exchange crypto for goods -> the person that sold the goods sells their crypto to someone else in exchange for USD.
I buy crypto -> I hope to make money -> I get scared and sell it when it starts to dive to realize my gains in USD.
A Chinese person wants to exfiltrate money -> They buy lots of miners -> they mine coins which are turned into USD.
So crypto itself doesn't have much intrinsic value because there is no anchor to its value. The US government anchors USD to specific values, and at least as long as we are not run by morons, that optimizes for stability.
Crypto is seen much more as an investment (will it go up or down) than as a currency. This is most directly reflected by how crypto is talked about. People talk about the price going up and down, not about crypto inflation or crypto deflation. Because its measure of value is volatile it is not a very good currency.
Systemically if people stop buying crypto, the price will go down. If people stop exchanging goods for crypto it will be harder to sell the currency. If people can't exchange their crypto for something they can pay rent with, then they won't want to accept crypto.
So what's the systemic risk? Every person who is around crypto wants it to be used because then their potential net worth will increase. This creates a rejection of negative news and hype around positive news. People will more willingly accept a reality that 10x's their worth.
Unfortunately, as soon as this reality is pierced and people start to sell, it will create absolute free fall (error correction) to it's "real" value which is roughly the sum of illicit transactions and potentially transactions for those countries who's currencies are failing (although why you would choose crypto and not USD, outside of a high risk high reward bet, I'm not sure).
So now let's say you are a crypto bank. There are two options.
1. A person initiates a trade of `x BTC` for `y USD`. The bank takes ownership of the BTC and directly exchanges for USD based on current value immediately, and then sells the BTC when it wants. (good for the bank when price is going up).
2. A person initiates a sell of `x BTC for USD`. The bank takes ownership of the BTC and sells it on the customers behalf for the best deal that the bank can find. (protects the bank during free-fall/runs on the bank).
So we are in a situation where as long as crypto sentiment is positive everyone benefits, banks, holders, miners, etc, but if crypto sentiment turns negative, it can free fall, and in the processs, destroy the "banking" institutions that are the foundation of non directly criminal crypto uses.
In summary, crypto seems very much like a Ponzi scheme to me.
If I were to guess, I would estimate the "real" value of crypto to be `sum(total_criminal_activity) / num_BTC`. If drugs can be bought through BTC, but not USD, then that creates demand for BTC proportional to drug trade. Where else would direct demand for BTC come from assuming nobody saw it as an investment tool?
Now some of that is likely exaggerated and might seem bad faith, but the above is more or less my good faith understanding. I would be happy to be corrected by someone who knows more or has a good argument on why I should be more bullish on crypto.
"systemic" and crypto is not something one mix together, another evidence of it being a FED project
That's my theory
Oh and i'm pretty sure he meant YC is done with crypto projects, they were crypto advocators, recently made a statement that they wanted to keep push for crypto projects, but with the current events that might have altered their plan
The people who invest in crypto are rent-seeking parasites hoping to extract value while incidentally providing liquidity to the Chinese miners blowing non trivial amounts of co2 in the air. The people who transact in crypto are actually building it and working towards the crypto dream of alternative currency.
It's important to understand that when a company sells a stock, they get money that they can then use to grow themselves. So there is generally some of the principal "retained" in a unit of stock, particularly because the unit of stock also creates a legal relationship with the company.
By definition all crypto starts from a miner, so when you buy a unit of crypto, you are transferring money directly to the miner. So the unit of crypto retains none of the principal investment.
That is an absolute terrifying property.
I am not quite sure what I think of ETH yet, since it's a little different, but BTC is straight bad for the environment.
There are also arguments to be made that alternative currencies not controlled by a centralized government are an important endeavor. If governments have a monopoly on management of currency, then it can be expected that they abuse monopoly power. The distance between policy and reality can be measured in suffering. The idea of a non centralized currency is that there is just the market and the reality of the market. Systemically enforced reality is an appealing property.
The government inflates a currency to (regressively) tax idle money while simultaneously de-valuing debt. That's not necessarily a good thing. It allows for unsustainable largess and directly creates boom and bust cycles. Here's some good fun from the last recession: https://www.youtube.com/watch?v=d0nERTFo-Sk Here's a pretty unsettling video about inflation and geopolitics: https://www.youtube.com/watch?v=xguam0TKMw8
Just as a disclaimer, I am a complete layman when it comes to finance and economics.