Wall Street Journal, 12.20.2022, Opinion Page, Todd Baker, Columbia University
The recent FTX crash got me thinking about the difference between the US dollar and Crypto again - a good friend and I argue about this frequently. He believes that the dollar is backed by capital, while I say that it is simply the trust in the holder that makes the currency (paper or electronic bits) worth something. So if you take my position, the US currency and Crypto are the same things and all based on the trust of the holder/buyer. In fairness, I grant the US currency has two hundred years of unbroken trustworthiness.
Yesterday’s opinion piece in the WSJ solved the question for me - Mr. Todd Baker looked at the purpose of each currency as it is traded.
Finance and financial services exist for a purpose that crypto trading lacks. As Nobel Prize-winning economist Robert Shiller once wrote, “Finance is not about making money per se . . . it exists to support other goals—those of society.”
Finance helps businesses, people and governments raise, save, transmit and deploy money for socially and economically useful ends. Banks allow savings to be pooled and turned into loans for fruit orchards, solar farms, automobiles, small businesses and houses. The securities market supports the needs of larger businesses and the government in raising capital and helps make the banking process more efficient by distributing risk broadly. Insurance and derivatives markets help manage risk.
Contrast that with the purposelessness of the crypto trading system. Crypto trading is a game that uses finance as its subject matter. It emulates finance the same way the board games Risk and Monopoly emulate war and real-estate investing. But it is a fiendishly complex and dangerous game born in the age of big data. The “finance” that crypto gambling emulates is the type that society wants less of: highly levered and opaque. It uses all the weapons of modern financial engineering and all the tricks of trading culture to boost returns.
Crypto trading is also gambling. Gamblers bring money—fiat currency—into a casino or online gambling game, wager on outcomes, and convert the winnings or losses back into money. The closed-loop crypto trading system operates in the same way.
It is good that regulators have ignored the crypto market and denied it coverage under standard finance control. Do we want Crypto in our pension/retirement funds and to be backed by the Fed? Gambling only rewards the ‘house’ and the ‘player,’ and the house rewards will build bigger casinos. Any player winnings are converted into cash for the player only. The next housing development, factory, or city facility will typically not be built using these funds. Let’s classify it correctly and keep it out of actual finance areas while refusing to backstop losses. The gambling area has plenty of regulations to help control and warn ‘players’ of the inherent risks.
Investors beware. Gamblers, have fun, and I wish you well…
A few stats on Crypto buyers - do these tell you something?
Only 16% of Americans have invested in Crypto
43% of men aged 18-29 invested.
Men are twice as likely to invest in Crypto as women.
Only 3% of adults over the age of 65 invest in Crypto.
Lee’s ‘friend’ responds: not capital (Which is money or cash, but not things on hand, liquidity)which is too narrow for this discussion. Collateralized is much more accurate IMHO. FTX for example is not collateralized and therefore investors safety is based solely upon simple trust of the Bankman-Fried Ponzi enterprise. No asset basis in other words only their reputation/promise.
The dollar is well, although perhaps not fully collateralized or guaranteed in case of default via investments in real estate, inventory, assets like autos jewelry etc Add the stability of the US economy, government and history and arguably inadequate of itself Fort Knox which contains some of Our gold inventory. Thus IMHO crypto is a foolish and unnessary risk or gamble unworthy of any trust.
Let’s call the bunco squad not the SEC
Thanks. Joe
PS next on the agenda AI tool or scheme
Appendix
Capital is the amount of money that an applicant has. Collateral is an asset that can back or act as security for the loan. Conditions are the purpose of the loan, the amount involved, and prevailing interest rates.
Return to the GOLD Standard ...
Lee’s ‘friend’ responds: not capital (Which is money or cash, but not things on hand, liquidity)which is too narrow for this discussion. Collateralized is much more accurate IMHO. FTX for example is not collateralized and therefore investors safety is based solely upon simple trust of the Bankman-Fried Ponzi enterprise. No asset basis in other words only their reputation/promise.
The dollar is well, although perhaps not fully collateralized or guaranteed in case of default via investments in real estate, inventory, assets like autos jewelry etc Add the stability of the US economy, government and history and arguably inadequate of itself Fort Knox which contains some of Our gold inventory. Thus IMHO crypto is a foolish and unnessary risk or gamble unworthy of any trust.
Let’s call the bunco squad not the SEC
Thanks. Joe
PS next on the agenda AI tool or scheme
Appendix
Capital is the amount of money that an applicant has. Collateral is an asset that can back or act as security for the loan. Conditions are the purpose of the loan, the amount involved, and prevailing interest rates.
Types of Collateral to Secure a Loan
Real Estate Collateral.
Business Equipment Collateral.
Inventory Collateral.
Invoices Collateral.
Blanket Lien Collateral.
Cash Collateral.
Investments Collateral.