https://willyreport.wordpress.com/2014/05/25/the-willy-repor...
Pre-publication version of the article is available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2977479
[EDIT]
>Further proof that the absurd run-up in November when bitcoin reached $1,200 was illegitimate.
That's 4 years ago.
Then of course there is the Tether debate. https://www.bloomberg.com/news/articles/2017-12-05/mystery-s...
Both probably related.
/s
Even in the absence of regulation, centralised clearing and interbank loan markets and a central bank as lender of last resort, fractional reserve depends on bank notes circulating and retaining value because enough people actually need them to meet debt repayment obligations, not on sufficient numbers of people believing that it's fully backed by the financial asset they actually want in their portfolio.
(Also, the history of bank runs suggests the legal requirement might have been a rather good idea)
The only way out of this is for customers to bargain collectively for the proper reserve ratio.
A simple example:
Bank has 90 deposits and 10 equity. That is used to finance 80 mortgages and 20 deposits in central banks.
Now, if the deposit customers have full understanding what kind of mortgages the bank has issued, they can estimate how likely it is that more than 10 of the mortgages fail, bank goes bankrupt and the deposit holder does not get paid full.
You see quickly that there is many ways how a bank kan reduce the risk in its credit portfolio. If the bank decides to lend only 10 and store 90 in central bank deposits, the risk of the bank losing more than 10 is quite small. but of course, you get more money from mortgages than from central bank, so you want to lend as much as you can to mortgages to maximize revenue. But then you need to pay also more to the (rational) deposit holders because of increased risk. You see also very quickly that even if the deposit holders had full understanding of the balance sheet, the calculations would be so difficult that wihtout regulation, most would inves their savings to banks that are riskier than what they think -> and lose their money.
I was sort of trying to get to a kind of the same point - tragedy of the point must yield regulation. Well, maybe it's not the same point. But I was trying!
There is literally no comparison. If Tether runs out of US dollars, they have no options, and people holding Tether have no recourse...
If I’m supreme ruler of the world and I replace all currency with Hinkley Bucks, 100 of them in total, and I put them in the bank, they loan 90 to a guy who builds a house. The builder and all their suppliers and employees put that 90 in the bank, and the bank loans 81 to a guy starting a grocery store chain. Then those guys and the farmers bank that money and the bank loans out 72 bucks. On and on until the balance in everyone’s savings accounts adds up to 1000 bucks. And yet somehow the bank has all one hundred bucks in its vault. Because the rest is loans.
If you increase the reserve to 11% then 100 bucks “disappear” from this economy. Going from 10 to 11% is a 10% increase in the reserve, and it [tanks] GDP.
If you go the other way you dangerously increase the money supply very quickly. I can’t even conceive of how much more volatile 1/1800 is compared to 1/10.
If you have no reserve, then the only limits are how many people want 100 bucks (so upper bound $700B) and how fast can you file the paperwork to make it happen. What’s the friction in the system.
My fear is that their 1/1800 is that friction, and not a safety feature at all.
The Wikipedia article on reserve requirements has a handy table by country, from which you can see that the required ratio is actually less than 10 in most of the developed world.
In fact, several countries have no reserve requirements at all! Following your logic, those countries should be even more volatile than whatever is going on in crypto currency land. I think we can safely conclude your logic is flawed.
Mind you, I still think the whole tether business is extremely fishy. I'm just annoyed by the spread of monetary just-so stories that pretend to apply to the real world. Reserve requirements are a red herring in modern monetary systems, because central banks will always guarantee liquidity by acting as a lender of last resort.
And of course the fact that I have $65 in my wallet right now instead of in the bank takes $650 out of the cycle. If you're in a country where people don't trust the banks that much, or people have almost no money, a big fraction of all the money in play may be in cash, in someone's pocket, a safe, a cash register, an ATM, a briefcase, or hiding under their mattress.
Banks usually don't lend money out to just anybody, so the worst case scenario never actually happens. Or only happens once every 70 years. If there aren't too many banks in your country then you oversee more of the money supply and the house of cards effect should be more obvious than here.
I think you're mostly right, except for a couple of problems that I know of.
One, when the system goes sideways those liabilities tend not to be paid off. Bankruptcies and such. And we assume that banks are managing these risks but that doesn't always turn out to be the case - which is how the reserve rate got instituted in the first place. The government says, we don't care how much you think you've got it sorted out, we insist that you be at least this tiny bit pessimistic. My original post was sort of pointing out that if you hear "Oh we have an 8% reserve so that means only 92% of assets are being used", the money moves around so many times that the effective rate is much lower and the risk is shared. But it still does put an upper bound on how much they can be leveraged. How much money is moving around (modulo fraud and 'monetary easing'). It's not the only one, and it might not even be the most important 'resistance' built into the financial policies, but it is part of it.
The second is that we for some reason measure the health of our economy by how much money is changing hands. We don't discount liabilities changing hands at all in that, which is a bit worrying, because in the early 2000's when they weren't lending money to anybody, everything tightened up, and when they're throwing money at anybody it looks like growth but feels like danger.
The interesting implication of this is that the central bank doesn’t really have direct control of the size of the money supply (as is implied by the ‘money multiplier’ myth). That is determined endogenously by the amount of lending the banks do (plus other sector’s - Government spending and current account surplus/deficit - contributions).
This Bank of England (UK central bank) paper explains how the banks originate money - https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
I'd argue that the endogenous money model most definitely isn't applicable to any cryptocurrency currently out there because maximum amounts are fixed, and thus (eventually) would be come unresponsive to market needs (and more technically, their derivative, the ‘speed’ with which money is introduced or removed, does not depend on the needs of the underlying economy and instead on technical aspects of the size of the mining network & cetera).
Sorry I didn't answer earlier I didn't see your comment.
If you were paying attention in the week that followed this post, the spread between GDAX and the other major US exchanges narrowed from $1000+ per coin to just about $11 right now, and trade volumes on GDAX plummeted. Maybe theres's some other reason, though there's some crazy correlation there at least. I'm surprised more people aren't talking about that.
That's the same time period around which Coinbase abruptly released Bcash. That time period was a barrage of negative kerfuffles for them.
Historically Coinbase/GDAX has enjoyed "inflated" BTC/USD prices because of their trustworthiness. Contrast with Bitfinex which does not serve US customers, has been hacked in the past, and is (last I heard) in debt from said hack. Or contrast with any of the other exchanges which are either questionable or located outside the U.S. Gemini is the only other state-side trustworthy exchange besides them.
(I say inflated, but it's probably more appropriate to say that the price is a discount on all other exchanges; a discount which accounts for the counterparty risk and difficulty moving USD in/out of them.)
The late December fiascos that Coinbase suffered has likely shaken that sense of trust, at least in the short-term, resulting in both reduced trading volume and reduced prices relative to other exchanges.
So the question is, which theory is more likely? That a single trading bot has complete control over Bitcoin's price and its discovery has resulted in the dismantlement of the program? Or that traders are reacting to the news of "insider trading" by Coinbase employee's? Or maybe it's as simple as being the end of December. The winter holidays slow down markets.
In my opinion, any honest examination of the tradeoffs between block size, orphan block rate, cost to run a non-mining node (which do not contribute to network security except indirectly via serving SPV wallets), and mining fees, will show that a 1-1.7MB block size limit is just too low for current tx volumes.
The current BTC network is unusable due to the massive fees. Even worse, those who actually used the currency (sorry, I mean store of value?) get penalized for having so many UTXOs. UTXOs directly increase the size in bytes of the transaction, increasing the fees you pay.
I've paid probably an average of $30 fees over the last 2 months, with the highest fee being $100 on a $4000 transaction (fee is related to size in bytes, not dollar value transmitted, I'm giving those numbers just to show how ridiculous it is)
EDIT: Also worth mentioning that the Coinbase CEO does not like blockstream because they censored Brian Armstrong (the CEO) for supporting BIP 101. Bitcoin Core has used a lot of heavy handed and very sketchy tactics to wrest control of the ecosystem in Satoshi's absence. They view themselves as the sole guardians of "consensus".
That being said, the least sustainable solution is to keep blocks at 1 MB for btc. The core group have ousted and alienated everyone who made bitcoin work originally. The fees have priced out everyone who created the ecosystem originally. It is crystal clear to anyone even slightly paying attention that they have done nothing but lie and censor.
If you are getting all your information from /r/bitcoin you should know that it is censored into oblivion and has been nothing but propaganda for years now. Bigger blocks obviously work and the 'lighting network' not only has raises enormous questions about how it can work, it has been promised as just around the corner for multiple years now.
[0] This actually happened a couple of times earlier, but those were fixable with straightforward software optimizations.
The bottleneck is propagation time. Also "The propogation time did not depend strongly on the network bandwidth for the given nodes"
Keep in mind that it is not sufficient for each node to have the bare minimum amount of bandwidth to download 1 block every ten minutes. When a node mines a block, we need that block to propagate across the entire network (~11,000 nodes [0]). Further, we want this propagation time to be relatively trivial; otherwise the number of orphan blocks would increase giving an advantage to large mining clusters and reducing the overall security of the network.
Bitcoin Cash scale what it can scale, that is, blocksize. That's it, it is a pragmatic approach absolutely obvious for anyone with more than 2 year of experience in programming.
A side-effect of SegWit is a partial increase to up to 4; the average block size is already above the previous limit of 1.
The next phase begins when 'regular' people are engaging in at least occasional direct exchanges of currency using private wallets to purchase goods/services. That would highlight the technical issues with Bitcoin, but even then I suspect Bitcoin will remain the top dog as a store of value and we'll collectively choose a runner up for rapid exchange/verification. It might not even be an independent coin itself, but a strap-on tech that helps protect against double spend, even if with a sub-100% accuracy in exchange for speed. The idea there being that it would primarily be used to mostly validate small-value transactions, with an inherently reduced double spend incentive, whereas big value transactions could go through the main coin.
If you're not Satoshi, don't try to enforce an imaginary trademark. It looks petty and detracts from serious arguments.
So to me it seems highly unlikely that there isn't some flavor of manipulation going on. There are random alt coins with multi-billion dollar market caps. There are fortunes being minted, people are surely manipulating something.
I think the interesting question though is will the world long term become the new manipulated view or will it eventually all just fall part.
Personal guess: none needed. The massive value drop right before Christmas was IMHO a combination of Christmas shopping (people cashed out their new riches to surprise their loved ones) and the end of FY2017 (tax gaming).
[disclosure: owning ~500€ in BTC, did not sell/buy during that period]