Hacker News Reader

Comment by everfree | Hacker News Reader

> Traditional finance can, in time, adopt tools and systems from the crypto space (for example, distributed ledgers, "blockchains") if they are technically robust, without the associated speculative mania.

New technologies and speculative mania naturally come hand in hand, no? Crypto seems to be following the same adoption curve that all flashy new technologies have followed.

https://i.imgur.com/uhYF1OW.png

There's the trigger, the peak of inflated expectations, the trough of disillusionment, the slope of enlightenment, then the plateau of productivity.

View on HN

The problem with crypto is that instead of speculating on the premise of the actual inovative technology, the speculation is centered around the close money substitute that the technology enabled. Investors bet on crypto-assets themselves, freshly printed private coins, as if they are going to have substantial market dominance in the future to the detriment of state-issued fiat money. That is completely unsound.

It's as if investors in the tech stocks would bet that a single company with an innovative trading solution would come to replace a substantial part / all of the stock market.

> It's as if investors in the tech stocks would bet that a single company with an innovative trading solution would come to replace a substantial part / all of the stock market.

But there was a single company with an innovative trading solution, and it did come to replace effectively all existing stock market settlement, at least in the US. It's the Depository Trust & Clearing Corporation, and it was founded in the 70s.

It replaced the trading mechanism of existing stocks with its own. It didn't replace the traded stocks with it's own stock or stocks it controlled, which is what crypto is trying. Perhaps the example was not clear.

> It didn't replace the traded stocks with it's own stock

I guess I still don't fully understand what you're implying, but I am interested.

If we go back to your original comment:

> The problem with crypto is that instead of speculating on the premise of the actual inovative technology, the speculation is centered around the close money substitute that the technology enabled.

I would argue that an investment in e.g. Ether is speculation on the promise of (an implementation of) the technology, rather than a "money substitute". The chain is designed such that as it charges usage fees, that value accrues to holders of the native token, ETH. It behaves not unlike a (hopefully) profitable autonomous company of some sort.

> charges usage fees, that value accrues to holders of the native token, ETH

The trouble with that is that if the fees are negligible compared to the economic activity that is mediated (as crypto bulls claim), then you need to lock a massive amount of capital in the collective float of the currency.

For example, the M2 money stock velocity of the US Dollar is historically in the 1-3 range, so that each dollar either in electronic or hard currency form changes hands a few times in a year.

So for Ether to generate even something like a meager 3% yield to beat inflation you need to charge on the order of 1%-3% for each transaction, which is orders of magnitude over what is expected or competitive. It follows then that the vast majority of the holders of Ethereum, and the backers of the scheme themselves especially, do not expect to earn from the fees, rather they speculate on the token itself, they hold it because it will appreciate in the future. They are betting ether will replace, say, dollars in mediating transactions and hope to gain value by depreciating the dollar.

To be very precise, I'm not saying that Ether can't move much faster and accrue larger fees (as it in fact did recently), but that the preference of the vast majority of non-speculators is to hold on to currency and near money substitutes for periods much larger than it would allow holders of ether to earn trading fees commensurate to the risk of holding ether. So the flurry of recent activity (and the willingness to pay large fees) must be of a speculative nature, unsustainable on the long run.

> So for Ether to generate even something like a meager 3% yield to beat inflation

Inflation eats away at a rate of 3%, so to beat inflation Ether needs to beat a -3% real yield, not a 3% real yield. A 3% real yield would mean that Ether appreciates at 6% compared to an asset that inflates at 3%.

> you need to charge on the order of 1%-3% for each transaction, which is orders of magnitude over what is expected or competitive.

That figure depends entirely on the total number of transactions and the fee paid by each transaction. It doesn't depend on the percentage of money transacted that is charged as a fee for each transaction. For many transactions, "percentage charged" is actually meaningless because the transactions don't even involve Ether at all aside from the payment of the fee. Ethereum is a virtual machine that charges for compute time.

> It follows then that the vast majority of the holders of Ethereum, and the backers of the scheme themselves especially, do not expect to earn from the fees, rather they speculate on the token itself, they hold it because it will appreciate in the future.

The vast majority of stock buyers do not expect to earn from the eventual dividends, rather they speculate on the stock itself, they hold it because it will appreciate in the future. That's just a feature of speculative financial markets - despite that, stocks plod along all the same.

> the preference of the vast majority of non-speculators is to hold on to currency and near money substitutes for periods much larger than it would allow holders of ether to earn trading fees commensurate to the risk of holding ether

Among other things Ethereum is a money transmitting service, not unlike PayPal. If we look at the money stock velocity of dollars on PayPal, I'm sure we would see that it is orders of magnitude higher than the general supply of all dollars out there.

> if the fees are negligible compared to the economic activity that is mediated

Hopefully blockchain scaling techniques will mature, and blockchains will be able to benefit from the economy of scale, charging fractions of a penny each for billions of transactions. That's the path this tech will have to walk if it wants to provide more value.

To beat inflation you need a real yield of zero - that's what real means, inflation adjusted; but I didn't type "real" so I don't understand this nitpick.

> transactions don't even involve Ether at all aside from the payment of the fee. Ethereum is a virtual machine that charges for compute time.

Yes, a stupendously inefficient computation on a distributed machine that's only selling feature is that it does not have a central failure point, either technical or legal. The only application that has been found to date for this computation model is settling financial transactions outside traditional regulatory regimes, so all the discussion is predicated on the profitability of this business. You proposed that trading fees could make the model profitable, I countered that it clearly does not.

Perhaps in the future it could be used to cure cancer or put people in orbit, web5 and all that vapor, but to date it's a payment/settlement network.

> The vast majority of stock buyers do not expect to earn from the eventual dividends, rather they speculate on the stock itself, they hold it because it will appreciate in the future.

That's exactly what I claim, crypto is similar to a stock with near zero dividends long term, pure speculation, close to zero fundamental value (or at least, extremely overvalued in regards to its actual technical merits). "But other people bought Enron stock and many people got rich trading it" does not really contradict my point of view, sure, suckers and their money can be parted in many ways.

> money stock velocity of dollars on PayPal, I'm sure we would see that it is orders of magnitude higher than the general supply of all dollars out there.

I'm willing to bet the exact opposite is true: the real world (non-crypto related, NFTs, ICOs etc.) trade enabled by Ethereum and subchains is a very small fraction of the trillion dollar or so that would be implied by its stock valuation multiplied by typical monetary velocities. Alas, no trustworthy data is likely to exist, so each must use their gut feelings.

Reply on news.ycombinator.com