Former Fed Chairman: Crypto Is "Too Dependent on the Greater Fool Theory" [pdf] | Hacker News Reader

Former Fed Chairman: Crypto Is "Too Dependent on the Greater Fool Theory" [pdf]

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49 points1vuio0pswjnm728 comments

Should read "former Federal Reserve Chairman Alan Greenspan". I think many people will recognize Greenspan by name.

iirc he cackled a similar sentiment about the stock market in 2007, and decided to show everyone what he meant

For folks who won't recognize the name, here's a fragment of the movie "Inside Job" (on 2008 financial crisis) about Greenspan's beginnings[1]. The name comes up several times in this documentary - never in a positive light.

[1] https://youtu.be/T2IaJwkqgPk?t=919

He's a major participant in the group that has 30 trillion reasons for you to keep focusing your frustration elsewhere.

The linked document is a 2 page PDF in the form of a Q&A. The portion the title quote is from is as follows:

> Do you have any thoughts on the collapse of FTX and the crypto market in general? Do you expect contagion?

> I do not expect the fallout from FTX to spread beyond the cryptocurrency/NFT space. Based on the information that has come to light so far, the collapse of FTX was not a result of lax risk management, inadequate accounting procedures, or some feature inherent to crypto – it was purely fraud. With respect to the wider crypto universe – I view the asset class as too dependent on the “greater fool theory” to be a desirable investment. Fortunately, although FTX and firms like it have increased marketing of their products in recent years, the lack of any noticeable widespread market reaction to FTX suggests that they are still fairly concentrated in the hands of a relatively small subset of investors. Moreover, the differences we observed in the aftermaths of the popping of the tech bubble and the popping of the housing bubble showed clearly that credit-fueled asset bubbles create far more contagion when they ultimately deflate. There does not appear to be a significant amount of leverage dedicated to the cryptocurrency/NFT space at this time, so I do not expect contagion to spread very far beyond this particular asset class.

> Moreover, the differences we observed in the aftermaths of the popping of the tech bubble and the popping of the housing bubble showed clearly that credit-fueled asset bubbles create far more contagion when they ultimately deflate. There does not appear to be a significant amount of leverage dedicated to the cryptocurrency/NFT space at this time, so I do not expect contagion to spread very far beyond this particular asset class.

This is the key observation. Public, permissionless, anonymous/pseudonymous cryptocurrencies can't have native leverage because they have no native identity. Without identity there is no way to do credit ratings or other means of enforcing repayment. As a result, all smart contracts are fully- or over-collateralized, creating a massive buffer against the kind of contagion that took down the banking system in 2007/8 (and 1929, the other major credit contagion). It's inefficient by tradfi standards, but extremely robust to volatility and deflationary monetary policy.

Lots of defi protocols are looking to provide what they perceive as solutions to lack of leverage including decentralized identity, undercollateralized lending, and uncollateralized stablecoin issuance. Credit boom and bust cycles are a natural feature of unregulated markets, and realistically any defi tech that wants to compete needs to embrace these while maintaining an ability to smoothly wind down during credit crunches.

> while maintaining an ability to smoothly wind down during credit crunches.

Any idea how that would work? In a credit crunch, once the money is gone, it's gone.

Most of the ideas protocols are trying will not in fact work in opinion. I wouldn’t be surprised to see the next cycle see an explosion in defi credit with a narrative like “we solved the problems of Celsius and genesis, and defi protocols are now proven to be safe in bear since only defi collapsed in 2022”. Followed by exuberance and a crash of products like Frax or even Rai if it’s bad enough (rai is over collateralized but due to slowness in onchain liquidations it’s possible for collateral to crash faster than it can be liquidated. This happened to Dai a few years ago but now it’s mostly backed by USDC).

Frax uses a market making mechanism that is supposed to identify the maximum seigniorage they can use to pump FXS without breaking peg. The ratio fluctuates over time. This is a partially uncollateralized coin.

For the other cases, you can Google it or ask in bsc or eth telegram/discord defi chats to find them. I prefer not mentioning them as they are generally going to fail and the longer we can sit in this bear market the better for devs. Bulls suck all the talent into scams.

Thanks, I’m drawing a blank though, what’s “bsc” (telegram/discord)?

Some readers may recall that back in June of 2022 Bill Gates also claimed crypto was "100%" based on the greater fool theory

https://www.cnbc.com/2022/06/15/bill-gates-says-crypto-and-n...

https://www.wsj.com/articles/bill-gates-says-cryptocurrencie...

https://www.theverge.com/2022/6/15/23169008/bill-gates-crypt...

https://www.bloomberg.com/news/articles/2022-06-15/bill-gate...

https://thehill.com/policy/technology/3525036-bill-gates-say...

https://www.axios.com/2022/06/15/bill-gates-cryptocurrency-n...

What is the "greater fool theory"

https://bogan.dyson.cornell.edu/doc/Hartford/Bogan-9_Greater...

it always bugs me how people are quoting Bill Gates on every issue, what are his qualifications to say something about crpto? or covid? or any other thing? a celebrity is not a scientist in every field. What about quoting Shakira on those issues?

Probably because Gates has an huge personal investment arm that hires professional investors who dig into crypto and concluded that it's nothing more than ponzis/FOMO/greater fools/fraud/scams.

So does Messi, Shakira and Eminem, and I am not relying on them to give me truth or quoting rhem as a proof on anything.

Not even remotely the same. The caliber is way off.

Gate's investment company has 100 employees:

https://en.wikipedia.org/wiki/Cascade_Investment

https://www.linkedin.com/search/results/people/?currentCompa...

Also, it doesn't take a genius to come to the same conclusion as Bill Gates.

He is running one of the biggest charitable foundation in the world that among other things works against infectious diseases and he has billions of dollars that needs investment. It’s not a doctorate (discounting honorate degrees) or something like that, but I’d say it’s better qualifications than I have and presumably than Shakira has.

I agree with you that we listen too much to famous people because of their fame, but it seems fair to acknowledge that Bill Gates has other qualifications in technology, medicine, and wealth management than just his fame.

I doubt Shakira is as well read as Gates. I’m not saying she is not intelligent, and does not read a lot however their fields of expertise are different.

Yes, I will take the crypto advice from the chairman of the most threatned entity by crypto. He's argument is valid to me though but Crypto is still much better alternative than government issued currencies. Aren't all other paper currencies even worse in some way? if everyone decides to dump a currency, what happen to my savings? if a government will go mad about printing/issuing, isn't all the value diluted (all governments will do that at some point, but the first example that come to mind is Zimbabwe)

Fiat currencies are backed by that countries economy.

No one had faith in the Zimbabwean economy hence hyperinflation when they printed money.

The world has faith in the US economy hence the US can do quantitative easing and the worst that happens is ~7% inflation (also caused by the worst supply chain problems in history, a global pandemic and a major European war).

Note that Bitcoin has lost more value than the US dollar.

> the world has faith in US economy

That's a bold statement. I guess by "the world" you mean US, EU and Japan. That's not even half of "the world".

It is the leading world dominant reserve currency by far. It is at about 58%. The nearest runner up, the Euro is at about 21%. When even adversaries keep large reserves of US currency I think that is a pretty strong acknowledgement.

Yeah, a long time ago it was trusted and given that unfair printing advantage, it doesn't mean everyone is happy with that today, nor does it mean it's a measurement of economic strength.

I suspect most of the world is unhappy with it. Doesn't mean it isn't the reality though.

Wut. I don't know of a single entity on earth, government or private, legal or illegal, that wouldn't accept US dollars in some form or other. I wouldn't say the same about Bitcoin, much less other forms of crypto.

> on earth

Different countries have their own currencies. In most of them, it's illegal to use another's country currency. So this statement doesn't make a lot of sense to me. Regarding most currencies being attached to the USD, it's an old tradition that a lot of entities are trying to get rid of. Some got democracy just for trying to get out of it (Libya comes to mind).

The majority of foreign trade is settled in US dollars.

> Some got democracy just for trying to get out of it (Libya comes to mind)

This is such a low-effort analysis of the geopolitics of the Arab Spring that it doesn't even make sense to argue.

> Note that Bitcoin has lost more value than the US dollar.

How does that make any sense? It's up more than 26,000% against the US for ten years now. What time frame are you working with?

> What time frame are you working with?

Since inflation has been an issue (since the OP raised hyperinflation as a risk).

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