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This is the latest in my ICO mania series of blog posts. Over the course of that chat, he told me that nobody in his business could foresee how the price of cryptocurrencies would ever fall, given the rapid increases in demand and the way that technology adoption is thought to work. Hearing something like this come out of the mouth of a professional investor is extremely disconcerting. Second, this is bubble thinking. My spirit animal, the noble woodchuck a type of marmotis a solitary critter, not a herd animal.
I therefore despise bubble thinking. I sat down and wrote a blog post about it called The Bear Case for Crypto. About 40, of you have read it so far. In that post, I foresaw the day when regulators would crack down on bad actors in the space, causing significant disruption. I would like to now revise it, and propose a more likely collapse scenario. The Zombie Marmot Apocalypse is still going to happen.
However, before it happens, I believe we are going to see…. Nor is it a bank. In previous discussions about market misconduct in our space, much has been made of the fact that this exchange or that one may be running a fractional-reserve. As their holdings appreciate, they introduce no additional USD into the system. But if we zoom out and look at this from a systemic perspective, as with a bank, a demand deposit is properly recorded as a liability of the bank.
With some notable exceptions i. We should ask crypto question can bitcoin claw its way back to being a payment system what do you guys think Or is it more likely they are reinvesting it into their businesses, or even into Bitcoin itself? The most obvious way, in my view, that Bitcoin mania could turn into Bitcoin panic is when a Bitcoin depositor goes to sell their BTC for dollars — and there are no dollars available to satisfy the sell order. In the current environment, there are a number of ways such a shock could arise.
This will place pressure on other platforms and their diminishing pools of liquidity as investors run for the exits. This is different from a mere fall in price, although a liquidity crunch will precipitate that. Borrowing from that thread, most people currently think Bitcoin works like this:. This only works as long as Charlie keeps showing up with new dollars. Charlie does not show up. Instead, the opposite occurs. When a shock pushes enough people towards the exit at the same time, that is when people will realize that this is the case, and there are not enough dollars in the Bitcoin economy to redeem their balances.
Delusionally, they may not be willing to part with it for pennies on the dollar per BTC, either, so bid-ask spreads will widen. As this phenomenon spreads, individual platforms will be crypto question can bitcoin claw its way back to being a payment system what do you guys think under pressure as their sources of liquidity are tapped out or flee. A loss in confidence in one platform would lead to loss of confidence in others. This one will be glorious.
Bitcoin only works as a conspiracy: The only things of which we can be certain are the immorality of promoting such a scheme and the fact that when it ends it will end badly. If not through regulatory intervention, then we could expect some weak hands to fold in the form of:. Those are not good choices.
In a falling-knife scenario which becomes more likely crypto question can bitcoin claw its way back to being a payment system what do you guys think each passing day, liquidity will likely be draining out of exchanges as well. Any such run following the usual pattern will be self-reinforcing and highly contagious; sell pressure from liquidity-starved companies will drive sell pressure among long-term holders, and vice-versa.
As a final note: However, its price may change a bit. And if those price changes are violent and in a downward direction, it is not difficult to see how institutional service provision to the Bitcoin space which is proceeding with seeming alacrity could both trigger a liquidity crisis in Bitcoinland when withdrawn, and introduce systemic risk to the mainstream financial system as well.
I therefore modify my prediction from September. The Great Marmot Bank Run will happen first. When and how, and what shock triggers it, no man can say. But happen it will. It is long overdue. The introduction of millions of ordinary retail investors to the marketlast week on Coinbase alone!
This is because Grandma has the power to band together with other Grandmas to become an unstoppable and very angry mob of Grandmas, pitchforks in hand, baying for blood. And blood she shall have. Grandma, qua depositor or investor, will call down swarms of attorneys to sue everyone in sight and claw back what losses they can. Law enforcement will finally get political backing for additional resources to investigate.
Years of chaos, legal wrangling and Congressional hearings will follow. After all that, fifteen-year technology adoption curves, rather than insane, short-term speculative bubble curves, will once again rule the day. Transaction backlog mempool would explode higher, with transaction fees going ballistic.
That would add to the panic. Over the past 48 hours, with the Bitcoin price continuing its exponential rise, transaction activity on the actual Bitcoin blockchain has been modest.
Virtually all transactions are taking place in exchange dark crypto question can bitcoin claw its way back to being a payment system what do you guys think. One major flaw in the claims of future Bitcoin value is not understanding that Exponential and Logistic functions look the same at the start.
It does not increase forever. If you believe this, you are worse than a fool as the world only has limited wealth. I conclude this post, as I conclude all my posts about ICOs, with a picture of some adorable Vancouver Island marmots.
This is nothing compared to short squeeze that might arise from large scale short future positions arise. Even though the future is cash settled, the only good hedge will be borrowed coins. Given how few there might actually be of these this might ironically push the price to 10, before a crash actually happens. Like Liked by 1 person. It happened in Greece already and in some special conditions. Crypto currency users will just exchange their bitcoin for another coin if it plummets.
The current fractional reserve system ensures that there are not enough dollars going around so why is this a problem for bitcoin? I have a question about how the exchanges handle trades, that relates to your thesis. I thought that, on your run of the mill exchange, honest, no margin, that they were simply a place to trade with other users of the exchange.
So to convert your bitcoin to dollars, at a given price x, there has to be a buyer at price x. If not, then the offer price has to lowered until it meets a real bid. Presumably a potential buyer had to at some point put real currency on the exchange. Now, maybe the exchange does do some market making, that should be kept to a minimum, and balance out, if there is an active market.
Your description makes it sound like the exchanges have make the trade directly with the user, at market price, if someone wants to convert bitcoin to dollars. Is that really the case? On an exchange, no, at least not in the beginning.
The mismatch is systemic in that it is almost certain that the notional amount of BTC in dollars is substantially higher than the actual amount of dollars presently prepared to buy BTC. Exchanges do enter into contracts with their users for e. They may also trade on their own accounts. Say a friend had deposited some USD on an exchange and is waiting for the bitpocalypse — how would your thesis affect their attempts to buy cryptocoin in the event of liquidity drying up?
Would their exchange allow them to buy the crypto-currency off chain in one of their darkpools, or would they have already stolen all the deposited money to cover other users transactions? You sell your BTC crypto question can bitcoin claw its way back to being a payment system what do you guys think someone else offering you fiat in exchange.
Coinbase and other venues are sources of dollar liquidity for that bank. In the 4 years I have traded bitcoins, not once did I use an exchange. Maybe you are too focused on how things work in the US, but I can assure you that Bitcoin works perfectly fine without exchanges in most places around the world.
Check out this site to get an idea: You can also do it at Bitcoin. Bitcoin works fine without exchanges. You seem very focused on withdrawals to USD. I remember when I believed that, when I was young… thank you for taking me back to those halcyon days. If more insti and retail investors are allocating a piece of their portfolio to crypto, should the stock market crash, would that also cause a liquidity run in the crypto space?
The unspoken rule of the crypto world is: There will never be a bank run back to the old system. Well written thoughtful article. Same thing could happen to many currencies and assets. I think your article is stating the obvious. I read Bitfinexeds articles on Tether roughly 1 week ago, after which I began to wonder if something like a bank run could happen.
I then came across this article which eloquently described my worst nightmare.