Can Bitcoin Crash Fiat? – Trustnodes

FTX is allegedly to ‘bailout’ Blockfi because 3AC allegedly defaulted following speculations of Celsius bankruptcy after Luna’s collapse raised attempts on other non-stables like stETH.

This all sounds like a Lehman Brothers domino cascade, the systemic risk the likes of Janet Yellen have been talking about. Except bitcoin isn’t burned through defaults, like fiat. There is no systemic risk.

In the fiat system, everything is connected to everything, with a little hiccup somewhere having the potential to turn into a huge avalanche everywhere.

In January 2021, for example, retail brokers saw the buy button of GME being cancelled because clearing houses apparently demanded such action.

Their stated concern was that if Robinhood could not cover its liabilities, then clearing houses might default, and we get a systemic monetary crash bigger than 2008.

Because fiat is debt, and if this debt is not repaid, then the lender has to pay it. During mass defaults thus, money is not just burned, money is burned to the power of two at least, and perhaps to the power of four.

The 2008 Cascade

The crash of the house of cards in 2008 was in some ways a simple affair. Banks created money out of nothing by giving mortgages without sufficient scrutiny. Once interest rates were risen to 6% by then Fed’s chair Alan Greenspan, many could no longer afford to pay these mortgages.

The bank therefore had to pay them. Pay them to who? Prior to central banks clarifying, and there has been no audit of the Fed so we have to take them on trust, the answer would have been to depositors.

Central banks however have stated that when a commercial bank makes a loan, they do not give out the deposits or savings, instead money is created at the point of making the loan. Printed from nothing.

When this loan is repaid, then the money is unprinted, or burned. If the loan is not repaid, then what?

Another way of asking this is, what happens if the government does not pay the central banks the bond debts it bought in 2020-21, about $45 billion a month?

Nothing would be our answer. The central banks’ answer would be inflation, maybe galloping or even hyper-inflation.

The only leg they can stand on is that the interest paid on debt, which becomes actual money and is not burned, becomes actual money slowly rather than in one big instant $30 trillion.

Yet, this $30 trillion is not being printed. It was printed, and it even has been spent. How can any inflation arise from what’s already in circulation? The only inflation that can arise now is the interest being paid on that debt that has already been spent and is circulating.

Let’s simplify this. Let us suppose a one off loan of $1 trillion is given straight away. $1 trillion has just been created, printed. Now over the next 30 years, $1 trillion will be paid in interest and $1 trillion on the capital advanced, so $2 trillion. $1 trillion of the capital advance will be burned, $1 trillion in interest becomes actual money, so we’re back to where we started whereby $1 trillion has been printed.

Therefore nothing will happen if the government does not pay back the central bank the bonds it bought at 0% interest, except the central bank is now putting those bonds into the private market and so soon enough they won’t be owed to the central bank, but to the public.

If we go back to 2008, we have these mass defaults, the banks have to pay back all these loans they printed from nothing, and of course they can’t pay them back. So they’re technically bankrupt, but are they really?

Because what would have happened if they just cancelled all these mortgages? Nothing, as they did pretty much just cancel them in a bailout where the banks were concerned, and instead of inflation we got deflation.

Why? Well, because actual money is the interest payment, not the loan capital. When banks were given trillions, that was used to cancel the loans, burning money in effect, while no interest was coming so no actual money replaced those loans.

The Fed printing of the past 15 years, therefore, has been a money burning exercise instead of money creation, which is why we got deflation and not inflation until now.

Now we’re getting inflation because $10 trillion was printed through borrowing from Fed by the US government in 2020 and some of 2021.

That wasn’t to cancel any debt, but plain new debt, pure money printing. That has to be paid back however, but in totality, no new money printing occurs during the payback as the capital and the interest, lets say 50% of each, cancel each other in an equal amount of money burning through capital repayment, and money creation in interest payments. Except there’s zero chance the government will pay back any capital, so in practice it is just endless money printing through interest payments only, plus new debt to cover the deficit.

The UnSystematicness of Bitcoin

Unlike the dollar, bitcoin is not created through being the liability of someone else. The bitcoin block reward is not debt. The bitcoin network does not have to juggle between money burning and creation, between capital and interest. You either have a bitcoin or you don’t.

There is therefore no house of cards in BTC, no dominos, no systematicness. The MT Gox bankruptcy of 2014 proved it. They went under, and of course it was painful for those affected, but the bitcoin system as a whole was unaffected. If you were an MT Gox customer, you had a problem. If you weren’t, there was no problem.

In fiat, it’s everyone’s problem because ultimately the illusion or deception that the debt has to be paid back, meets the reality that in fact it doesn’t have to be paid back because the loan can actually just be cancelled, just as it was just printed.

Naturally of course you can’t ‘just’ do that whenever you please because inflation can get out of hand, but local matters in fiat are everyone’s matter because it is a public policy matter to ‘just’ cancel loans, to bailout.

In bitcoin, there is no cancelling. If 3AC made bad bets, the bitcoin are not going to be burned, we won’t have to print new coins to bail them out, 3AC instead loses money and as far as the network is concerned, bitcoin just changed hands.

If BlockFi was owed money from 3AC, then again that’s their problem, and in this case FTX’s problem because they have a business relationship with BlockFi.

Where the network is concerned, all that happened is that some made bitcoin and some lost bitcoin, which is what happens all the time and so nothing quite happened.

BlockFi of course is a custodian and they have customers, so there’s the intermediary risk or problem whereby BlockFi actually lost nothing, their customers lost. Which is why we have defi, decentralized finance, whereby if you’re going to lose money, you might as well do it yourself.

People have choices though and their business their choices, but this intermediary problem and risk where your money is a liability, as is bitcoin deposited with a custodian, is addressed by crypto.

Fully? We wouldn’t say quite yet, with defi being very new and quite simple compared to the easily imaginable sophistication we might see say in two decades.

In addition, fiat requires a centralized custodian and so it is fiat bringing its problems to digital money, rather than this being a crypto problem.

But, the intermediary problem has been addressed as people do have the choice to not use an intermediary, at least once they get into the crypto system, and so again there is nothing quite systematic even about all these intermediaries.

They go down, their problem, the network cares not. In absolute terms, because the price might care. Which is why there’s still a lot of work ahead to make non-custodian solutions as appealing or more appealing than custodian providers.

Where something like Celsius is concerned, we’re arguably not far off from that point because you can just defi yourself with MetaMask and all is fairly convenient.

Except the network fees, but you can use smart contract strategies to pool funds so that those network fees become minuscule once the funds are deposited.

It is due to that almost par in convenience and room to potentially make it more convenient than custodian solutions that may explain why Celsius is nonetheless fairly small compared to the defi space. Their problem also seems to be mainly locked liquidity in staking, although they were taking bets with customers’ money as well which is a choice of course: you take bets yourself or give it to someone else to take them for you.

Bancor, which is defi, has paused what it calls an Impermanent Loss Protection. That protection as it happens can really only be provided by keeping an eye on the pairs of say eth/usdt so that you decide at what level the eth is turned into usdt, rather than the algo doing it itself.

They added a token however to get around that, but as it happens the token is more a one turtle down thing, with nothing systemic here either.

What we have instead is some people and some entities lost money, as happens in any price fall, and we have the centralized trust-based custodian system showing cracks in part because their customers would have probably lost some of that money themselves anyway.

And so we have nothing, but of course FTX loaning Blockfi money is a bailout and bitcoin has failed since its whole point was against bailouts.

Sure, whatever keeps banks feeling like they’re not Blockbuster is fine with us. And so the final point of this article.

The Systemic Bitcoin

Although there’s nothing systemic in bitcoin itself because it does not have supply creation or burning through liabilities and debt, the price movements of bitcoin – like that of any asset – can have systemic effects on fiat.

If a lot is borrowed from banks to buy bitcoin and its price crashes so we get mass defaults, then the central bank will have to print to cancel money.

Which is why banks shouldn’t loan to people that can not afford it, with it being completely irrelevant that it is bitcoin the subject matter, as of course it was mortgages, and it can be stocks, or gas derivatives speculation.

There is therefore nothing quite systemic here either in as far as the nature of bitcoin is concerned. Instead it’s just another thing people can buy, including with loans, and it’s for banks to make sure people can pay back those loans, or indeed seize all their assets and print money anyway to cancel loses with it still quite a big mystery as to why all them houses were re-possessed in 2008, or indeed why gov has to pay any interest in 2022, when they can just cancel.

The only way bitcoin is systemic is if somehow everyone instantly started using bitcoin, and no one uses fiat anymore.

That’s not going to happen anytime soon, but even then, systemic to who? To Blockbuster?

Because the government will keep taxing in bitcoin or in corn, companies and citizens will keep transacting, commerce will go on, and so nothing would be systemic about that one either.

Which leads to the conclusion that only fiat has systemic bugs, and it does so due to its very own messy nature of how its block production comes to be: based on trust, and manipulatable anyway.

And only fiat can have 2008 style bailouts because only that can you print as you please and still keep deflating.

Bitcoin on the other hand is an asset that you either have or you don’t. And so there can’t be a mass burning of it that causes a depression, and even if an entity goes under, someone still has that bitcoin. So, there’s no change where the network or the system itself is concerned.

The only change instead is the non-change. Intermediaries have problems, which is why we bitcoin, but some bitcoiners like intermediaries so they’re having problems. We don’t care.

That’s conceptually speaking. The intermediaries in question are not having serious problems as they just lost some money when everyone else is losing money. If it was something more serious like MT Gox, it would of course be a problem, but not a systemic problem and the solution is just custody your coins.

That can have its own problems too, but that’s the frontier. And those are old world problems. Where Celsius is concerned for example, they’re holding assets on trust for the end owners, the beneficiaries, and there’s a whole branch of law, the Chancellery, that deals with that.

Where 3AC is concerned, they’re a hedge fund that didn’t hedge well and lost money. Who cares, plenty lost money. There’s no up without down, so. Plus, bitcoin doesn’t address the matter of whether you can lose money. It addresses the systemic matter of whether your money is actually your money, the one you didn’t give to a custodian, the one that is in your wallet.

In fiat it isn’t because the money in your wallet can still be devalued through manipulating supply.

In bitcoin, nothing whatever has changed at all, with the network as resilient and as robust as ever. More so in fact because we’re again seeing just how fragile the fiat and intermediaries system can be, while defi is holding out fine without any problems.

Which goes to show we are very right to try and address the problems of fiat, the problems of trust, the problems of intermediaries and the problems of centralization as proper crypto and proper decentralized finance is clearly so utterly resilient.