Why isn’t Bitcoin still vulnerable to fractional reserve issues?
I get that no new Bitcoin can exist outside of the 21 million. I know a lot of us advocate for getting crypto off exchanges for re-hypothecation reasons. But how does Bitcoin actually solve this?
I’m talking post a hypothetical mass adaption phase. If it does play out this way then great. People who got on board before have generational wealth. But we look at this thing and extrapolate based on current exploitations of Keynesian monetary theory and current central banking machinations.
Let me try and explain my thoughts on this:
Year is 2xxx. Hyperbitcoinization is over and done with. It is the world reserve currency. Barring for authoritarian nation states who have outlawed its use, the world transacts in BTC. Modern Exchanges have become defunct as no one needs to purchase via fiat conversion.
Everyone has and earns varying amounts of it. By this point, many have heard stories or experienced first-hand the risks of self-custody. Some are responsible enough for this; many are not. People want to act in their perceived self interest, so they store their Bitcoin with custodians who are protected via the modern equivalent of FDIC insurance,etc. Banks have replaced their fiat with BTC and operate under this new paradigm.
Humans born prior to the adoption have accumulated. Humans born after have not. They must earn and accumulate their own stack. But they also must purchase the other assets they need to live (cars, houses, etc.) that are perpetually more expensive than their modest wage can afford to buy outright. They need to borrow BTC now to afford the things they need now.
So they borrow from one of these aforementioned institutions. The institution then covers the funds for the purchase. Great. But now the consumer is paying a fixed loan that is increasingly expensive in relative BTC until maturity. During this timeframe their paychecks decrease in nominal BTC in response to BTC deflation. Okay, maybe negative interest rates or reverse balloon style payments solve this. But…
These institutions have limited supply of hard BTC to do this. They need to lend now in order to receive future BTC to satisfy demand for credit. Eventually they run out and begin causing credit/liquidity issues in the broader market since there is no other trusted reserve asset. So these institutions get “creative”. They start lending out BTC they don’t have anticipating that their future BTC reserves while progressively smaller, will have a market value sufficient to keep them solvent. They are allowed based on their protected status/trustworthiness to do this to some satisfactory ratio set by the market/central bank (whatever that looks like in the future). Things are running “smoothly”.
But then some calamity befalls the world. War, famine, pandemic, climate issue etc. strikes and now someone needs to raise funds in the now to pay for current needs. Current reserve ratios don’t allow for this, so the local/regional/world authorities lower these requirements until they are 0 or even negative, issue anti-bonds, adjust taxes, etc. to raise the funding/liquidity needed to get through this crisis. Short term this works, but contributes to faster deflation.
Wages shrink in relation to this. I’m sure you can figure out how the rest of this game goes from here.
The ramifications of the legacy fiat system are still there, but in a deflationary sense instead of inflationary. It is just done with a harder more democratic medium. You end up just trading a system of savings that become worth less overtime for a system of savings that becomes worth more over time but functionally harder to stack.
Modern central banking and governmental manipulations of monetary policy arose from an inflationary capital system. To think this won’t happen in a deflationary system seems naive. It remains to be seen how a deflationary currency will truly affect supply and demand on a global scale, but I don’t think buying assets that are currently out of reach over time (credit) will become a thing of the past. I believe in BTC as much as the next guy. So stack now for the inevitable future. But It’s analogous to the industrial revolution and modern capitalism causing “unforeseen” issues in the future as the free market devolved into the Byzantine system we have today. If we want this system to be the solution we know it can be, we have to start thinking about this now. The old system was good until it was abused. Protect the Satoshi in the long run; let’s start figuring out what this thing needs to be to protect it from future threats. The time is now, not when panic sets in. That’s how we got here in the first place. I just want, like most of us who “get-it”, to try our best to really “get-it” before it’s too late.
TL;DR:
BTC has the potential to fail if the need for credit in a modern society operates the way it does today. Does BTC really fix this, or do we need to start figuring out how to protect it from these threats in a BTC denominated world?
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