Friday, 8 September 2017

So is this a gigantic ponzi scheme or am I being cynical and simplistic?

Blockchain data storage network Filecoin has officially completed its initial coin offering (ICO), raising more than $257 million over a month of activity.  Filecoin's ICO, which began on August 10, quickly garnered millions in investment via CoinList, a joint project between Filecoin developer Protocol Labs and startup investment platform AngelList. That launch day was notable both for the large influx of purchases of Simple Agreements for Future Tokens, or SAFTs (effectively claims on tokens once the Filecoin network goes live).
As I understand it, an ICO is where people pledge actual money and established cryptocurrencies like bitcoins for new, non-established cryptocurrencies or 'tokens' as they are sometimes called.  I'm told bitcoins can still actually be exchanged for cash, but I've never knowingly met anyone who has successfully done so.  One can buy and sell (but not sell short) these cryptocurrencies on unregulated exchanges like Bittrex, here's a screenshot:
There are about a couple of hundred cryptocurrencies / tokens one can trade / swap with likeminded counterparties now.  All the little ones can be traded like an fx pair against the more established bitcoin or ethereum.  If you would rather trade against the dollar you can, well kind of.  You see you can trade against the US Dollar Tether, here's the screen shot:
Tether is a cryptocurrency that is pegged to the US dollar, except the peg isn't actually guaranteed.  Tether Limited (based in Hong Kong) do guarantee that 'tethers' will be backed by an equal amount of US dollars, but they don't guarantee to exchange them for you should you want to 'cash out'.  Presumably the Hong Kong regulators keep a close eye on the activities of this unregulated firm trading predominately in the USA.  Bittrex appear to insist you play their markets using only cryptocurrencies, including the tether.
So it's kind of like a computer game then?  Users deposit their dollars or euros or yen, change it into their chosen token, then try to swap their tokens with other users with the aim of increasing the number of dollars (or tethers or bitcoins) in their account.  You can even remove your tokens and buy into an ICO with them.  As nobody can go short (and a few people who invented these cryptocurrencies or got in early have the bulk of chips) there really is no limit on how high the prices can get.  Even if a bitcoin is worth a million dollars, grotty students in their pjs can still buy in for ten bucks and receive 0.00001BTC.  It's just numbers on a screen that the players are bidding higher and higher.  Online Texas Hold-em is so last decade!
I think the price of a bitcoin - or any of these other cryptocurrencies - could very well go to a million dollars.  After all, it's just a closed system of folk (and 97% men apparently) trading imaginary tokens with one other and they all want the reference prices to increase.  I reckon as long as more actual money is flowing into cryptospace (and into that bank account in Hong Kong and into these ICO's) than out, the prices of bitcoin and other cryptocurrencies will continue to rise and increasingly the participants will become paper rich.  But what happens when a significant proportion of them become millionaires and can retire aged 24 or just rich enough to want to cash out some and buy a car or a house?  
Is this is an over-simplistic analysis?  Is it really cynical of me to suspect that the people on the other side of this trade (the people swapping the tokens for actual dollars and euros and yen) will decide they'd rather hang onto the cold hard cash thank you very much and switch off their exchanges?  The only alternative explanation I can see is that a massive revolution really is happening where so many people will change all their cash into bitcoins and refuse to take part in the consumer economy until the politicians, bankers and shops have no choice but to start accepting them?  Have I missed something?

12 comments:

Unknown said...

Mark, if all this money is coming into crypto, a lot of dollars are bidding up the price of bitcoin. If there were no new dollar buyers, the price, denominated in dollars would not go up. Yes, there are already crypto multi-millionaires, it's not unknown that people's investments have gone up 10-12x in the past 9 months.

Shiney said...

Umm.... just like banks and fiat currencies then?

If we all wanted to 'cash out' we couldn't as the banks who hold all our 'money', which are just digits on a screen, would go bust. And, soon enough if the gummint gets their way, we won't be able to cash out at all as cash will be banned.

So, tell me how fiat currencies are any different.

Bayard said...

"So, tell me how fiat currencies are any different."

Well, with fiat currencies you CAN cash out, even in a big way. Say you have £1,000,000 in the bank. That's just data on a computer somewhere. You wish to spend that £1,000,000 with 1000 different sellers for stuff. You then end up with £1,000,000's worth more stuff than you had before. Can you do this with bitcoin? I don't think so.

AFAIK, the only buyers of crypto currencies are would-be speculators, so that the currencies are really no different to shares in "a company for carrying out an undertaking of great advantage, but nobody to know what it is".

Mark Wadsworth said...

1. I also assume it's a Ponzi scheme.

2. I know somebody in real life who got in at the start and cashed in a few years later, he made enough real money to take five years off work.

3. Fiat currencies - i.e. national currencies like sterling - are different. The theory might look shaky, but in practice they work surprisingly well.

4. Bank created currency is of course a con trick and depends on people not withdrawing deposits any faster than borrowers are paying off mortgages.

Lola said...

I'm with MW. The only difference between nationalised fiat currencies and crypto currencies is that the former are based on debt (nowadays) and the latter are not. But IMHO whatever way you look at it neither are 'money' as such - depending of course as to how you define 'money'.

Steven_L said...

Unknown - my post not MW's :) But how easy is it to actually exchange your tokens for cash when you become a crypto-millionaire? What if one of these exchanges just takes your crypto and doesn't wire you the cash? What comeback have you got? Believing you are a millionaire only to see it vanish like that must be 100 times worse than never having participated and wishing you had!

Shiney - in the fiat system central banks can mitigate bank runs, fund the system, ensure people get their cash and stem the panic. One of the big selling points of crypto appears to be no central bank. So no lender of last resort if a load of the big participants take their cash and run for the hills.

Baynard - I struggle to follow the line of argument that existing current account facilities and payment systems don't work very well too. Visa, Mastercard and PayPal work very well in my experience.

MW - the only person I'm met that claims to have got in early also claims to have 'lost' his bitcoins. This is another bad flaw in the system if you ask me. If I lose my debit card or forget my online banking password it's not the end of the world.

Also, if bitcoin or any other crypto becomes more mainstream, and savings and loan type institutions spring up, there's nothing in theory to prevent people's bitcoins being lent out and the money supply inflating like this is there? Plus they keep having these 'forks' too where they just print more crypto. And anyone can create a new crypto. So as far as I can see the supply of crypto is potentially just as unlimited as the supply of fiat.

I am kicking myself for not taking this seriously when I first read about it in the zerohedge comments section. I think they were less than $10 a bitcoin at the time! But kicking yourself for not buying in back then isn't a good reason to buy in now is it?

Dinero said...

Bank deposits are backed by real obligations to supply goods and services to deposit holders from borrowers promises to pay. And similar with BoE notes , either a government enterprise provides goods or services ,or someone who pays tax does the same to fund the Treasury bonds held by the BoE.

Bayard said...

"I also assume it's a Ponzi scheme."

I'm not so sure. A Ponzi scheme is one that pays out using the money paid in. Crypto doesn't, by and large, pay out, at all. ARAICS, it's much more like the South Sea bubble. Some of the crypto "coins" are being sold by the original "company", like shares (in the case of Bitcoin, these are paid to the "miners"), but most of them are being sold by one lot of speculators to another, who are buying them in the hope they will go up. Sure, you can use bitcoin to buy things like real money, but I doubt that's true of many other cryptos and I'm prepared to bet that the value of "bitcoin for stuff" type transactions is vanishingly small compare to "bitcoin for other currency" ones, just as the number of people who bought shares in the South Sea Company in the hope of one day seeing a dividend return was probably vanishingly small compared to the number of people who bought them hoping to sell to a greater fool later at a profit.

mombers said...

I've dabbled a bit in BTC for fun, have put in approx £100, sold £200 and still have 0.019 BTC left. I've been lucky on a very small scale in other words :-) I even managed to get some ZAR for GBP with an interim BTC - but only because I have very low spreads on both (buying and selling from friends at the same time)

Bitcoin and other cryptos are for speculation only BUT the potential for blockchain for application as a distributed ledger is enormous. In my industry (asset management) settlement is estimated to cost between $30bn and $40bn. This includes a lot of faffing around with mistakes, undelivered shares or cash, etc. If a large group of asset managers, brokers and custodians got together and agreed to use a private blockchain to facilitate settlement, this could cut those costs enormously and reduce errors. The blockchain would be an irreversible ledger of who owns which shares, and who owes who fiat currencies. Sure, you still have the possibility of your counterparty not paying money into your bank account but you definitely know when shares or bonds are transferred into your name and settlement can be done after 10 or 20 minutes instead of next day. Reducing this settlement window reduces risk enormously too - if someone is in trouble, you have a few hours of transactions that you might lose your money from, instead of a whole day. Will be interesting to see...

Shiney said...

@S I was being deliberately provocative - of course you can buy 'stuff' with $/£/€ and it is harder with BTC but my guess is that may change over time.

The ability to 'cash out' into another currency, from say sterling, would be problematic if a large proportion of people decided to do it at once.... I would assume.

Also agree with @M - the blockchain technology is the most interesting part.

Bayard said...

Shiney, interestingly the archaeological record shows that we are almost back now where we were thousands of year ago with trade, records of debt and credit, but no physical cash as such.

Curtis said...

@SL "What if one of these exchanges just takes your crypto and doesn't wire you the cash? What comeback have you got? Believing you are a millionaire only to see it vanish like that must be 100 times worse than never having participated and wishing you had!"

Then that exchange will go out of business, at the expense of a few unlucky people. Same as exchanging currencies on the


@S "The ability to 'cash out' into another currency, from say sterling, would be problematic if a large proportion of people decided to do it at once.... I would assume."

I assume you're referring to 24 June 2016 when lots of people wanted to 'cash out' from GBP into USD (and EUR to a lesser extent).