Crypto as intergenerational war

See the latest Australian dollar analysis here:

Australian dollar free falls as Fed hikes return

There’s debate around the Barefoot Investor that makes for interesting reading:

Money expert Scott Pape, who is better known as the Barefoot Investor, has hit back at claims that he is “costing his followers” a fortune by not backing cryptocurrency.

He has been accused of “embarrassing” himself and sticking his “head in the sand” when it comes to making money on crypto like bitcoin and ethereum, as well as new coins.

In a question shared in Mr Pape’s most recent newsletter, Chris tells the Barefoot Investor that he is willing to put aside the “1000 per cent of gains” on various coins and focus on income instead.

…“Who doesn’t want a 17 per cent return from staking coins? Crypto and DeFi (Decentralised Finance) are the future. The Barefoot Investor is the past. Wake up. You’re embarrassing yourself,” wrote Chris.

[Pape replied] “Yet history also teaches us that in every gold rush there are scams, cons and bubbles just waiting to be popped. This time is no different. If anything it’s worse — today a majority of Gen Z investors in the US think crypto will make them millionaires, according to a new survey by data analytics firm Engine Insights.”

Pretty silly stuff but it does throw up an interesting point of view.

For anyone with knowledge of financial history, crypto is a scam of historic proportions. It is neither a store of value nor a transactional medium and is based upon the same principles as a synthetic CDO cubed that will suffer a bank run the moment things get tough if it is not wiped out by governments first.

But, viewed as an inter-generational social phenomenon it becomes more interesting.

After all, why wouldn’t Millennials believe in it? They’ve watched their parents get stinking rich on the global property ponzi scheme of traditional finance from which they’ve been systemically excluded. Why not back their own?

This is especially the case when the new ponzi scheme comes with the delicious schadenfreude of destroying the very banking system that has so brutally repressed their basic human right to a roof over their heads.

This might even throw up an interesting idea about how sustainable crypto is.

My working thesis is that the stablecoins like Tether that underpin the shaky crypto edifice will collapse in the not too distant future during some kind of broader financial accident. That moment throws up the usual question. Will Tether (and crypto) be bailed out by central banks as they step in as lender of last resort? I have always thought not given the credibility of crypto at that juncture will be fatally exposed and compromised.

But what if Millennial politicians have taken power before then? I have already been surprised at how stupidly some governments have embraced the crypto bazooka pointed at their own heads. What if the fateful moment when stablecoins collapse is overseen and governed by those on the Millennial side of the intergenerational war? Could they engineer a buyer of last resort for an imploding crypto universe to defend their generational wealth against the system championed by their parents?

The problem for this outcome is embedded in crypto itself. Because it is international, and stablecoins are (hilariously) secured against USD collateral, the only central bank big enough would be the FOMC.

The other issue is that I doubt central bankers would have any qualms in watching the competition disappear. Especially since they’ll all be launching  their own digital currencies:

Australia is weighing plans for a central bank-issued digital currency alongside the regulation of the crypto market as it seeks to overhaul how the nation’s consumers and businesses pay for goods and services.

The government will consult on a digital version of cash that will be universally accessible, according to notes from a speech to be delivered by Treasurer Josh Frydenberg in Melbourne Wednesday. At the same time, it will consider a licensing framework that will allow crypto transactions within a regulated environment. It expects advice to be received on both by the end of 2022.

See the problem? Crypto fancies itself as global. Currency and lenders of last resort are local. So, when the time comes, there’ll be no bailout for crypto to form locally protected asset quangos for Millennial voters like houses have become for Boomers.

On the contrary!

Houses and Holes
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Comments

  1. Well said. It’s on a trajectory to calamity, and if it threatens the sovereign currency monopolies and their fiat debasement experiments before it’s eventual demise, it will simply be outlawed – China and India are just the beginning.

      • The governments want to get in on the action. They want their share i.e. tax it. If it becomes too big it’ll be outlawed.

        • If Govt is hooked on the tax, why would they change that? Also wouldn’t it become too big to fail by that stage (if not already)?

        • Yeah and they could confiscate property or cash in banks but there’d be some pretty big turmoil in this connected world. Maybe at the next crash, could be a good time to bring in wider governance but how to trust government/regulators when they’ve made such a mess of the current system.

  2. It is neither a store of value nor a transactional medium and is based upon the same principles as a synthetic CDO cubed that will suffer a bank run the moment things get tough if it is not wiped out by governments first.

    Wrong, I’m able to pay for goods or services without the need for a bloating banking system in between. Crypto does away with middle men and central bankers. Who have delivered what benefits for society exactly? Oh they created massive inequality you mean? Sure put your faith in wall street and banks, but I’d rather take my chances on a decentralised blockchain and hard assets.

    For those interested, look up the Lightning Node network, all the claims that crypto is too slow are wrong. I sent money between wallets in a manner of microseconds.

  3. I'll have anotherMEMBER

    It’s been the best performing asset / currency / investment / commodity / store of value / whatever you want to call it for the past 10 years.

    It’s been so good, for so long, any economist calling it a bad investment has been well and truly debunked.

    If you call yourself “barefoot investor”, put out books on “investing” and manage to call the single best investment for a decade running a poor choice, that’s kinda silly of you.

    It’s not your job to have sound theory, if your guiding investment, it’s to pick winners.

    You blokes seem to be happy to be wrong for 10k days, just so one day you can say you’re right.

    In the mean time, people have missed out on a small fortune. How it wasn’t obvious 5 years ago to say, hey, put 5% of your portfolio in crypto! I’ll never know.

    I mean, it’s only based on blockchain, the greatest human invention of the 21st century. It’s only created Defi, the largest boat rocker banking and finance has seen in 50 years.

    Nah. Who’d put money on that junk.

    • “I mean, it’s only based on blockchain, the greatest human invention of the 21st century.” LOL

      “It’s not your job to have sound theory, if your guiding investment, it’s to pick winners.”
      So throw in a few good picks at the nags and dogs for the SMSF?

  4. Personal Risk ToleranceMEMBER

    How is tether – at a market cap of $77B – structurally important to a $2.5T market?

    The other stablecoins are either regulated within the US (USDC), or are pure DeFi entities with >100% collateralisation (which are automatically liquidated at face value during a crash).

    The whole crypto edifice could yet fall over, but I’d bet money that Tether and stablecoins won’t be the trigger.

      • Personal Risk ToleranceMEMBER

        That’s the whole point of blockchain – it’s a public access database. You can run a query and look at what everything is backed by.

        Tether might be about to fall over. But unlike the GFC, you can tell where the debt is and exactly who will go under if it has a value of zero.

  5. It might be a scam it might be the future. I don’t know but instead of making all these grand, blanket statements I’ve just put a little bit of play money down and it makes the whole thing interesting.

    • Know IdeaMEMBER

      Sounds about right.

      Personally, I do not hold any such “assets” for the same reason I hold no junior miners: the assets are just a bit to speculative for my liking and are in a field about which I have not put in any real effort to understand.

      Junior tech companies on the other hand …

  6. The funny thing is that the price of crypto is denominated in that old unfashionable thing called money. Whoda thunk !

  7. Money is whatever the government via the law says it is. I would prefer gold coins, but others have decided differently.

    It would be a simple matter to change the law such that all housing must be paid for in bitcoin, and taxes on housing must be paid in bitcoin. That would shake things up a bit.

  8. To all the fellow crypto bulls out there perhaps we should sit back and listen to the wise words written here and by the commentators. They are after all probably some of the savviest investors on the planet. When Facebook came out, they were able to look through the limited nature of it and see it’s world shaking potential. They are probably wealthy because they bet the farm on it. Then when mobile came out, they instantly saw the power of Uber and got in pre-IPO. Some of the older legends here laughed at the people pouring scorn on Amazon at the rich valuations, the clucky interfaces, the limited market. These smartest men or women in the room could see the limitless opportunities that Amazon would unleash.

    Now they look at the clunky interface of blockchains, the difficulty with custody. They read the reports on zkSnarks and optimistic rollups. They apply all of the knowledge and skill they obtained in investing in Facebook, Amazon and Google. They realize that nothing can be build on it, that it is dead tech and going nowhere. And they, the savviest of the savvy, they warn us. Given the success they have had in foreseeing past tech, we should listen to them.

    I for one will be selling all of crypto and putting it in the bank.

    Ian

  9. The average retail plonker eventually does their @rse through misadventure, misunderstanding or poor behaviour.

    And no one thinks they’re the average retail plonker.

  10. Best use case for crypto is to hide money from government.

    Chinaman can mine crypto in their own country with cheap power, then buy house in Australia and move here.

    Guy can hide assets from family court, bankruptcy court, and lawyers in general.

    Venezuela and north korea can mine crypto with cheap oil and buy goods avoiding US sanctions.

    Gold was no governments money, so they changed to fiat as a government tool of control.

    Crypto is an attack on fiat.

    Governments can make their own local or global crypto, but that doesn’t stop you hiding funds in a widely accepted illicit crypto.

    • Osiris,

      You seem like a tech savvy investor with an eye on the future. How did you go with Facebook? Did you get in early? I bet you probably did because you have a deep understanding of how Facebook would have changed human social interactions.

      Ian

      • I have no time for the deep research needed to properly invest, because my time is spent on real work.

        Investing in Facebook would have seemed ok at the time. So would a million others. But then it’s a fulltime job reading reports to make sure it’s not going in the direction of MySpace.

        The profit multiples aren’t so great when you account for the generalized scattergun losses.

        Could buy blue chip shares, but only make 10% a year.

        I made tons of money without ever having bought a share in my life.

  11. Muttafukaburrasaurus.MEMBER

    It would be a useful tool for CB/ governments if they had a controlling interest already.

  12. I agree the scenario where crypto assets could be saved by politics is plausible. Boomers currently control the political system, boomers own all the houses, so the political economy is rigged towards inflating house prices even if that means suboptimal economic and social outcomes. Within a pretty short period of time, Gen Z will control the political system, and if they own nothing but crypto then it’s not unreasonable to assume crypto will be inflated at all costs.

    I don’t think you need to take a view on the precise form that action might take. For my part, I don’t really see how bailing out out stablecoins ensures the perpetual, exponential inflation of pure speculative assets like Bitcoin. But I could easily imagine a Gen Z FOMC including Bitcoin in open ended asset purchases during a downturn (thereby supporting the economy via the wealth effect).

    It’s sounds absurd, but that’s what you get when you allow the next generation to be both economically illiterate and completely disenfranchised. And as you say, it’s no more unfair than what boomers have done by engineering the housing bubble.

    The tragedy is that there’s a better way for Gen Z to restore balance to the political economy when they take control, and it’s effectively what boomers did on the way in: increase government spending on public goods (infrastructure, education, healthcare, environment), which will result in higher real wages, positive real interest rates, and lower house prices. Let’s hope they have the sense.