Originally posted by @Matthew Radniecki:
I stay away from what I don't understand.
In our fiat system, supply is regulated by the Fed, and printed by the Treasury. In a crypto system, where is the supply coming from? Mining?.... that's a whole 'nother level of questions.
Outside of the underlying questions, "investing" in crypto to me seems no different than forex trading... which is a very very active investment in which to make money you must always be actively trading. But it seems so many crypto investors are choosing to buy and hold. Perhaps I don't understand currency trading enough, but I've never met someone that's accrued any significant wealth from a currency buy & hold strategy...
But like I said, perhaps my folly is simply ignorance into crypto mechanics.
You raise a lot of good questions.
Regarding USD fiat, it gets a little complicated, but most dollar creation is actually done by the banking system via debt. The monetary base, which is the total of physical notes and usually you also consider reserve accounts at the Federal Reserve, is actually very small at around $10T. The amount of "wealth" in the world dwarves this amount. To give you a comparison, there is even a little more than $10T worth just of above ground gold in the world. Bitcoin clocks in at some $350B. That doesn't even touch on real estate values, debt instruments, equities, small businesses. It can get wild. The Federal Reserve uses other metrics to try to account for how much "money" is in the world, but the system has proven to be so gordian and opaque that it simply cannot be accurately measured. You may know if it as the shadow banking system; or it's also referred to as the eurodollar system. Unfortunately, it can't really be worked around. When economic activity is explosive, there is a natural increase in demand for the currency required to facilitate it. It's an amazing concept, but essentially currency is the plane upon which economic activity takes place. But that plane can be expanded as needed through the use of debt or money-like instruments. And this can be done by actors independent of the central bank. For example, in the modern banking system, US Treasury's are actually treated as money, they perform monetary functions.
Crypto currency could be treated in the same way. Just because the true supply of Bitcoin is very stringently determined (one new Bitcoin mined roughly every ten minutes, no matter how many people are actively mining) does not mean that someone cannot extend the derived supply of Bitcoin through the use of debt (think fractional reserve banking).
Crypto is still too volatile to be money. It's still held speculatively. It's not accept throughout enough of the economy to be considered money. But it is being adopted both as an investment and also for transactional use. I recently saw a Bitcoin ATM in a gas station of all places. Specifically in an area where I would not have expected to see one. The greater the price and the market cap of Bitcoin become, the more stable it will inevitably be. For example, if 50% of the people holding Bitcoin right now (let's say they also hold 50% of all Bitcoins) decided they weren't going to buy or sell any more of it for the next 10 years and instead just hold it, the supply of Bitcoin doesn't change, BUT the supply that the market plays around with does. And the more people hold Bitcoins for longer, the more the market cap increases, meaning it will become less volatile. As it becomes less volatile, it becomes more viable as a currency. Because a currency needs to be able to hold its value reasonably well. That's why the currency markets seem to be so insensitive. They move glacially. Because currencies theoretically are worth all of the economic activity that takes place upon their plane plus some a discounted valuation of all of the economic activity that *will* take place upon their plane. The best FX traders don't trade short term according to charts and signals, but over periods of months and years as they watch large scale economic changes unfold on national and global levels.
Cryptos aren't nearly there yet. Some people are liking Ripple for this. Which has been designed this way and is working to get adoption by the banks to replace the SWIFT system, which is dreadfully inefficient. It's pre-mined so it doesn't require nearly as much energy in order to be used. Bitcoin, for being the head and shoulders leader and the progenitor of the space is actually pretty cumbersome as far as cryptos go. Which makes sense, of course. One visionary comes up with the idea and creates an ingenious product, but later generations will always have the advantage of hindsight and trial-studies from which they can improve their design.
It's very difficult to say where the whole space will go. A "Fed Coin" is a possibility for the future as they try to find a way to maintain control over money. It would be an improvement over paper as money, but there would be tremendous loss of privacy. Also, if Bitcoin goes stratospheric and becomes widely adopted, the government won't have an easy time interfering with its value, as investment advisors will likely be advising their clients keep some 5-20% of their savings in it. So any intervention would be seen as confiscatory.
I could write on, but allow me to leave it here. Crypto is almost assuredly the future. So it's worth learning about.
