Bitcoin vs Dollars: Which One is a Fraud? Which One is a Ponzi Scheme?

Mistalk blog reflects on Jamie Dimon calling Bitcoin a fraud:

Dimon’s statement on Bitcoin represents the irony of the year. Euros, dollars, etc. are precisely fabricated out of thin air.

That was not always the case for dollars. They were once exchangeable for gold. But euros right from the start were a complete fabrication.

The Eurozone problems we see today are a direct result of the fraudulent nature of Target2 guarantees on top of the fraudulent nature of the euro itself.

🙂 Even if thin air is not fully right, all these currencies are just based on government order. One can increase and decrease the currency at govt will and create mega monetary theories to justiify whatever they do: inflation target, Taylor rules and so on.

He says things like modern finance are a bigger fraud:

In an article that I wish I had written myself, Viktor Shvets, head of Macquarie’s AsiaPac equity strategy, accurately explains “Modern Finance”, Not Bitcoin, Is The Real Fraud.

If one describes Bitcoin as a fraud, how would one describe a ‘financial cloud’ that is at least 4x-5x larger than the underlying economies? It is unlikely that US$400 trillion+ of financial instruments circulating around the world would ever be repaid and most are now backed by assets that are already either worthless or are diminishing in value. How does one describe rates and the yield curve that are either directly determined by Central Banks (BoJ or PBoC) or heavily influenced by them (Fed or ECB)?

While we maintain that despite the presence of US$7.5 trillion of excess reserves (amongst G4+Swiss central banks), global deflationary pressures are so strong that break-out of inflationary pressures is unlikely. However, if public sectors continue to insist on suppressing business/capital market cycles, then some form of full credit market nationalization and/or currency debasement becomes inevitable.

Even fractional reserve lending:

If someone had a Yap Island stone and wanted to lend out three of them, that would not be possible. Nor can one have $100,000 worth of gold or Bitcoin and legally lend out $1,000,000 of it.

If someone tried to do so they would be convicted of fraud. Yet, via fractional reserve lending, banks can lend out money they do not have, and few think anything of it.

There are two distinct problems with fractional reserve lending as it exists today.

  1. Duration Mismatches
  2. Money Creation Out of Thin Air

CDs provide an easy to understand example duration mismatches. A person buying a 5-year CD gives up the right to use his money for 5-years in return for an agreed upon interest rate. Bank can and do lend out such money for 20 years.

Historically, borrowing short and lending long caused numerous bank runs and financial crises. Note that there are no reserves on savings accounts. Banks can lend that money out while guaranteeing you availability. If everyone tried to get their money at once, the system would implode. We have seen numerous examples in Europe recently.

It is a pity that much of this so called modern finance tools have become so ingrained in our textbooks and thinking, that we hardly question them. Infact these are the most admired jobs and calling anything which challenges the status quo is called as fraud. But then those whose houses are made of glass should not throw stones at others..


2 Responses to “Bitcoin vs Dollars: Which One is a Fraud? Which One is a Ponzi Scheme?”

  1. vikramml Says:

    Bitcoin is what it is, but many of the things surrounding it like ICOs, Altcoins, etc have attracted many frauds. Whether or not bitcoin survives in its current form, the tech behind it is likely to change things for the better. Its like the dot com era, many startups were fraud and went bust, but the dot com potential was real. But, it was difficult then to predict which companies would do well and what the future would look like and so it is today with Bitcoin. The Bitcoin world right now is like dot com meets ponzi scheme.

    But, for the same reason, it is really a lot of fun. No regulation; which also means that all your money can be lost in a flash. Exchanges getting hacked, rampant price manipulation, ponzi schemes galore, etc. But, nonetheless, I’m having a lot of fun trading leveraged futures on bitcoin, which is definitely a fraud derivative on a potential fraud! 😀 India hardly provides any good trading avenues, so it is like a breath of fresh air. Every step in India is fraught with regulation, they might as well just tell you to go into a coma.

    On the other hand we have India, where RBI still doesn’t know how to create a market for interest rate futures. I don’t understand why don’t they just copy-paste from other countries? Now, yes, bitcoin will go bust and then RBI will tell you that they protected you from its bust and we will have the same self-praising on being prudent like in 2008. But, we all know the reality. Even if it was a good thing, they did not have the capacity or the intellectual firepower for it. RBI didn’t know what the hell to do with CDS, nor does it know what to do with bitcoin and don’t let them delude you that they knew better. The anecdote that comes to mind is: there was once a bad road accident, a villager came up and said this could never have happened in his village because there aren’t any roads. So, that is the question, should we stop building roads because there may be accidents? That is the RBI policy and the govt policy and the policy of the people who run to govt to solve every problem of theirs.

    Oh and just to compare with China. China has 70-80% of bitcoin mining capacity (which is a result of their overcapacity in electricity, as that is the main cost). Since we compare with China, lets focus on basic things like electricity where production is 1/5th per capita that of China. India continues to lose out on opportunities like data centers, bitcoin, and whatever next is out there, due to lack of basic infra.

  2. ralph47 Says:

    I quite agree fractional reserve is fraud. In addition to the reasons given above for thinking that, there are more reasons here:

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