Foreword
Sometimes, someone makes an argument so profound, so beyond my understanding, I just have to concede that they are playing 4D chess.
As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.
If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.
Matt Levine
Matt Levine wrote an interesting paragraph in his regular column “Money Stuff” on Bloomberg on Monday, June 13th, 2022:
See, I genuinely think that there are some people who would sneer at a bank saying “we have a fortress balance sheet and exceed out regulatory requirements for capital and liquidity, as you can tell from our quarterly financial statements”: “Sure,” these people would scoff, “we’ve heard that before.” And then they’ll read a Medium post from a crypto project that claims to have, but does not describe, a “comprehensive liquidity risk management framework” and put all their money in it.
Matt Levine, Bloomberg, https://www.bloomberg.com/opinion/articles/2022-06-13/merger-buyer-s-remorse-sometimes-works
It’s interesting, because I seem to be getting a lot of arguments in a similar vein, especially in the past few weeks.
Crypto
One of the arguments for crypto is that they are “not controlled by any central government”, and thus cannot be “printed”. This is weird of course — most major central banks understand very well the lessons learned over the course of millenniums, and so don’t actually print money, at least not in the way envisioned. But if you consider crypto, and how staking or mining works, you’ll be hard pressed to call it anything but “printing”.
More to the point, “printing” is apparently bad, because it causes inflation, which leads to the second argument — that crypto is an inflation hedge. Which was a great argument to make… all the way up to November 2021. When inflation actually started really going wild. Yes, our inflation hedge went down in value, as inflation went up.
To correct my clearly flawed understanding, someone recently noted that I misunderstood. It’s not that crypto is an inflation hedge, but it is a hedge against fiat debasement. Which, to me, is weird. Because that’s the same argument as before, just with different words — “printing” is “fiat debasement”, which leads to “inflation”, and as described before, things like QE isn’t really fiat debasement, and well, until 2021, there was no real inflation since crypto’s invention, and of course when inflation hit its stride in November 2021, crypto went down.
All very profound arguments that I’m still trying to understand.
Crème de la Crème
But the pièce de résistance, the crème de la crème of arguments, is this gem:
Crypto is a long term hedge for fiat debasement / inflation (1). Daily, weekly, monthly, quarterly, even yearly fluctuations are just noise.
Various
So let me get this straight:
“Fed swapped Treasuries for Federal Reserve Notes with muted inflation consequences for a decade and a half.”
Response: “OMG! Fiat debasement!”
“Government issues massive fiscal stimulus to help those in need during a once in a century pandemic, resulting in US dollars losing 8.6% value in a year due to inflation.”
Response: “OMG! Hyperinflation!”
“Crypto drops around 70%, on top of the same 8.6% due to inflation, with some coins essentially becoming worthless in 7 months.”
Response: “Meh, just noise.”
Yeah, that’s some real 4D chess argument right there.
Be consistent
All jokes aside, it is important to recognize that a lot of the financial-sounding arguments put forth by many crypto advocates simply do not make sense.
There are reasonable, interesting properties of crypto that we may want to explore. But attributing mythical, but contradictory and illogical prowess is basically turning crypto into a cult.
Cults are (debatably) a “solution” if you are feeling spiritually lost. Not so great when you are financially lost.
Footnotes
- I’m still not sure which one they’ve settled on.
Janky Thoughts 