Luna crashed because people lost trust in it. The only reason people have trust in BTC is because other people have trust in it. If that ever changed, there is no actual use for a BTC, and they are thus intrinsically worthless.
Fiat currency has the backing of a government. The government demands certain payments of this currency in order to own land, and also for some extra rights like mineral extraction, fishing licenses etc. Thus, as long as the government is viable and can confiscate the land of those who don't pay, there will be demand for the currency, and it will be proportional to the value the government assigns to the property and the rate of tax.
Thus, the currency is stable, because you know at the end of the day, there will always be a buyer who needs to pay their taxes.
Monetary supply outstrips the government's ability to collect on it. It is usually done on purpose to benefit some ruling individuals or for strategic reasons to zero the value of a country's debt. But I challenge you to find any example where the hyperinflation didn't make sense to pursue to the people in charge of the money supply.
> But governments can be poorly run so I suppose “stable” is not the right word.
no, but the currency belonging to a particular gov't is as stable as the gov't itself, so your statement is still true; vis a vis the Zimbabwe currency vs the US dollar.
What people refuse to believe is that a currency is actually a reflection of the real world. Yes there is some filtering going on and time lags can be huge but any well managed currency is only going to perform as well as the real economy.
Fiat currency does not actually have the backing of a government. What could the UK do when the pound peg broke? Nothing but lose enormous amounts of money trying to hold it.
The government doesn’t give it a baseline value, it just has the power to force people to use the national currency when doing business involving legal affairs and the like (which may help bring up its value). Even then, I know of 3rd world countries that prefer the US dollar for all day to day (peer to peer) transactions even when the local government has their own currency established.
What scenario involves the UK losing an enormous amount of money would be one where they are attempting to "hold a peg"?
I'm confused. Countries manipulate their currency supply in various ways in order to make their money cheaper or more expensive, I get that. But I thought the main goal was to keep exports or imports to a good balance to avoid wrecking a real economy. Like, actual people's lifestyles and jobs and well-being, beyond just the value of an investment instrument
I'm not sure I see the metaphor holding up here, isn't the issue that came up an arbitrage opportunity caused by a peg that in the real world doesn't really exist or which is easy for actual human beings to intervene in?
Are you describing what Russia did? Did they "lose money" with the actions they actually took? It seemed more about adding rules and changing contracts than by spending money on anything in particular, I'm not sure how one would calculate how much money they lost doing it. Or if that's a useful way to think about it really even, nations just have so many other priorities and their money policy is not at all algorithmic...
So it sounds like this "ERM" is algorithmic enough that it broke things. It did get stopped due to human intervention though, so it feels like a weak metaphor.
I hope international currency markets aren't quite so fast... hopefully we won't find out.
The very concept of a currency peg is that you sell things in exchange for the currency when it is not valued highly enough, and buy things in exchange for it when it is valued too highly. It wasn't the implementation that is algorithmic, it was the idea of a pegged currency itself that made Black Wednesday inevitable.
If a national government can't maintain the value of their currency, they aren't backing it, and if they have so much gold that they can maintain the peg no matter what happens, it isn't fiat (the gold standard is where the government will sell and buy gold at a fixed price, printing or destroying currency in the process). So I would conclude that fiat currencies aren't backed by anything.
Well pegs are stupid ideas. Just let the interest rate "float" into the negative range. That way your currency will remain stable while every other country inflated their currency to represent the same negative yield.
It could leave the Exchange Rate Mechanism which created the conditions for the run. And it did. Fiat currency always has the backing of a government, as 'fiat' suggests.
To be perfectly clear, you're claiming with a straight face that government issued currencies are stable because there will always be a buyer who needs to pay taxes?
Any reasonable definition of stability precludes hyperinflation, we agree on that right?
Historically government backed currencies are are stable because they have two underlying components: an economy denominated in the currency and an implicit threat of force (e.g. standing militaries). It's one of the reasons the US dollar is the chief reserve currency around the world as well as the denomination in which oil is traded in.
You need dollars not because people have faith in them but because people have faith in the underlying institutions they represent. It's fine to claim you back bitcoin because you don't have faith in the traditional institutions but pretending that those institutions don't support dollars in a way that crypto/bitcoin isn't seems a little near-sighted.
Yes it would preclude hyperinflation. Of course, now we should ask ourselves what kind of situation results in the government having to spend more money into the economy than it is receiving back. Oh right, by not taxing those who have money. Money that doesn't circulate doesn't pay taxes. If you keep money in your bank account forever that money will never be taxed, the government will never see that money again. It must run a deficit, not because it is stupid, it must run a deficit because it is actively subsidizing an influential part of the economy and any refusal to pay the subsidy is harshly rejected not just by the rich but also by the poor.
The fact that inflation is the escape hatch for loss aversion psychology tells you that everyone on this planet is actively choosing for there to be inflation or even hyperinflation instead of a negative interest rate.
People will argue how immoral it is for a bank to tell you that your physical capital is slowly depreciating and thus even a 0% interest rate would be too high to offer to you. No, that would violate the principle of private property, private property of coupons that represent the time of other people, who are slowly aging and paying opportunity costs. People think they deserve to own the time of other people as if they were cattle or slaves. After all, their freedom to not be a debt slave violates your right to private property which is a far more pressing matter, after all the psychological bias of loss aversion justifies any hideous act (note how I didn't refer to immoral acts, as many hideous acts are considered moral).
There are plenty of fiat currencies, backed by stable governments, that have become completely worthless. The Zimbabwean Dollar is the most famous one this century. There are plenty others.
This fully disproves your argument, as far as I can see.
You have it backwards. The trillions of tokens were created because people lost trust in it. Specifically, the loss of trust instigated the price drop from $1 to ~98¢. That's what started the collapse. Only afterwards did the "death spiral" of minting of more tokens, which degraded trust, which decreased the price, which drove more minting, etc. happen
There were two coins involved; the overprinting of Luna corresponded with lost confidence in UST. The obvious conclusion is that "algorithmic" stablecoins are bullshit.
Whatever fate lies ahead for Bitcoin, it doesn't have this particular weakness. It's not "leveraged" in the same way as Luna/UST.
People lost trust because they knew people losing trust would cause a death spiral, and they wanted to get out before everyone else.
It was a fire in a crowded theater. Bitcoin depends on trust, yes, but there's no Damoclean sword like there was for Luna. Some people losing confidence does not necessarily lead to others losing confidence.
Like toilet paper in a COVID pandemic... people were acting not because of the item itself, but because they knew how "the crowd" would react - a self-fulfilling prophecy.
You have the chronology wrong. The tokens were created because the price kept slipping, and the more the price slipped the more tokens were printed, the more people panicked etc
If people had thought this was a sane and reasonable move that didn't really affect things the price would quickly return despite the quantity increasing.
The believed durability of the token changed
No matter what strategy is to be used to try to repeg it, it will only work if there's faith in the price.
Price isn't a thing it's a relationship between people about a thing
Bitcoin also has the backing of a government - El Salvador.
I would rather argue though that even government backed currencies are fully dependant on trust, not government usage of it. Just check out any government currency hyperinflation event.
91% of El Salvadoreans prefer to use USD, and most stopped using Chivo (the privately-owned, government controlled wallet) after withdrawing their initial deposit.
> El Salvador is a failed state about to default on its national debt. It's not a real "government" in the way that most of us would define the term.
At least for now, El Salvador has enough cash on hand to pay the $800 million bond payable in February 2023. Current cash foreign reserves are about $3000 million.
I'd like to clarify though, that I'm not an economist, and that the processes required and implications of using those funds to pay the upcoming bonds due are outside my scope of knowledge.
> What criteria of the definition doesn't El Salvador fulfill?
The one that is actually important when it comes to currencies, having something valuable (whether it is a resource, power, political influence, military, finances, etc.) to back the currency up with.
But on the most technical level, you are correct, El Salvador has the ability to back up BTC in the same capacity as a country like Zimbabwe can back up Z$.
It doesn't have the resources nor a policy of "backing" bitcoin. By contrast, countries that issue their own currency have a central bank that is typically tasked with maintaining price stability, hence "backing" the currency.
From the article, El Salvador has been cut off from financial markets by two of the ratings agencies that played a pivotal role in the corruption that caused the 2008 GFC to happen. Their reason for cutting El Salvador off is because their debt to GDP is approaching 87% (a fraction of what other countries have run up, especially due to COVID).
The IMF (International Monetary Fund) which typically steps in to offer predatory financing terms, already outlined their demands: drop Bitcoin support.
So El Salvador really must have gone all into Bitcoin, right? Yes, somewhere between 25million to 73million dollars worth (in contrast to their 800million dollar bond or the ~6billion dollars they raise in taxes each year [1]).
Oh the horror. There is definitely no geopolitical maneuverings here. /s
One of their largest industries (up there with tourism) is remittance processing (mostly for out of the US) denominated in US dollars. Most of their local economy operates on US dolar too, which means accepting Bitcoin everywhere offers some significant advantages:
1. Not being beholden to the whims of American banks and the American government
2. Less administrative overhead would mean being able to offer more competitive services with lower fees [1]
3. Being Bitcoin friendly would attract more crypto oriented industries to be based out of their country: offering a wider market to tap into (global remittances)
[1] "Last year, they collectively transferred nearly $6 billion, or roughly 23% of the country’s gross domestic product, and a chunk of that went to the middlemen facilitating these international transfers." https://www.cnbc.com/2021/09/09/el-salvador-bitcoin-move-cou...
Sorry, I didn't see it. 23% of GDP is the value of the remittances that enter the country. This does not mean that remittance processing (which is an economic activity) represents 23% of GDP. Remittance processing is likely a tiny fraction of GDP, since it's a low value added activity.
Fiat currency has the backing of a government. The government demands certain payments of this currency in order to own land, and also for some extra rights like mineral extraction, fishing licenses etc. Thus, as long as the government is viable and can confiscate the land of those who don't pay, there will be demand for the currency, and it will be proportional to the value the government assigns to the property and the rate of tax.
Thus, the currency is stable, because you know at the end of the day, there will always be a buyer who needs to pay their taxes.