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On Money, Liquidity & Eurodollar
or why stablecoins more often used as money compared to bitcoin - against Austrian economics expectations - and in the future this doesn’t seem to change
Imagine you run a factory producing metal chunks. Your supplier is an iron mine. A client who bought the last consignment from you is late with the payment - but you still need to buy from the supplier to produce the next consignment.
Normally what you do is you go to the bank and take a loan - a credit against the collateral of your factory assets (equity shares, goods and other forms of capital). However, during a crisis, fiat banks avoid high risk and do not provide credit - or ask for interest rates which destroy your business model. That is why the central bank system has emerged as a credit of last resort - but as we know it doesn’t work as expected.
In hyperbitcoinized world, if you go to bitcoin hodlers (a new form of bankers) - they would put even higher interest rates to match the bitcoin volatility risks. Thus, you can’t operate under such conditions.
Bitcoin is very different from gold: gold were constantly mined, while bitcoin mining will stop. With the growth of the economy, there will be growing demand for money, which will cause high-interest rates - ie volatility. Bitcoiners believe in that with the memes “number go up” and “∞/21m”. Until the end of the mining era, the volatility will be severe - and hyperbitcoinisation makes this only worse. Thus businesses have to outcompete the overall economic growth + premium on top of borrowed bitcoin interest + their own business margin.
Where are we left? A good factory with no real problems has ceased to operate/stop ovens (which kills them) - why? Because there is no liquid money in the form of credit available - and #Bitcoin doesn’t seem to be fixing that in any way (instead it will make the problem to be worse than in the gold standard age, since the gold can be mined - while bitcoin, after some period, is not).
So what market participants will do? First, they will switch to barter (like in post-USSR in the early 90-th), but because of its inefficiency soon they will invent their own credit liquid money - and, if it would happen today, it will be probably in the form of crypto. This will be IOU money. Eventually, new private banks will emerge which will be producing that money in return for collateral, doing risk scoring.
This is why I am after private banking school of economics - and not Austrian nonsense about economics being able to run with hard money made of scarcity. Money must be liquid.
This is the use case for crypto or digital finance - and the reason why stablecoins gain such traction (before them it was eurodollar, which is, in fact, private banking money not managed by central banks - a dominant form of money in the world as of today).
- 1.Bitcoin as the most censorship-resistant tech will stay for sure - and is required for the economy. That’s why I distinguish BTC-as-money from Bitcoin-as-technology. Not “blockchain technology“, which doesn’t provides censorship resistance, but “bitcoin-based technology”!
- 2.This provides utility, i.e. we will face BTC-as-a-utility. It also has utility as the first (thus the only) digital scarcity. So it will have a value - potentially growing value - and will remain volatile.
- 3.Thus, BTC will be used as collateral to produce liquid credit - and the emergence of things like @fedimint proves that.
I.e. Bitcoin is a civilization-level of importance tech and BTC is a store of value (with its own risk profile), digital scarcity and, if you will, a hard and sound “money” - but I doubt it will ever become a means of exchange and unit of accounting (thus I wonder whether term “money” is applicable to something which is not MoE and not UoA).
Last modified 6mo ago