wfrobinette wrote: ↑
Tue Jan 30, 2018 3:10 pm
I've been laughed out of a room full of twenty somethings explaining how the market works. They believed crypto had done so much good for economy because it's made people lots of $. I said it hasn't done anything for the economy. The failed to grasp the concept that for them to "cash out" in USD at bitcoin = 15k that some other person(s) had to put 15k USD into the mix. I swear these guys thought they were printing money.
This is true, but "value" (in a manner of speaking) can be created without cash-outs.
Assume we create a new crypto, "NullCoin". Let's assume that the total issuance is 100 coins, and no more can be minded. In the initial coin offering, they are sold at $1 per coin to 1,000 different investors. Immediately afterwards, the "market cap" of NullCoin is $1,000 ($1 x 1000 NullCoin).
The next day, there is the first secondary market transaction in NullCoin. One of the 1,00)original "investors" sells the one NullCoin he owns for $1,000. There was a lot of buzz over the NullCoin offering and so other "investors"were eager to buy-in, but only this original investor was willing to sell and only at $1,000)
So in that single secondary market transaction, only $1,000 changed hands. However, this single transaction sets the market value of NullCoin at $1,000 per coin, and single-handedly increases the "market cap" of NullCoin from $1,000, to $1,000,000,000.
Now, even though only an additional $1,000 changed hands, all
of the original investors see themselves as having $1,000 in NullCoin, and rate their net worth as having gone up by that much. That $1,000 transaction created an additional $999,000 in wealth, seemingly out of thin air!
Or should we instead say that the "illusion of wealth
" was created out of thin air?
But don't laugh too hard. The exact same dynamic is at play in the stock market. Substitute "shares of stock" for "NullCoin" and the narrative would be just as true. And in either case, to many of the holders, it is
magic. It is like a big magical printing press printing money!
But the magic only works for so long as there are other people willing to pay those kinds of prices.
Edit: And it can be "good for the economy" (again, in a manner of speaking) to the extent that people who hold the appreciated NullCoin feel richer and that changes their purchasing behavior. These changes happen even without people cashing out. They just look at their account balance and "feel richer", and it makes less likely to save funds they otherwise would, and them more likely to spend--more likely to run up credit card balances even. We saw exactly this kind of thing happen when people felt richer during the dotcom bubble and the housing bubble... I don't think that crypto is "big" enough to have any significant impact on the economy. But if it gets big enough it will impact the non-crypo economy in both positive ways (while the bubble is inflating) and negative ways (when the bubble pops). I'm hoping that crypos are on their way down, so that this won't happen.