In an interview on CNBC, investor Warren Buffett said the following: “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending”. He didn't give the exact reason why this would happen. He just added: “When it happens or how or anything else, I don’t know”. Here we will give the exact reason by demonstrating one fundamental flaw that all cryptocurrencies have.
Cryptocurrencies are publicly portrayed as innovative payment systems. We constantly hear stories about their fancy features like speed, decentralization, security, immutability, and scarcity. And that these features somehow make them better or superior to the fiat payment system. But what we never hear, is that crypto systems cannot solve one fundamental problem. A problem that trumps all those fancy features. Now let's see what exactly that problem is.
In barter or commodity-based payment systems, both parties in an exchange receive either goods or services. If one traded tobacco for a haircut or a cow for gold, both parties received items that satisfy human wants and needs. However, in payment systems like fiat or crypto, there is a problem. Nemaley, only one party receives goods or services. The other party receives just system units. They receive something that cannot be used to satisfy human wants and needs. So obviously, the system that issued such units must be able to solve this problem. The fiat payment system solves it, while crypto does not. Let’s now demonstrate this.
The fiat payment system has two stages. In the first stage, the banks create the units by granting loans or purchasing government bonds. With such created units, loan or bond beneficiaries go to the market and get goods and services. So that stage is when the said problem is created. The market gives up items that can be used to satisfy wants and needs and gets only system units. The solution to this problem comes in the second stage. Namely, given that banks have loan contracts with the beneficiaries, liens on their properties and in the case of government bonds that must be repaid, this forces the beneficiaries to give goods and services back to the market. Otherwise, they would not be able to get the units to pay their debt, and they would face foreclosures on their properties. Additionally, the issued units are recorded in the balance sheets of the banks as their liabilities. That means that if the beneficiaries default, the banks must sell foreclosed properties for the units to close the unpaid debt and in that way remove liabilities from their balance sheets. And that is how the problem is solved. That is how the market gets goods and services back.
In crypto systems, however, there is no solution to the problem. These systems have only the first stage. The market initially gets the units as trades for electricity needed to maintain the systems. Electricity is a good that can satisfy a lot of needs and wants. But once the market traded that good for the units, and trades them further for other goods and services, these units are never withdrawn from the market. There is no debt-like mechanism with pledged collaterals to ensure regular withdrawal of the units from the market and the return of goods and services. Instead, the market is stuck with the units indefinitely, or at least until the systems collapse.
The creators of crypto systems create them to have all those fancy features that we mentioned at the beginning. From the outside, these features give the appearance of superiority to the fiat payment system. But none of that solves the said problem. In the long run, the market will reject payment systems with such a fundamental flaw. People will stop giving up goods, services, or fiat units that ensure the return of goods and services, for fancy management of units in crypto systems. Nobody can satisfy their wants or needs with decentralization, immutability, or scarcity. But only with goods and services. That is why cryptocurrencies will certainly come to a bad ending.
Submitted September 10, 2023 at 03:46AM by Eaxecx https://ift.tt/kfPNlwQ
