The Real Basic Economics Class and Paper Gold/Bitcoin
Level 1 - NGMI
Welcome Avatar! Figured this would be a good break from all the chaos and a comical take on our education system as well. You should read it to understand why markets are not efficient, why your economics degree isn’t useful and how to avoid making major mistakes that are “obvious” in hindsight. Again. No one has a crystal ball. If you’re shooting more than 60% you’re actually a top league investor (yes really - most underperform dramatically versus all indexes).
Part 1 - The Entire Degree Is Based on a Flaw
If you’ve taken classes in economics you know that the first thing they teach you is that people act in self interest and “we assume they are rationale”. Boom.
Right there you know everything can be thrown straight into the trash bin. Click, hold, drag into the trash and delete.
People are not rational. They are irrational. If you want some examples let us know if you’ve seen the following before
Girl who has an abusive boyfriend that she believes will “change one day”
Girl or Guy driving for hours for some person they adore for no apparent reason
Person who steals money and somehow glorified later as a celebrity - see Wolf of Wall Street Jordan Belfort. He literally stole millions via insider trading and is now a “motivational coach“
Have you ever seen a successful ad that sells based on logic/benefits vs. emotion and transference of feeling? Real ones know the answer to that. No way!
We could go on and on. The reality is that people are not rational at all. They are emotional creatures and buy, sell and act based on how they feel in the present moment.
Not All is Lost: One part of the assumptions is accurate. If you follow incentives you will figure out what is going to happen over the long run (90%+ accuracy). There are always exceptions.
If you have two kids and have a $2M net worth, you would probably give both of them $1M each even if one was more talented than the other. This is because that’s a fairness thing relative to a family unit. However. In the business world where there is no reason to create a “everyone is equal” structure, following the incentives is best.
Real Estate Agent Example
Work in Real Estate for five years
You make 2-3% for all transactions $20K or $30K for every $1M you sell
Do you *really* care if the buyer buys for $1.1M vs. $1M? Not really since the difference is $2-3K versus the $20-30K you would get. $100K is a lot for the buyer but not really that big of a deal if you collect $20K or $22K
Do you *really* care about being right about the market all the time? Not really since the game is churn
Are ALL real estate agents like this? Of course not! In fact you should look for ones that admit when a market is bad/good. This means they actually are trying to create a long-term relationship with their clients
Part 2 - Supply Demand Chart
Everyone has seen the above graph. The problem is that they misinterpret it with insanely low IQ takes. The most common mistake is assuming that “supply” and “demand” are equal. They are not equal. Demand is *ALWAYS* more important than supply. There are no ifs and or buts about this. It is always more important.
If supply is down and demand is the same, price goes up. If supply is down but demand is down, price won’t go up. If supply is down and demand is up or flat then yes, price goes up.
Used Car Market
Now that this is starting to become mainstream news (6 months later) all you really need to do is ask “are more people going to drive cars”
Cars are pretty much a magic mirror for population growth. If you have 10% population growth, you should see 10% car growth (easily). This is because the same percentage of people typically buy a car vs. the population. Nit pickers can argue for multiple cars at a home but in the end the best proxy is population
Is this a perfect calculation? No. It gets you close enough though
Last year, there were massive supply chain issues and new people were *forced* into the car market due to COVID and other issues
Now… That was temporary (of course). Once you buy a car you don’t need to buy another one for a couple of years at minimum
Fast forward to today, you have supply of cars available going back to normal. Demand was *PULLED IN* for 2020-2021 since people were forced to buy
Now you get this in 2022
Part 3 - Paper Gold and Bitcoin Market Differences
We wrote this and thought it was pretty clear. That said, not everyone is familiar with “paper” commodities so we’ll explain it in real simple terms.
On Wall Street (and apparently computer coin exchanges) you can create fake assets by simply creating “paper” that mirrors the price of an asset. You can do this because you have enough cash to settle the balances and simply collect fees from speculators.
Example: Joe has 1,000 lbs of gold. This is stored in a basement somewhere with private security. Kevin works for Lehman Brothers, he sells 1,000 lbs worth of gold in the form of paper. He doesn’t actually own the gold, he just wants to offer a product that mirrors the price of gold. No one cares because Lehman has billions of dollars.
Five years later the price of gold goes up 5x and Lehman was betting on the price going down. Well now how do you pay out the people who “own the gold”. Oh. You can’t because you don’t have any gold. Now you’re bankrupt. Note: Lehman blew up due to real estate but we used this to paint the picture and foreshadow.
Same for FTX: You login to your FTX account. You click “buy” for Bitcoin. You think FTX has bitcoin on its balance sheet. It doesn’t. They actually have ZERO bitcoin and own a bunch of scam coins like Serum instead. The price of Serum goes down 90% the price of bitcoin goes down 50%. Well now there is a 40% hole. As people ask for their cash *or* their bitcoin, you find out they have none. Congrats. Another bankruptcy
Put It Together: If we know with certainty that FTX didn’t actually hold any bitcoin, it means the supply of Bitcoin was *inflated*. FTX was lying to everyone saying they held say 10,000 or 100,000 or 1M bitcoin (whatever the number was). The foolish buyer thought he owned bitcoin and didn’t!
By definition the number of “bitcoin” on crypto exchanges was much higher than it should have been (people were buying fake bitcoins that were never held, just a piece of paper that tracked bitcoin price). No one will know the exact amount (except the auditors) but we do know they were selling paper coins that don’t exist.
If FTX was selling fake BTC that they didn’t have (say 100K coins) it means there was demand for 100K coins that never got reflected properly. People were buying Bitcoins that didn’t exist.
Short Summary: This is clear as day at this point. Anyone with financial background will understand what happened. If you don’t have financial background then it’s even easier: 1) do you own physical gold? 2) do you own the actual seed phrase for your coins and hold them in self custody? If you answered no to both, you don’t actually own any gold or bitcoin. A gold ETF is not gold.
It is “paper” gold. A Bitcoin ETF is not bitcoin. It is “paper” bitcoin
If you don’t own the seed phrase or don’t own the physical commodity, you don’t own any Gold, Silver, Bitcoin, Ethereum etc. You actually own a piece of paper that might be backed by thin air and promises. A potential zero.
Part 4 - Bonus Example of 3rd Party Custody Risk
BlockFi was a ponzi business where people gave their keys to someone else for a 2%+ yield. Anyone with an internet connection can go online and figure out that Bitcoin has no cash flows, has no income, has no CEO and has no yield. Similarly. A Gold rock does not have a yield.
Blockfi would have made more sense if they had a negative interest rate since they needed to earn money to cover the “cost of storing your coins”. (Yes this is a joke just buy a hardware wallet)
Now as you can see, what really happened is you exchanged real bitcoins for “paper bitcoins” that you think were held by someone else “safely”. Since you don’t have proof of funds you never actually know where it is.
Minutes later you find out they gave a large amount to FTX who swapped it for some scam coins that went down 90%. Yes. Your money was swapped for complete scam tokens that went to zero (or nearly zero).
Anyway, with this scenario they stated that they incurred a large loss but not “all” assets were with FTX. That said, if you ever get a chance to withdraw you better take out every cent. You had a chance last time. If you get a third chance you better sprint!
We got blocked by the CEO after that tweet. Wonder why?
As a final conclusion. If BlockFi cared about protecting customers they would allow them to take out their funds. This of course won’t happen because then they would have no business. Expect this to be a long and painful process unless someone decides to “invest” in this idea again.
Quick Conclusions
Here are some Quick bullets to remember:
People are not rational, they are emotional
In work/business people will do what they are incentivized to do over a long time frame
Demand is always more important than supply. You can have a low supply of fax machines but they won’t sell well in 2022
Ask yourself if demand *changed* when anyone talks about low inventory of any product. This applies to cars, homes, shirts etc. Inventory means nothing, demand is what matters long term. If you have increasing demand, then sure you could have prices go up even more (of course since demand continues to increase, again like a computer versus the fax machine)
Sadly some people have to learn the hard way on fundamentals for “paper products”. If you don’t own it in your hand there is always 3rd party risk
Finally, we’re aware paper gold products are relatively safe since they charge fees to float this paper and it’s not a great comparison to a firm someone offering “positive yield”. It was the easiest example we could think of and to be honest we’re feeling pretty trash after last week so didn’t bother to think of a better solution
On that note, best of luck anon. Stay safe. Manage your risk and continue to learn about any new product you’re interested in. In our cartoon opinion, it is better to manage all of your own money (2% on $1M is $20,000 a year and you can easily get $2K worth of data that will help you make better investment decisions - vs some manager who does worse than ETFs)
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce. We’re an advisor for Synapse Protocol and on the JPEG team. Currently homeless.
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Wow I didn't know all these firms could create paper commodities, that's crazy
Also, the part that BTC demand wasn't correctly reflected in the price due to paper is a very clever insight nice
Might be a noob question but are stocks also “paper” (ie. you don’t own any actual company shares, just the promise that you have them)?
And if so, any way to make sure you own them as well?