Crypto Beans #13 Fed is a Legal Money Counterfeiter!

Hey there everyone! 👋 This is Shivam. I bring to you the 13th weekly edition of Crypto Beans. This is an effort through which I try to share my thoughts on the crypto space and help you stay updated. Your 0 to 1 guide in crypto.

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Read time - 4 mins

In this edition, the article I explore is titled "Fed is a legal money counterfeiter!" Hope you enjoy it.

State of Crypto affairs - A quick look at the market 

The global cryptocurrency market cap today: $1.20 Trillion

Weekly change: 22.73% | Yearly change: -39.02% 

Bitcoin (BTC) is the largest cryptocurrency with a market cap of $528 Billion.

Weekly change: 31.54% | YTD change: 63.58%

Another important metric is Bitcoin dominance which can be used as a rough indicator of the relative strength of Bitcoin versus other cryptocurrencies. A high Bitcoin dominance means that Bitcoin has a large market share and is potentially more influential in the overall cryptocurrency market and vice-versa.

Bitcoin dominance: Current Year: 45.19% | Last year (March 2022): 42.26%

Greed and fear index 

The market sentiment has been turning, now the market seems to be getting more cautious with the news around layoffs and looming recession.

Note: The data used is based on metrics like Volatility, Surveys, Bitcoin Dominance, Social and Google Trends. Source: Coinstats

Is ETH ultrasound money? 

Let's have a look at Ethereum supply changes post its merge to a PoS blockchain from PoW, as there is a shift in the narrative for Ethereum to become a store of value due to the expected reduction in ETH emissions.

Supply change since merge POS -66,578 ETH

The graph highlights POS vs POW issuance since the merge. Impressive numbers, look super bullish for ETH long term given the supply of ETH is not growing as before

Spill the beans (Explain to me like a 5 year old) 

The traditional banking system is broken

The traditional business model, the fractional reserve system for banks, has been broken since it was invented. It's been broken for 400 years. It is the ultimate levered system that is highly unstable. And guess what....

It has always been that way. We have had nothing but bank instability for hundreds of years. Now, what we try to do to offset that is we have deposit insurance, we have central banks, we have myriad of bank regulators that crisscross in this unstable system to try and force it to be stable. And even then it doesn't always work. And then the taxpayer has to wind up bailing out the bank system over and over again.

It's just been a level of brokenness that it has been over the last half a millennia or something. We've had bank runs in the 17th century and in the 18th century. We had bank runs, terrible ones in the 1930s. We had the 2008 financial crisis and lots in between the savings and loan crisis. This happens over and over again.

The banking system is never sound. The banking system is always unstable. The banking system is either in one of two states, it is blowing up or it is about to blow up. Well, then the question asked - Is there is a sustainable business model for banks that would be different from what we currently have?

A fully reserved banking system model would be a much more sustainable business model. In this the banks don't lever, they take in the money. They reinvest the money and there's a little bit of spread in between for their trouble.

SVB bank run is a classic case of some of the risks of Fractional reserve banking.

Fractional banking relies on trust, which is established by the government and the central bank ensuring the system works. Ideally no bank can survive a full fledged bank run and have a sustainable business model.

Banks use this model because this is how they make money

Customer deposit money with banks. Banks not only provide custody of deposits but also pay an interest rate on the deposits. Banks then use the customer deposits to finance credit cards and loans at an interest rate higher than the rate paid back to customers. They keep the difference, and this works.

This is a liquidity crisis, not a solvency crisis.

Now, what does that mean? This is nothing like 2008. In 2008, banks made loans and they bought securities. Then they lost a ton of money on them, and they were unable to meet their obligations because of losses.

In 2023, banks made loans and they owned securities which were largely good. There was no real problem with securities. What happened was everybody wanted their money back on the same day. And a bank can't turn to a bunch of securities and sell them all in the next four minutes and raise cash in order to meet those obligations. This is what causes banks to fail.

Can the Fed stop this? Does it affect them?

It is important to understand that Federal Reserve will never go bankrupt. It's like the bank in Monopoly. The rules in Monopoly state that the bank never runs out of money, just write down 100 on a sheet of paper there, you got another $100 bill. The Federal Reserve has the same ability to do that. They're sort of a legal counterfeiter, so they can just basically counterfeit up as much money as they want. If you and I practice this, we go to jail for being counterfeiters.

This is different to what happened in 2008

In 2008, was banks made bad loans and they lost money. So we put together a bunch of rules so that they can't make bad loans again and lose money. Banks were forced to buy very high quality assets like treasury securities and then they took some duration risk along the way. But then the tightening led to interest rate risk and dropped the prices of these high quality assets.

This is not 2008, now the money is moving around the banking system faster than anybody could have ever imagined. And this is the thing that has shocked regulators and banks in terms of the speed of money that is coming out of these banks and is going to continue to be a problem.

$42 billion was withdrawn from Silicon Valley Bank last Friday in one day. How did $42 billion get withdrawn if there was nobody lined up in front of the bank? They were all laying in bed using their mobile banking app.

And so regulators have got to learn now, and I think they're learning the hard way, and they're scared that the velocity of deposits is much higher than they've ever imagined it would be.

What's brewing today? Bringing fresh beans to you: 

Here’s how ChatGPT-4 spends $100 in crypto trading: The experiment is aimed at understanding GPT-4’s potential biases toward certain cryptocurrencies, how the events of last week could impact investment decisions, and whether it can adjust strategy to eventually turn a profit.

Polygon Partners With Salesforce for NFT-Based Loyalty Program: Salesforce partnership with the blockchain platform marks another major company’s investment into customer engagement initiatives using Web3 technologies.

Crypto Wallet Prototype Discovered Inside Microsoft Edge Browser: The unreleased features suggest the tech giant is considering a deeper move into Web3.

Whats meme-ing? Better make sure this is fun

And now the funny part,

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.