Daily Bread for 6.16.22: Crypto Is about More than Crypto

Good morning.

Thursday in Whitewater will be sunny with a high of 88. Sunrise is 5:15 AM and sunset 8:35 PM for 15h 19m 53s of daytime.  The moon is a waning gibbous with 94% of its visible disk illuminated.

Whitewater’s Community Development Authority meets at 5:30 PM.

On this day in 1911, IBM is founded as the Computing-Tabulating-Recording Company in Endicott, New York.

Matt Levine, author of the Money Stuff column at Bloomberg Opinion, writes that Crypto Debt Can Be Trouble. In seeing the decline of crypto currencies’ value this way, Levine reminds that big events have multiple effects:

Crypto winter

One thing that has happened is that the prices of risky cryptocurrencies have gone down. Bitcoin traded above $40,000 two months ago; today it got close to $20,000. Ethereum went from $3,000ish to $1,100ish. The total market capitalization of all cryptocurrencies, “which topped $3 trillion in November, dropped below $1 trillion.”

In the abstract, this is just fine. Extremely speculative people had extremely speculative positions in extremely speculative assets, and the prices went up a lot, and then they went down a lot. Some gamblers made some money and then they lost some money; that’s how gambling works. People who put their life savings into Bitcoin should be told, very firmly, that they should not have done that; that was wrong, and now they know. Also though they still have like half of their life savings. If you put your life savings in the S&P 500 you haven’t had a great year either.

The deeper problem, always, is when you add leverage. Someone who gambled $40,000 on Bitcoin now has $20,000, fine. But someone who bought a Bitcoin with $20,000 of their own money and $20,000 borrowed from someone else now has roughly nothing, which is worse. Much worse, though, is that the person who loaned them the money — and who thought that money was safe — is now at risk of not getting paid back. Lots of people all around the ecosystem made overcollateralized loans against risky cryptocurrencies, lending speculators $100 against $200 or $300 or whatever worth of Bitcoin or Ethereum or Dogecoin or whatever. When the prices of those risky cryptocurrencies fall far enough fast enough, the lenders will ask for their money back. But the leveraged speculators won’t necessarily have the money: They were in the business of leveraged speculation on cryptocurrencies, which is a very bad business to be in right now, and all their money might be gone. A $100 loan overcollateralized by $200 worth of Ethereum two months ago is now undercollateralized, backed by about $70 worth of Ethereum. And this is happening to every leveraged crypto speculator and every crypto lender in every cryptocurrency all at once.

Levine, who’s insightful (he is!), shows that foresight requires looking at more than a single possibility. There are multiple effects from this crypto winter.

Levine’s training might suggest that he would be skilled at spotting these effects, as he was formerly “an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit.” But Levine was also a classics major who taught high school Latin after he was graduated from college. That earlier experience likely shaped his analytical skills, too.

There’s no one training or background that has a monopoly on thinking about causes and (as it often turns out) multiple effects. One can come to that useful outlook through many paths, and benefit from having done so. Communities, all communities, have scores upon scores of people who show foresight however acquired and sharpened.

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