Topic: Gold collapsing. Bitcoin UP. - page 509. (Read 2032286 times)

Fully agree. Though to be fair, my understanding is backing did work somewhat OK in the US in the 1800s when banking was very fragmented.

My understanding is back then banking in the US was very fragmented, especially compared to Europe. Banks were largely small and regional and many issued their own paper notes backed by gold. The US also did not have a central bank to bailout banks or downturns.

The result was no bank was so large that it's failure mattered to anyone except their depositors/investors, to big to fail was not a concept yet. This also meant that if banks levered themselves slightly (meaning more notes than backing assets), they were exposed to a deposit run. To protect against this banks mostly kept leverage well below 2x. Yes, there was the occasional run and bank failure, but it would happen on an individual bank basis, and was not system wide.

Depositors (i.e. the market) were responsible to ensure bank honesty and most banks remained honest out of self preservation interest. If a bank acted even slightly irresponsibly (or was rumored to), it wouldn't take long for a depositor queue to form to drain reserves.

The key was the system was decentralized and fragmented, and so could withstand individual failures. This system worked for a time, and it was the most rapid growth in US history and when the US surpassed England as the largest economy.

When I've read the reasons behind why those who created the FED did so, they wanted to strengthen the system against two things. 1) They wanted protect depositors against failures and 2) they wanted to enable the government to have the ability to fund itself through downturns (previously during a regular recessions, the US government would need to turn to the JP Morgan's of the country for funding, they wanted to stop this).  

The problem is they didn't understand two things: 1) they eliminated market pressures from the system by making depositors not responsible for their loses and 2) they eliminated the decentralized nature of the system by structuring everything under one dominant entity (the FED).

Then in the 1920s two things then happened: 1) Leverage exploded in the banking system because banks lost their market pressure to be honest and 2) the FED issued many more dollars than they held in gold reserves. By the 1930s when this leverage process started to reverse, the FED found itself bankrupt with no ability to pay their obligations (they openly admitted this), additionally the FED had become a centralized To Big To Fail entity that everyone relied on. Since the FED was both bankrupt and To Big To Fail at the same time, the US fully defaulted and FDR banned gold ownership to keep everyone in the banking system.

What is heartbreaking to read in this history, is instead of learning from their mistakes and return to a decentralized and market based system that worked, FDR doubled down and created regulations in the place of market forces and banned individual ownership of money, and he was cheered for it. This is the moment America choose security over freedom and when the experiment failed IMHO.

The point to this long winded post is paper backed gold can (and did) work, it's just that it requires a decentralized system that can withstand individual failures and uses market forces to keep honesty. Sound familiar?

I can see why you could think gold back paper is the same as fiat money, but here is why I think that is incorrect.

In a gold backed paper system, gold is the reserve base asset. Yes entities can issue paper or a ledger backed by gold but: 1) you have to trust those entities to be honest (and history has shown that many over leveraged and failed) and 2) you can only use paper or ledger transfer within that single issuer's system.

For example, if two people used the same regional bank that issued a gold backed ledger, they could transfer paper gold between each other using similar transfer mechanisms as fiat. However if those two people used different regional banks that issued separate gold backed ledgers, transfers between them would require the banks to physically transfer gold between them (or they probably would not transact directly and require a gold withdraw from one and gold deposit to the other). Similarly if two nations issued gold backed currencies, trade between them would finally have to be settled in gold. BTW, this is how the US slowly acquired it's gold horde in the 1800s starting from nothing, it traded services and slowly acquired physical metal, this happened despite most countries having paper currencies for end-user convenience.

For example when France and Spain traded, even if both countries issued paper currencies backed by gold, they would settle in physical gold eventually.

The key is gold is still the backing asset, and transfers between issuers of gold backed paper would still have to settle in physical metal. (This is where the phrase "cold hard cash" comes from, paper is neither cold nor hard.) Additionally if a backer issued more promises then held gold, that backer would eventually go bust because it would require a bailout by mother nature to magically issue more gold.

In a fiat system, a fiat currency or debt is the reserve base asset. This reserve asset exists as a man-made ledger item only (just like Bitcoin BTW). In today's global US dollar system, US debt functions as the reserve base asset.

Here transfers between different regional banks or even different countries is done 100% in a ledger form. Since US debt is the backing asset, and US debt exists in ledger form with the US treasury, transfers can be done between any two entities by the US Treasury, nothing physical needs to move.

For the same example, today when France and Spain trade, they settle in transfers of US debt, which are ledger transfers on at the US Treasury listing only.

The two systems may look the same from an end-user perspective (us plebs), but the mechanisms, trust and guarantees of the two systems are vastly different.

https://p.gr-assets.com/540x540/fit/hostedimages/1384008962/6740869.jpg

No it can't.  That model has failed every single time it has been tried.  The dollar was once backed by gold.  That peg failed.  Egold was once backed by gold.  That also failed.  If you look through history, there are countless other failures of gold-backed currencies.  The reason:  a central point of failure.  Bitcoin is the only reasonable solution.  To attempt another centralized gold backed currency would be insane.

but from a practical standpoint, it's never been done.

just look at the largest supposed holder of gold; the Fed.  totally opaque.

One has nothing to do with the other. You can use a ledger that's backed by units of gold, or a ledger that's backed by nothing and can be inflated on a whim. Sure you have to do audits to make sure a gold ledger isn't being inflated, but it can be done.

Nice post, rocks.

Pre-Central bank vs. post-Central bank inflation. They get away with this because most of the public does not care about the SoV function. I remember seeing an inflation chart for Rome a while ago, and it looked very similar with the last 100 inflationary years lining up with 200-300 AD Rome. We know how that turned out.

Great read, thanks.

The problem for gold bugs is they are stuck on looking at the Store-of-Value function and history of gold only. They do not see that despite a superior SoV function gold failed because it's Payment-Function is weaker than central bank fiat money, and that the Payment-Function drives adoption, not the SoV function. Example: this article focuses on the SoV function only.

The key central bank invention was to transition money to a ledger account, which enabled instant transfers between accounts regardless of geographical location. Essentially fiat money could move as fast as information, this is light-years ahead of gold. The public accepted fiat because it is easier to work with, despite it's poor SoV function because the public didn't emphasize the SoV function. This lack of public SoV focus is largely why governments have gotten away with their abuse of money IMHO.

Yes Bitcoin provides a superior SoV function, but it has a superior Payment-Function to fiat and that is what will slowly win over individuals. Essentially Bitcoin provides all the benefits of fiat ledger money with the benefits of direct control/interaction (no middlemen), this combined with personal computing creates a vastly superior Payment-Function, which is what will drive adoption.

Bitcoin's perfect SoV I don't see as being the sole driver of wider adoption, even though it's SoV is why I support the project. That is why it is critical to protect Bitcoin's SoV function from the inevitable attacks we'll see.

Apparently Blockstream is 1-2 months away from releasing code for federated sidechains... Interested to see what comes out of this

http://news.goldseek.com/GoldSeek/1422975660.php

Why inflation is just smoke & mirrors... he pretty much sums up what bitcoin is all about with its finite supply but fails to correlate the two.

Elaborating on this, people in 2011 looked at 2009/10 prices and had the exact same conversation, however risk in 2011 was significantly lower than in 2009/10.

In 2009/10 bitcoin was not even a standalone entity yet. It was a very small community of developers lead by Satoshi who set most of the direction. Mining was largely centralized and supported by satoshi in '09. Bitcoin was a novelty and it was not proven yet if it would successfully function on it's own in the wild with usage beyond a small number of aligned individuals.

2011 was the year Bitcoin successfully transitioned to a standalone entity and demonstrated that it would function out in the wild without the training wheels of it's founder. That was a huge transition, which justified the price increase from $0.10 in 2010 to >$1 prices in 2011.

Each of these two transitions (the one above and the one Melbustus states) came with a significant move in valuation.

Just think how many transitions there are to go between today and mainstream adoption.

Edit: I was not involved during this time period, and base the above on what I've read. I vaguely remember first reading the word bitcoin in a slashdot article title in 2009, but did not investigate at all due to work time pressures. It was a New Yorker article on Satoshi of all things in late 2011 that my wife suggested I read that got me involved and I immediately latched onto it. Still regret not reading that link in 2009.

^ This.



^ And this.



^ And this.

Elaborating on these, from when I discovered bitcoin in 2011, I thought it'd take >10 years to get to where we are today. There was basically nothing in terms of ecosystem or buy-in from any notable "mainstream" people, and we were experiencing a 94% crash from a blow-off peak. It certainly seemed like it would take forever to bootstrap the ecosystem, if it was to happen at all. Furthermore, bitcoin hadn't *really* been battle tested at that point. The risk was huge for a number of reasons.

The risk is still large, of course, but there's little comparison. We've experienced *too-rapid* growth in awareness and hype, and now we settle in to the longer task of building polished tools, educating people, and integrating bitcoin into broader systems and workflows. It's going to take time, but we're over what was a pretty high-looking hurdle from 2011's point of view.

The purpose of dev lists in some sense is they create a balance between open access and a barrier to the public. Due to the interface only people truly interested in a topic participate, and it is very easy to ignore those who distract a discussion (simple per user block). Because of this they tend to not degenerate in the same manner I've seen many forums/comment sections.

Regarding "troll slaying", I don't believe this is effective at all. Take JorgeS as an example, he wasn't slayed but improved his trolling. On this forum he was able to test multiple forms of FUD, see which one were easily refuted and he shouldn't use any more, and which were more complicated to refute or that were hard for newcomers to understand. This thread has started to become a troll testing ground which is why I've been less active.

Well said. Relative newcomer bitcoiners, both trollish and non trollish, often can't see the amazing growth of the network and  infrastructure in only 6 years because they weren't there see how rickety it was only a few years ago during initial bootstrapping.  The party is only getting started and this is an excellent entry point for anyone who wants to cost average as we're near the point of maximum opportunity if not at it now.  

Edited for clarity and spelling

Claiming bitcoin wont go sub200 ever is just silly, at best, and kinda discredit the whole thread.

How is it the price keeps tanking with such great "groundwork" in place???  Why teh inverse correlation?
A guy from the internet once told me increasing demand on a limited-supply asset (such as BTCeanie BTCabies Bitcoin) should drive the price up, was I lied to???

Exactly. All of these people saying "Oh, but they're not investing in bitcoin/why aren't they buying".    You don't think that once the necessary groundwork is laid that all of these investors won't take us where we need to be? Lol

precisely

You can catch up with people who discovered bitcoin two years ago. Same risk - you venture more, but the risk per dollar is considerably less than back then.

1. Do it now, don't wait until the price is 600 or 1200 or whatever. Now is the time.

2. Risk 10 times more than the 2013'ers did risk. Either place a larger fraction of your portfolio in bitcoins, or take up a loan, or trade on margin.

You don't need to be grumpy. The risk is smaller. Many did not enter in 2013, even knowing about bitcoin. They did not take the risk. Those who did, deserve what they have.


Edit: Trading on margin might not be too smart. You don't have control.