BitCoin: an alternate currency

Discussion in 'West Mall' started by Bevo Incognito, May 23, 2011.

  1. Driver 8

    Driver 8 smoooove

    Caitlin Long is a 22 year Wall St vet who has written quite a bit about banks and crypto, specifically about how they will probably try to use rehypothecation to create leveraged claims on underlying assets, which is part of the risky stuff that got us into the 2008 crisis. I recommend reading her to understand what might be going on with the banks and crypto

    caitlin-long.com

    Caitlin Long on Forbes.com

    Twitter @CaitlinLong_
     
  2. iatrogenic

    iatrogenic 1,000+ Posts

    Good article. It exposes how week bitcoin is and answers your question about fractional reserve banking.
     
  3. Monahorns

    Monahorns 1,000+ Posts

    I didn't take it as bitcoin being weak, but that "the system" isn't being honest. You don't really get bitcoin you get some kind of promise on a financial asset. Not that I can explain in detail, but it is that type of things that I was referring to earlier. Usage of bitcoin is being "managed" in order to benefit those in power and keep regular Joes from truly having access.
     
  4. Dionysus

    Dionysus Ok Cool. Hook ’Em! Admin

    That’s the rehypothecation that Driver 8 referred to. Banks make money issuing “paper claims” to assets they do not own, essentially re-using collateral to fund their own trades and borrowing. It’s a form of leverage and can be very risky. And it is legal!

    The way to protect yourself from this is to transfer your bitcoin purchase from the online exchange to a hardware wallet where you have the private keys. If you hold the keys then you alone control the asset—the flip side to this is that you are responsible for securing those keys.
     
  5. bystander

    bystander 5,000+ Posts

    I wonder if the party who is issued a "right" to the collateral are aware that the bank doesn't hold title to the asset and that if the person who produced the collateral in return for a loan remains in compliance with the terms of the loan that the collateral would not be a true form of collateral?
     
  6. Dionysus

    Dionysus Ok Cool. Hook ’Em! Admin

    I don’t know all the details but it’s my understanding that the bank does own the asset. The risk is that they leverage that asset beyond it’s actual value and benefit from the spread. It’s all good as long as a run on the bank doesn’t happen because the bank would not be able to satisfy legitimate claims. I think that’s how it goes, I’m happy to be corrected on it though.
     
  7. iatrogenic

    iatrogenic 1,000+ Posts

    I wouldn't worry too much about "regular Joes" having access to something whose "value" fluctuates hundreds and hundreds of percentage points each year, has limited liquidity, and purports to be a currency but has no lender of last resort or government backing, and is issued based on solving a math problem. Come on man!
     
  8. bystander

    bystander 5,000+ Posts

    I did some quick research; from the link below:

    Risks of Rehypothecation
    With rehypothecation, the asset in question has been promised to an institution outside of the borrower’s original intent. For example, if a piece of real estate functions as collateral on a mortgage loan, and the lender pledges the asset to another financial institution in exchange for a loan, if the mortgage lender fails, the second financial institution may make a claim on the real estate.

    Rehypothecation
     
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  9. Joe Fan

    Joe Fan 10,000+ Posts

  10. Driver 8

    Driver 8 smoooove

    CNBC article on crypto

    The U.S. regulatory environment has been pretty friendly so far

    Bipartisan lawmakers seek cryptocurrency rules to protect consumers and keep US competitive

    "Virtual currencies and the underlying blockchain technology has a profound potential to be a driver of economic growth," Reps. Darren Soto, D-Fla., and Ted Budd, R-N.C., said in a statement. "That's why we must ensure that the United States is at the forefront of protecting consumers and the financial well-being of virtual currency investors, while also promoting an environment of innovation to maximize the potential of these technological advances."
     

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