Nostr Web Client

Before Bitcoin was officially released,

Friedrich Hayek warned of the dangers of custodial bitcoin wallets

In his book, he laid out the boom-bust credit cycle, which happens when banks create money through lending. For example you deposit $1, but they lend it out. Now you think you have $1, and so does that other guy.

Some hate altcoins, because they are just venture capitalists printing money out of bullshit. But what people should be more aware of, is that 90% of the US money supply comes from private banks doing fractional reserve lending. And this is far more dangerous than the measly Federal Reserve, because it creates malinvestment, that causes depression when it bursts.

When you use custodial bitcoin wallets, these are really fractional reserve bank accounts, and the very thing you hate, (printing money) is being done in a sinister new way....

Because the more volatility that comes from these credit busts, the less cryptocurrency will be used as real world money. Which causes capital flight on the "real" lightning liquidity, making it even harder to self-custody due to the cost of capital. You see, Bitcoin's enemy isn't altcoins, it's fake Bitcoin.

If Hayek were alive today, he'd say "Not your keys, not your economy"

Reply to this note

Please Login to reply.

Discussion

mister_monster 1y ago

These debt-austerity boom bust cycles happen no matter what money you use and are impossible to control. They happen because fundamentally, when you borrow something, you're not borrowing from someone else, you're borrowing from your future using them as a facilitator. You're transferring value back in time, which you then won't have in the future when you would've had it. But in the moment you do have it, you have more than you've created. The only way to stop them is to entirely end lending, and even outlawing it wouldn't stop it, there's no way to do so.

DrZhivago 1y ago

I think the largest difference is the ability to fractionally lend can be divorced from the ability to custody.

If you have BTC on-chain you can be certain it is in your custody. Whereas in a bank, the custodian can default and lose what you thought you had.

Fractional lending will certainly continue to exist, but blow-ups can be more localized instead of systemic. Lending will become opt-in.

shortwavesurfer2009 1y ago

And even lending isn't really that big of an issue. The primary problem is that people think they can take their deposit out while it's being lent. And that's just not the case. if all lending occured through CDs where you could not get your money out that would be alright

shortwavesurfer2009 1y ago

SimplifiedPrivacy.com 1y ago

The issue with fiat money is the money itself is debt.

Debt exists in time.

So yes you’re correct you borrow against time, but the bond yield curve is really a measurement of how much money exists now vs the future. When the liabilities are now, and the assets are in the future, it’s a bust.

It’s not “impossible to avoid”, the answer is the money supply has to be an asset... and not debt

mister_monster 1y ago

Well boom busts are impossible to avoid, because you can't stop people from lending to each other. But Keynesians think that by creating money during the bust they can smooth it out, which works but it causes even worse problems that accumulate as we can all see.

Fractional reserve lending exacerbates it a lot, because *everyone's* money is being lent out, whereas without it it would just be people that want to lend creating the cycle, you have to have capital earmarked for lending normally but when everyone's money is controlled by a bank that lends it out now you have all liquid capital contributing to the problem.

SimplifiedPrivacy.com 1y ago

Different industries could experience drawdowns, but under a supply based economy (real money), there is no logical reason for unrelated industries to be connected. Capital flees one industry to go to another.

While as under fractional reserve banking, the money created leads to malinvestment, where they think there will be all of this return, but in fact, it’s due to the artificial credit boom.

Under the system Austrian economics proposes, people are not stopped from lending to each other. The primary difference being that those who are lending, know their funds are tied up and can not access them for a given period of time. This prevents them from thinking they can use these assets to pay down debt.

The yield curve inverts during a credit crunch, as more money is needed in the present than exists.

The assets are in the future, but the liabilities are due now.

DrZhivago 1y ago

Since most of BTC on Lightning or eCash is custodial, do you think the same flaws of banks are an inevitability? Or have these protocols been able to overcome that temptation?

Monero has shown itself to be the superior non-custodial salable option imo

SimplifiedPrivacy.com 1y ago

The fate of Bitcoin will be its users decisions and not the technology. The blocksize was arbitrarily limited and that can easily be undone, even today. And even without that increase, the users can culturally switch to non-custodial solutions.

I agree on Monero

Brisket 1y ago

But unlike the fiat system, no Bitcoin is going to be printed to make people whole again.

The worst case scenario is that Bitcoin price drops for a while, like when FTX, etc imploded.

If WoS or GetAlby are running a fractional Bitcoin reserve I doubt it will have much affect. The biggest fractional reserve risk is in exchanges or custody providers such as Coinbase & Gemini. Not your keys, not your coins is a lesson to be learned many times.

Custodial spending wallets are not the risk you think they are unless a single service becomes dominant. Bitcoin is permissionless money, it will always be desirable by those who seek to steal from others.

I ain't holding no privacy shitcoin longer than I need to. I'll gladly hold a million sats in my WoS account though. I'll take the small custody risk over the certain loss of value over time.

SimplifiedPrivacy.com 1y ago

hey thanks for writing in, please see the thread with shortwavesurfer below on the same topic

Peace K 🪙 1y ago

I missed something. How are custodial wallets creating more Bitcoin then there really is?

SimplifiedPrivacy.com 1y ago

Custodial Bitcoin services are really banks where you are told you have an amount in your account, but they don't actually have it allocated to just you. They can lend it out or earn interest on it. And in fact are very motivated to do so.

Fractional reserve banks follow the same model. It's called "Austrian economics", which studies the increase in the money supply created by banks lending.