diff --git a/claims/opportunity-for-gain.md b/claims/opportunity-for-gain.md index 72bec44..54135e3 100644 --- a/claims/opportunity-for-gain.md +++ b/claims/opportunity-for-gain.md @@ -1,6 +1,6 @@ --- -title: Unregulated crypto markets are desirable because of the opportunity for gain -description: Evaluating the thesis that there is money to be made in unregulated crypto markets, and therefore unregulated crypto markets are desirable. We find the negative externalities of an unregulated crypto market to outweigh the benefits, thus this claim fails: an unregulated crypto market is *not* desirable. +title: Opportunity for gain +description: Evaluating the thesis that unregulated crypto markets are desirable due to the opportunity for gain. We find the adverse effects of crypto trading to outweigh any benefits, and as such find this claim to be false. category: - claim: y - featured: y @@ -15,20 +15,19 @@ claim: ## Claim Steel-Manned -#### Retail traders (individual, non-professional market participants) +### Opportunity for gain: Retail traders (individual, non-professional market participants) -* Investing in crypto has the possibility of gaining me huge assymetric returns. -* I've heard other people making huge gains by investing in crypto, therefore it is possible that I can make huge gains aswell. +Investing in crypto has the possibility of gaining me huge assymetric returns. I've heard other people making huge gains by investing in crypto, therefore it is possible that I can make huge gains aswell. +### Opportunity for gain: Quants and hedge funds -#### Quants and hedge funds +If I'm allowed to trade products that are massively [asymmetric](../concepts/asymmetric-information.md) and disadvantageous to retail traders, then I can and I will. Markets are a force akin to evolution: inefficient players will be elimated, and the strongest will be rewarded. -* If I'm allowed to trade products that are massively [asymmetric](../concepts/asymmetric-information.md) and disadvantageous to retail traders, then I can and I will. Markets are a force akin to evolution: inefficient players will be elimated, and the strongest will be rewarded. -* There is no non-public disclosure about the risks of these assets. Everyone is going in with their eyes open that this is the wild west. -* Even if I know it’s a [greater fool asset](../concepts/greater-fool-theory) and has no [fundamental value](/concepts/fundamental-value.md), if I have access to non-public information and more capital I can (and should) use it and exit before the other fools. -* If the market allows [market manipulation](../concepts/market-manipulation.md) ([pump and dumps](../concepts/pump-and-dump.md), insider trading, [wash trading](../concepts/wash-trading.md)) this is public knowledge and it is reflected in the price formation of the assets. -* Some people legitimately did make money trading on [bubbles](../concepts/bubble.md): South Sea Bubble, Dotcom Bubble, Tulip Mania. These booms and busts are just a natural part of market cycles. +Even if I know it’s a [greater fool asset](../concepts/greater-fool-theory) and has no [fundamental value](/concepts/fundamental-value.md), if I have access to non-public information and more capital I can (and should) use it and exit before the other fools. +If the market allows [market manipulation](../concepts/market-manipulation.md) ([pump and dumps](../concepts/pump-and-dump.md), insider trading, [wash trading](../concepts/wash-trading.md)) this is public knowledge and it is reflected in the price formation of the assets. There is no non-public disclosure about the risks of these assets. Everyone is going in with their eyes open that this is the wild west. + +Some people legitimately did make money trading on [bubbles](../concepts/bubble.md): South Sea Bubble, Dotcom Bubble, Tulip Mania. These booms and busts are just a natural part of market cycles. ## Evidence of claim being made @@ -42,25 +41,35 @@ Mann Group chief in [Silverman, Gary. ‘Crypto Has “No Inherent Worth” but > Bitcoin offers a compelling risk/reward profile for patient, long-term investors willing to spend the time to truly understand Bitcoin. [HQ, Ikigai. ‘The Case for a Small Allocation to Bitcoin’. Kana and Katana, 1 March 2019:](https://www.kanaandkatana.com/valuation-depot-contents/2019/4/11/the-case-for-a-small-allocation-to-bitcoin) -> Bitcoin offers a unique opportunity for a non-material exposure to produce a material outcome. It would be irresponsible to have an exposure to Bitcoin that one cannot afford to lose because the risk of losing the principal is very real. But it would be almost as irresponsible to not have any exposure at all. +> Bitcoin offers a unique opportunity for a non-material exposure to produce a material outcome. It would be irresponsible to have an exposure to Bitcoin that one cannot afford to lose because the risk of losing the principal is very real. But it would be almost as irresponsible to not have any exposure at all. -## Evaluation: False (High confidence) +## Evaluation -#### Risk to individuals +### Risk to traders -While some people have made gains trading crypto, there is a strong sample bias in self-reported winnings of crypto assets: participants who make outsized returns [gambling](../claims/is-gambling.md) on the [bubble](../concepts/bubble.md) are more likely to report these returns compared to the vast majority of those who lose money investing in crypto assets. +Investing in crypto assets is a [negative sum game](../concepts/zero-sum-game.md) as defined in game theory and economics. Negative sum games result in a net loss across participants and multiple losers associated with every one winner. -And in such an [asymetric](../concepts/asymmetric-information.md) and "wild west" market, the chances of a minow beating out the sharks is tiny. +Since crypto assets are [investments](../concepts/security.md) the purpose of buying a crypto asset is to buy it at a lower price and sell it at a higher price to generate a return denominated in a [real currency](../concepts/currency.md). However as an investment, crypto assets have no [income-cashflows](../concepts/income-cashflows.md) therefore the only money that exists to pay out investors is money that is brought in by later investors. This makes the entire scheme a [zero sum game](../concepts/zero-sum-game.md). All money won by [speculation](../concepts/speculation.md) is ultimately money that is equally lost by another participant. + +This is comparable to the analogy of a game of poker and other [gambling](../concepts/gambling.md) games The only money that can be won in a poker game "pot" provided by the players of the card game. The act of playing poker does not generate any money, it simply redistributes to participants according to a game of chance. If the "house" or casino takes a percentage of the pot on every round of the game played then the size of the pot must decrease over time. This turns the zero-sum game into a negative-sum game which admits a negative [expected return](../concepts/expected-return.md). + +Investing in crypto assets is statistically guaranteed to lose money for almost all market participants because as investments they have no [income-cashflows](../concepts/income-cashflows.md). This differs drastically from [productive assets](../concepts/productive-asset.md) such as [stocks](../concepts/stock.md) ,[bonds](../concepts/bond.md) and [real-estate](../concepts/real-estate.md). + +While there is evidence of some people making gains trading crypto, there is a strong sample bias in self-reported winnings of crypto assets: participants who make outsized returns gambling on the bubble are more likely to report these returns compared to the vast majority of those who lose money investing in crypto assets. + +And in such an asymetric and "wild west" market, the chances of a minow beating out the sharks is tiny. Everything that has been illegal for 80 years is suddenly allowed: [wash trading](../concepts/wash-trading.md); [front running](../concepts/front-running.md); [insider trading](../concepts/asymmetric-information.md); price manipulation and [order book](../concepts/order-book.md) tampering;[refusing cash withdrawels](../concepts/counterparty-risk.md); [pump and dumps](../concepts/pump-and-dump). Exchanges are basically like bucket shops from the 1920s. -What we are seeing is a captive market for fictitious commodities that is controlled by opaque unregulated market making and an economic cartel. This is great if you're inside the cartel, but not so great if you aren’t. Wealth transfer from the public to insiders is all but guaranteed by the [information asymmetry](../concepts/asymmetric-information). +What we are seeing is a captive market for fictitious commodities that is controlled by opaque unregulated market making and an economic cartel. This is great if you're inside the cartel. Not so great if you aren’t. Wealth transfer from the public to insiders is all but guaranteed by the [information asymmetry](../concepts/asymmetric-information). #### Wider risk -We have no idea how much [leverage](../concepts/leverage.md) is baked into the entire market, induced by products like unbaked [stablecoins](../concepts/stablecoin.md) which can seemingly produce limitless amounts of unsecured debt products on demand. +Crypto assets have the characterstic price behaviour that resembles many other [bubbles](../claims/is-bubble.md) and [market manias](../concepts/market-mania.md) throughout history. -In her 2022 paper ‘DeFi: Shadow Banking 2.0?’ Prof. Hilary Allen warns that the current [decentralized finance](../concepts/defi.md) system risks emulating the “shadow banking” services (functional equivalents for banking products which operate outside the regulated banking sphere) which contributed to the 2008 banking crisis: +Where [bubble](../concepts/bubble.md) assets have complex financial instruments built on top, there is risk of far reaching systemic damage. The 2008 subprime crisis provides a demonstration of what happens when a range of complex financial products are completely dependent on the cash flows of a fundamentally unstable asset. Just as a fall in house prices caused mass mortgage defaults by borrowers in precarious financial positions, and in doing so brought down the entire financial system propped up by their repackaged debt, the cautionary tale of Terra shows the very same vulnerability throughout the system of [decentralized finance](../concepts/defi.md) (DeFi), which hinges on speculation-driven token value. + +In her 2022 paper ‘DeFi: Shadow Banking 2.0?’ Prof. Hilary Allen warns that the current defi system risks emulating the “shadow banking” services (functional equivalents for banking products which operate outside the regulated banking sphere) which contributed to the 2008 banking crisis: “if DeFi is permitted to develop without any regulatory intervention, it will magnify the tendencies towards heightened leverage, rigidity, and runs that characterized Shadow Banking 1.0.” @@ -68,7 +77,7 @@ Commentators have raised concerns about stablecoins in particular, describing th “If something were to shake confidence in stablecoins’ acceptance in the DeFi ecosystem (this ‘something’ could range from a hack, to a problem with the reserve of assets backing a stablecoin, to a problem with the smart contracts managing the value of a decentralized stablecoin), we could then expect holders to exchange their stablecoins for fiat currency and exchanges to seek redemption, forcing stablecoin issuers to start liquidating the reserve of assets backing the stablecoin, depressing the market value of those assets, and cutting off credit for the corporations in which MMFs usually invest through the commercial paper market.” -This fragility and extreme vulnerability pervades the entire crypto-economy. The core mechanism – of minting tokens with no use value and who’s market price is artificially driven by speculative hype – underpins almost the whole system. What might appear as a recipe for [perpetual growth](../notes/financial-perpetual-motion-machine.md) and financial gain in fact appears highly likely to have created a speculation fuelled [bubble](../concepts/bubble.md). +This fragility and extreme vulnerability pervades the entire crypto-economy. The core mechanism – of minting tokens with no use value and who’s market price is artificially driven by speculative hype – underpins almost the whole system. What might appear as a recipe for perpetual growth and financial gain in fact appears highly likely to have created a speculation fuelled [bubble](../concepts/bubble.md). Where does all this lead to? * If the crypto marklet is left unregulated, [systemic risk](..claims/is-systemic-risk.md) @@ -80,22 +89,23 @@ Where does all this lead to? * [Moral hazard](../concepts/moral-hazard.md) - public is incentivized to take on disproportionate risk expecting a bailout. * A terribly pathological form of [capitalism](../concepts/capitalism.md) that doesn't result in price formation on collective enterprise, goods or services. -## References +# References -Akerlof, G.A. (1978) ‘The market for “lemons”: Quality uncertainty and the market mechanism’, in _Uncertainty in economics_. Elsevier, pp. 235–251. +Akerlof, G.A. (1978) ‘The market for “lemons”: Quality uncertainty and the market mechanism’, in Uncertainty in economics. Elsevier, pp. 235–251. -Allen, H.J. (2022) ‘DeFi: Shadow Banking 2.0?’, _SSRN Electronic Journal_ [Preprint]. Available at: [https://doi.org/10.2139/ssrn.4038788](https://doi.org/10.2139/ssrn.4038788). +Allen, H.J. (2022) ‘DeFi: Shadow Banking 2.0?’, SSRN Electronic Journal [Preprint]. Available at: https://doi.org/10.2139/ssrn.4038788. -Burilov, V. (2019) ‘Regulation of Crypto Tokens and Initial Coin Offerings in the EU: De lege lata and de lege ferenda’, _European Journal of Comparative Law and Governance_, 6(2), pp. 146–186. Available at: [https://doi.org/10.1163/22134514-00602003](https://doi.org/10.1163/22134514-00602003). +Burilov, V. (2019) ‘Regulation of Crypto Tokens and Initial Coin Offerings in the EU: De lege lata and de lege ferenda’, European Journal of Comparative Law and Governance, 6(2), pp. 146–186. Available at: https://doi.org/10.1163/22134514-00602003. -Cumming, D.J., Johan, S. and Pant, A. (2019) ‘Regulation of the Crypto-Economy: Managing Risks, Challenges, and Regulatory Uncertainty’, _Journal of Risk and Financial Management_, 12(3), p. 126. Available at: [https://doi.org/10.3390/jrfm12030126](https://doi.org/10.3390/jrfm12030126). +Cumming, D.J., Johan, S. and Pant, A. (2019) ‘Regulation of the Crypto-Economy: Managing Risks, Challenges, and Regulatory Uncertainty’, Journal of Risk and Financial Management, 12(3), p. 126. Available at: https://doi.org/10.3390/jrfm12030126. -Dhawan, A. and Putnins, T.J. (2020) ‘A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets’, _SSRN Electronic Journal_ [Preprint]. Available at: [https://doi.org/10.2139/ssrn.3670714](https://doi.org/10.2139/ssrn.3670714). +Dhawan, A. and Putnins, T.J. (2020) ‘A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets’, SSRN Electronic Journal [Preprint]. Available at: https://doi.org/10.2139/ssrn.3670714. -Ferrari, V. (2020) ‘The regulation of crypto-assets in the EU – investment and payment tokens under the radar’, _Maastricht Journal of European and Comparative Law_, 27(3), pp. 325–342. Available at: [https://doi.org/10.1177/1023263X20911538](https://doi.org/10.1177/1023263X20911538). +Ferrari, V. 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