Please do make any financial decisions based on the contents of this blog. My blogs are designed to be thought-provoking and introspective, not financial advice. Please do not act on any document unless it is titled “Statement of Advice.”
Central Banking
Central Banking is an awful way to manage an economy.
I’m not going to write an economics or history book here, but if you care about your finances, your community and the broader economy, you should learn about Central Banking.
In summary, Central Banking is the tool that gives the government the unilateral power to expand and contract the money supply. It is falsely claimed by mainstream academics and economists that Central Banking is necessary to provide a nation with flexibility in monetary policy, economic stability, crisis management, along with better opportunities for growth, investment and global trade. The reality of Central Banking, however, is the complete opposite. Any short-term benefits that might be enjoyed by the State’s at-will manipulation of money supply come at the cost of greater distress for the poorest 99% of society. All monies printed today need to be repaid in the future, and in every fiscal cycle in history, bar none, the effect of printing money without the guarantee nor the reality of proportionate production, has resulted in a marked lowering of living standards for the poor and middle class.
Central banking is a vicious and elaborate institution whose job is to strip power, money and authority away from citizens and confer it to the state. Devaluing the citizen’s production is not just the incidental outcome of central banking; it is the modus operandi.
The main evil of inflationary central banking is systemic financial privilege, not born of free market enterprise, but by the order in which the inflated money passes through the economy. The earliest participants in fiscal expansion (governments, banks, stockholders and land speculators) benefit the most from inflation.
The benefits generally stop at homeowners. A rise in local property prices benefits no-one who wishes to remain in that market. The only way homeowners may benefit from inflation is if they borrow upon newly created equity to invest in real estate as early as possible in the cycle – and in fact if they don’t invest, they will be worse off and, in many cases, forced to downsize when interest rates need to be lifted to curb inflation. Everyone beyond the homeowner investor is disadvantaged via higher prices which are on average not met by higher incomes. This is a function of the flow-on effect of price rises. If you need evidence of this, you only need to do small amount of research which will reveal that the average household rent or mortgage repayment as a percentage of average income has more-or-less tripled since the 1960s.
Inflation forces society into a cutthroat game of “invest or lose” with many flocking from productive industries which are the last in line to receive the inflated money (natural resources, agriculture, hospitality and the arts) to unproductive establishments such as deep state bureaucracy, banking and finance – the bravest of which will have a go at property development.
Prosperity need not be so cutthroat. If we were to abandon Central Banking and permanently outlaw the expansion of money supply, we would see a higher participation in productive enterprise. There would still be poor people and billionaires, but there would be no sectoral privilege, and there would be higher overall levels of productivity – the rich would stay rich, and the poor would be far richer. Success would be awarded to competence, rather to where one sits in the credit cycle, and smart people would be inventing cool things that benefit us all, rather than chasing a constantly devaluing dollar in the cruel and counterproductive game that is inflationary central banking.
Crypto
Some believe that crypto “currencies,” bitcoin (BTC) in particular, are the best way forward in reforming the crooked Central Banking system. The idea behind BTC is noble, and it could work in theory, but due to rampant conflicted interests it is rapidly diverging from its original objectives, which are best laid out in Satoshi Nakamoto’s original Bitcoin whitepaper.
The Crypto Bros will tell you that their main objective is to provide a decentralised, deregulated, disinflationary means to exchange, available to anyone with a phone and an internet connection. The Crypto Bros talk of a utopian future world where poor people in poor countries no longer need to suffer under the tyranny of autocratic governments and everyone can participate in free commerce in a trustless peer-to-peer digital environment.
The reality, however, is much the opposite.
Centralisation
As follows are the Top 10 Crypto exchanges and their market share of BTC trading volume:
- Binance – 44%
- Bybit – 12%
- Gate.io – 8%
- HTX (Huobi) – 7%
- OKX – 6%
- Coinbase – 6%
- Bitget – 5%
- MEXC – 5%
- Crypto.com – 3%
- Upbit – 3%
99% of all BTC exchanges occur on just 10 platforms, of which Binance enjoys nearly half. Cryptos are a fairly new concept, so the current centralisation of exchanges might not be such a concern if there was evidence that the market share was becoming more diluted in time. But the opposite is happening. For instance, Binance’s market share on BTC volume went from 10% in 2018 to 44% today, with similar trends in all the major exchanges. The Crypto industry is becoming more centralised, not less.
Centralisation does not necessarily mean governmental control – it can be private and corporate, and in many cases, a conspiracy. Scandals regularly plague the Crypto space if you do a little research, you’ll see that the major exchanges are owned and controlled by small numbers of warlords and oligarchs. Binance has been involved in many scandals, the most recent being their unilateral decision to cease the accounts of members in the middle east for political reasons. Regardless of who you sympathise for in a geopolitical conflict, the idea of freezing accounts on the basis of race, religion, political views or nationality, is not just antithetic to freedom and decentralisation – it is downright disturbing. I emptied all my Binance accounts as soon as I heard this. As someone who has unpopular political views, how could I ever trust this exchange? How far will they take it? What is stopping a Crypto exchange from colluding with a company, nation or organisation? Evidently nothing.
Deregulation
As a free market enthusiast, I often surprise when I advocate for some level of regulation. One of the tragedies of deregulation in the Crypto space is that members (usually poor and middle-class people), lose enormous amounts of money on their platforms, with absolutely no legal recourse. It is estimated that 70% of people lose money in Crypto schemes. Due to its anarchic “DeFi – fuck authority” stance, the government will not assist in any way if you’ve been taken advantage of on a Crypto platform. In fact, I think the government takes pleasure in seeing people lose money at the Crypto casino, as it strengthens the state’s value proposition as the best authority on money. With regulated financial products, most federal governments insure deposits so even if the deposit-taking institution goes under the account holder gets their money back, and if there’s any foul play in stocks, derivatives, or other regulated investment schemes, the state allocates substantial resources to prosecuting perpetrators and getting hard-earned money back to victims of fraud. Are they perfect at it? Hell no! Most financial services regulators have no idea what they’re doing. But, for the average citizen, some regulation is better than none.
Inflation
One of the sales pitches you hear tirelessly from the Crypto Bros is they are disinflationary. Using BTC as the chief example, The Crypto Bros say that because Satoshi’s algorithm is designed to only release a grand total of 21 million BTC, there is a cap on supply and voila! The problem of inflation is solved!
This is complete nonsense, and to understand why, it is necessary to have a basic understanding of what causes inflation. Governments and consensus academics will try to convince you that inflation is a mysterious outcome of a complex economic system, but really, there is one root cause of inflation and that is money supply expansion. It really is that simple. When you increase the number of units of currency in circulation, you decrease the value of those units.
As BTC is not “pegged” to any other asset, its value is determined by supply & demand. If there’s more volume buying than selling, the price in dollars will rise, and vice versa. The supply of BTC can therefore only be quantified by the number of units that can be purchased.
When BTC was first released back in 2009, they could only be bought in integers i.e. you could not buy a half a BTC or any fraction thereof. By December 2009, there were 1.61 million BTC in circulation and therefore only 1.61 million units. This was indeed disinflationary! Satoshi would have approved.
However, as BTC got more expensive and centralised, the exchanges began to allow the trading of BTC and other Cryptos in fractions. Today, you can buy and sell BTC on Binance and most of the other exchanges to the eighth decimal place – that is fractions of one hundred million! There are currently 19.76 million BTCs in circulation, so that means that there are 1.96 quadrillion units of BTC in circulation. 1.976 quadrillion units! What’s more, there is nothing is stopping the exchanges from adding more decimal points. Every time an exchange adds another decimal point, they are multiplying the supply by 10x, which adds 900% inflation. If we compare the finite supply of 1.61 million BTC in 2009 to the 1.976 quadrillion today, that’s an average of over 400% per annum inflation.
And let’s not forget, BTC is just one of nearly 9,000 active Crypto schemes, most of whom have no intentions on capping the supply.
With Central Banking, the total global money supply is currently estimated to be around $50 trillion US dollars, with an average inflation rate of around 5% per annum.
BTC is 80 times more inflationary than fiat currency.
Other issues with Crypto
Volatility
Even the “stabler” Cryptos like BTC are extremely volatile, with 10% intraday swings being completely normal. Imagine for a moment that BTC did replace the dollar as the main currency. Let’s say you had a $1 million house or whatever that is worth in BTC. Imagine if your house was worth $1.05m in the morning and then $950k in the evening. What about over the course of a year? It is normal for BTC to fluctuate by 60%+. Imagine if your million-dollar home was worth $400k at the end of the year, or $1.6 million! Can you imagine the chaos that would ensue? We have enough of a boom-bust economy with a currency that falls in value by 5% a year – imagine a 12-fold magnification! It would be financial mayhem.
Volatility is not just incidental, but a feature of Crypto. Crypto traders thrive on it. In fact, volatility is the very reason they buy this stuff. The average punter is not interested in Crypto as a currency. Hence, you’ll never hear me refer to Cryptos as “Cryptocurrencies.” The word “currency” is simply not a characteristic of this digital gambling chip. The average punter is buying Crypto for one reason and one reason only – so they can sell and trade for a profit. If a Crypto started behaving like a real currency, which is having no volatility aside from a slight reduction in value every year from inflation, no-one would buy it.
If you need proof of this, the proof is in the volatility. When BTC is hot, the punters buy it in droves and the price rapidly rises. When BTC is cold, the punters head for the exit causing the price to crash. Indeed, there are some bitcoiners out there who believe in the revolution and will never sell, but these good souls are evidently the minority – the price action proves this.
Institutionalisation of BTC
One of the main selling points from the Crypto Bros is that large fund managers like Blackrock are building SEC-approved spot ETFs for Cryptos like BTC, which are creating enormous inflows. The Crypto Bros point to this as evidence that BTC is becoming mainstream and will eventually replace the fiat system that we know it.
Really?! I’m not so sure about this.
Do we really think that global fund managers like Blackrock and the punters who invest in their Crypto ETFs are doing so because they believe in the “Crypto Revolution?” Or could it be that they are just trying to make money? It would be delusional to believe that their priority is anything other than making money. And again, the proof is in the volatility. When BTC is rallying, the inflows into the BTC ETFs soar. But when BTC price is falling, the investors dump their BTC ETF holdings all the same.
Cryptos are just one tiny fraction of the portfolios that these institutional investors hold. Like any business, they are offering products that will sell, capitalising on any trend that may be profitable at the time.
Leverage and derivatives
Perhaps the most dangerous thing about Crypto, which is granted by virtue of their “DeFi” status, is the amount of leverage the exchanges offer.
Platforms such as BitMex allow leverage of up to 100x to anyone, including poor and unsophisticated investors. This means the punter can stake $1,000 of their own money with a nominal holding of $100,000. The punter may choose to go “long” (betting the price will rise), or “short” (betting the price will fall). If the punter guesses the direction correctly, they’ll make a huge return, but if they’re wrong, even for just 1 second, they will lose enormous amounts of money and in many cases, all of it, instantly. At 100x leverage, a 1% movement in the wrong direction will instantly wipe out their entire position, and given the volatility of most Cryptos, this can happen within seconds or minutes of making the trade.
The dangerous part is, the punter might guess the direction correctly for the first few seconds, or minutes, or hours, but if they stall in exiting the position, whether by greed, not having fast enough reflexes, a drop in internet strength, or a “technical issue” with the exchange that seems to only occur when people are trying to cash in profits, they can lose it all very quickly.
I learned this lesson the hard way!
Back in April 2024, I thought all the hype around the BTC “halving” causing a rally was way too confident. So, I bet against it. I placed a short position with 10x leverage. At 10x leverage, it meant that a 10% increase in BTC’s price would wipe me out, and any 1% drop would give me a 10% return.
Or so I thought.
I placed the trade and closed the app, monitoring the price of BTC and some other holdings over the following weeks through the Wall Street Journal – I couldn’t be bothered logging into multiple apps to check the price action on my holdings. I could see that BTC was falling in price on a daily basis, and at no point was the daily price of BTC more than 10% above my entry point. After about 2 months, BTC was trading at about 15% below my entry price. I was thinking that my position would be up around 150%. Not a bad return for 2 months! But when I logged in to the app, I was stunned to see that my position had been wiped out entirely. I zoomed in on the culprit and saw that when it was wiped, there was an intraday fluctuation of a singular one-hour candle that soared above the canopy. But it was only around 8% above the entry price, which was within the 10% liquidation zone. I thought there must’ve been a mistake.
After doing a bit of research into the exchange’s liquidation rules, I discovered that the liquidation margin shrinks over time. At 10x leverage, you are initially tolerable to within 10% movement in the wrong direction, but over time this tolerance diminishes and even a small intraday fluctuation can wipe you out. Shoulda read the fine print!
Cryptos are volatile enough, but if you add leverage, it may as well be a case of “heads I win, tails you lose.” This is why I call it the “Crypto casino.” It is gambling, pure and simple. But this casino is not like a traditional casino. It is open 24/7, and you can take it to work and to bed with you. Due to rampant volatility and rapidly diminishing liquidation margins, you do not have the option to trade leveraged Cryptos passively. As I learned, you need to constantly check your positions with the disposition of a gambling addict. These exchanges are deliberately designed this way, to keep people hooked and risking more money. The richer members with more knowledge of derivatives and self-control tend to win more (or lose less) while the poorer members tend to lose everything. I’d rather a real casino any day!
As a financial planner, If I advised an unsophisticated investor i.e. someone who isn’t already a multimillionaire, to invest in a leveraged strategy and they lost money, I could be sued and banned from practicing. The Crypto exchanges, however, get away scot-free.
Blockchain “technology” is so overrated
I’m not going to go into too much detail here, but one of the things that the Crypto Bros are relentless about is how “blockchain technology” is revolutionising the world as we know it.
Really?!
To me, blockchain is nothing special. It is a digital ledger of all transactions that is open for everyone to see. It is therefore supposedly unable to be tampered with because if anyone tried to manipulate it, their blockchain would be different to everyone else’s and therefore be wrong.
I don’t believe for a second that blockchain ledgers cannot be tampered with. If Binance wanted to, they could. But tampering is not the point here. I have read many books and had many conversations with the Crypto Bros about this so-called “revolutionary” technology, and I don’t see the big deal.
Elon Musk is catching and re-using rockets mid-flight after launching them into space. Now that is revolutionary! But a digital ledger of transactions… what am I missing here?!
Advertising
At risk of turning this into an essay, I’ll make one final point. Crypto exchanges like Binance go to extraordinary lengths to increase inflows. As a former customer of theirs, I am still on their mailing list. They bombard my emails daily with all sorts of incentives to drag me back to the Crypto casino – most of which are along the lines of “deposit $X into your Binance account today and you’ll go in the draw to win a BTC” and stuff like that.
At some point, we need to ask the question: are these Crypto exchanges really trying to revolutionise the world with a decentralised disinflationary digital currency that will help poor people escape poverty? Or are they just trying to extract as much money as they possibly can from us?
I see no evidence of a revolution – this is a bubble.
My conclusion on Crypto
I may sound too far gone, but let me assure you I haven’t completely given up on Crypto, and BTC in particular! I really like Satoshi’s manifesto. Its fundamental goal is sound, but big changes are needed in order for BTC to be successful, and they are:
- If we are moving to a disinflationary money system, we would have to abandon all other Cryptos. It would have to be BTC and BTC only. The very existence of others, is inflationary.
- No state licensing requirements for exchanges. While the state is involved, Cryptos will never be successful. The state has failed with fiat currencies, and they will fail with Cryptos. For competition to thrive the exchanges must be free and open source.
- Cryptos to be regulated the same as other financial products, to the extent that protections are offered for deposit-holders and bad players prosecuted. Only sophisticated investors (multimillionaires) to be allowed to do leveraged trading.
- A final limit to the number of decimal places a BTC can be split, which can never be expanded. Let’s say we wanted to replace the units of dollars currently in supply (50 trillion) with units of BTC. There will be 21 million BTC in total, so if we wanted 50 trillion units, that would be around 2,800,000 units per BTC. The closest we can get to this without somehow overriding Satoshi’s algorithm is 6 decimal places. This would cap supply to 21 trillion units of BTC.
- As the world transitions from fiat to BTC, the price action of BTC would need to be contained to within, say, 5% per annum. If the price action is much higher than 5% swings, opportunistic traders will swoop, and the volatility will just take off again.
- BTC holders will need to get comfortable with the price of BTC dropping significantly. When BTC starts to behave like a disinflationary currency, with no more opportunity to profit from it, investors will dump it and seek other investments like stocks and real estate. BTC holders will need to get comfortable with holding a rapidly depreciating asset during the transition and be of the understanding that fiat currency will no longer a meaningful way to measure the price of BTC.
- BTC to become legal tender, with all citizens obligated to accept payment for all goods and services in BTC. BTC will no longer be bought using fiat money but earned through employment and production.
Once and only once all the above changes have happened, I’ll believe in the revolution. But unfortunately there is near zero chance of this playing out. The Crypto Bros have taken a noble concept and used it to make themselves rich at the direct cost of others in the negative sum game that is Crypto trading. Any objection or criticism of Crypto is met with a highly energetic recital of the manifesto, but never actually addresses the points raised. You’ll never get straight answers from the Crypto Bros, and if you question or doubt the trajectory of BTC or any other Crypto’s future value, the Crypto Bros will use chart analysis to bamboozle you, proclaiming how foolish it is not to go all-in right now with a desperate sense of urgency. Cryptos have become a form of virtue signal, and any resistance to the revolution is seen as supporting the evil status quo of Central Banking.
Perhaps a systemic meltdown of the current fiat system might increase the odds of BTC’s supremacy as a major global currency, but I think we’d have a better shot at the Gold Standard.
The Gold Standard
I’m not going to give you a history or economics lesson here. If you really care about the future of our society, you should read up on the history of banking and how we’ve devolved from the Gold Standard to Central Banking. The systemic fraud, embezzlement, corruption and intellectual abandonment that led us to Central Banking is frankly, shocking.
One of the advantages of the Gold Standard is that it has been tested and is tremendously successful in stamping out inflation. It doesn’t solve all the world’s problems, but it does remove the inherent corruption and economic destruction of Central Banking.
Under a Gold Standard with 100% reserve requirement, banks can not expand the money supply without increasing their reserves. Banks can only lend out what they own, and as the money supply stays fixed, there is no inflation. Banks can be profitable, but only through prudent banking and lending practices, and not by writing a bond and manufacturing valueless money out of thin air. Businesses can be profitable, but only through competence and financial savvy, and not by being first in line in the credit creation cycle. Individuals benefit enormously, in that the cost of living remains largely the same – they can maintain budgetary certainty and need not be so anxious all the time.
Perhaps the best part about the Gold Standard with 100% reserve requirement, is that governments are forced to trade solvently. Under such a system, the government will only be able to spend what it earns, and not a dollar more. This forces the government to run efficiently and prioritise its funds in a way that best serves the needs of its people, not wasting any money or time on unproductive deep state bureaucracy.
Do yourself a favour. Read into both Central Banking and Gold Standard with 100% reserve policy. For every argument in favour of Central Banking, there is an even stronger argument in favour of Gold Standard. This is not ideological. This is real. We’ve had both systems before, and only one of them consistently made living conditions worse for the average citizen, while only benefiting a few.
Conclusion
Of the three monetary systems discussed, the Gold Standard is the fairest and most prosperous.
And to address the elephant in the room, do I own gold?
No, I don’t!
There may be some remote exposures in my portfolios to gold, but I have not positioned my portfolios to benefit from a rise in gold prices.
If I made the above argument while owning gold, that would be somewhat hypocritical. I’d be like a conflicted Crypto Bro who owns BTC and is telling everyone to buy BTC.
Apart from its industrial and aesthetic properties I don’t see gold itself as being of any value. It’s only use in my ideal world would be to stop inflation. Sure, we can dig more gold out of the ground, but a bank would need to buy that gold from the gold miner or fund operations themselves. The overall money supply would stay the same. The bank would have less money and more gold and be no better off. So why would they bother?
The Gold Standard with 100% reserve requirement confines the mining of gold, and any other business initiative, to productivity as its highest priority. The more value you can provide, the more money you’ll make, and the better your lifestyle will be. Under such a standard the entrepreneurial spirit would be reinvigorated, and no human energy would be wasted in the counterproductive mission to inflate the money supply. People would finally be able to move away from the jobs they hate, the ones that are financed by Central Banking such as banking, finance and demoralising public sector roles, to productive enterprise without fear of being inflated into oblivion. When productivity becomes the highest form of commerce, we’ll all be richer, less anxious and driven by a burning desire to create the most amount of value for the people we serve.
Please do make any financial decisions based on the contents of this blog. My blogs are designed to be thought-provoking and introspective, not financial advice. Please do not act on any document unless it is titled “Statement of Advice.”