How will the banking system be affected by crypto?
Published in
4 min readJul 27, 2018
Originally posted by Sizhao Yang on Twitter —
- First, we have to see what how the current banking system is laid out.
- At the core of the modern monetary system is the central banking per country.
- The role of the central bank is the manage the money supply, interest rate, and currency in reaction to the economy.
- The goal of the central bank is to change these instruments in response to inflation, economic growth, and employment.
- The monetary supply and interest rates defines the monetary velocity and supply to the country first and its constituents.
- These constituents are the commodities (petro dollar) linked to the currency (otherwise known as tokenization in crypto).
- Other constituents include the trade partners (i.e China and US, US and Euro).
- This is why the entire world holds its breath whenever the Fed chair speaks because when he/she talks, it affects the world.
- Currently, the monetary supply is based on fiat, which means that the central banks can print as much as possible.
- The old central banks were based on Gold, but that tied the central banks hands when crisis happened.
- Nixon moved the USA off of the gold standard to enable flexibility for the central bank to change the monetary supply/velocity.
- Why does the central bank matter? The interest rates affect the interest rates of your mortgage, credit card, and savings account.
- The central bank lends to the commercial banks (JP Morgan), and they buy equities/bonds or lend out money for mortgages/CCs.
- Central bank -> Banks -> Commercial/Retail banking -> Mortgages/Private banking/Credit cards/Loans/Insurance
- So, how is this market segmented? It’s by volatility and ability to take volatility as a consumer/business.
- The avg consumer has a 9 to 5 job and gets a steady paycheck and cannot handle sudden losses because they will take years to get it back.
- Therefore they can primarily invest in less volatile financial instruments. Mostly stocks, bonds, munis, or real estate.
- So a lot of the conversation about why normal consumers are not in $BTC or $ETH is besides the point. It’s simply too volatile.
- It’s no surprise to see from one statistic that only 300k people hold more than $5k USD worth of Bitcoin $BTC.
- As you get more volatile, it tends to correlate with wealthier individuals and institutions.
- From least volatile to most volatile is: treasuries, muni bonds, real estate, bonds, stocks, junk bonds, mid cap stocks, small cap, VC.
- Notice that venture capital and angel investing is at the end of the spectrum. Why? Because usually 80 to 90% of a portfolio goes to 0.
- Yes 0. Most companies that venture capital invest in, either become zombies (cannot return capital, or cannot exit) or die outright.
- With such illiquidity, it’s no wonder that the industry is myopically focused on unicorns. You have to catch unicorns just to survive as a fund. 80% of your portfolio goes to 0 and you are illiquid for 10 years.
- So how is this related to crypto? Right now we’re in the very right of the spectrum of banking products.
- Meaning bitcoin and alt coins are very volatile and it’s designed for whales but what happens in 2025 when bitcoin is $1m a coin?
- Will it still move 800% in one year? No it won’t. It will be like the central bank now, it will be much more stable almost boring.
- As $BTC bitcoin is the reserve currency, you will increasingly have other products that will be built as a “loan” from the central bank.
- Remember this? Central bank -> Banks -> Commercial/Retail banking. We are in the left side right now. We’re not even in step 2.
- As $BTC become the lending instruments, it will be lent to more products.
- From most volatile (most reward) to least volatile (lowest yield): ICOs, tokenizing startups, tokenizing venture capital.
- Then as the more consumers get in they will demand less and less volatile products.
- Remember this? treasuries, muni bonds, real estate, bonds, stocks, junk bonds, mid cap stocks, small cap, VC.
- The next products will be tokenizing equities, junk bonds, mid cap equities, and bonds and this is exactly what’s happening right now.
- Overstock is leading the charge. They are creating a marketplace where ICOs and stocks can flow through enabled by crypto.
- This process of tokenization will continue further and further down the chain of volatility until it reaches your consumer/mom.
- When will that happen? When will normal people use this? Well likely when most people used Facebook, which is ~16 years after Netscape.
- So long? Crypto is going to disrupt everything! Democratization takes time. Technology, use cases, and distribution have to line up.
- The use cases that people are looking for which is insurance (Geico) will take much longer than people think.
- Consumer markets are not just constrained by technology and use cases, but also go to market strategies.
- Most famously, Sequioa always ask “Why Now?” The timing within this sequence is as crucial as knowing the exact use case.
- There was a board game that was monopoly for failed dot com ideas.
- The “stupid” failed ideas were: social networking, reviews, group discount buying, social games.
- The “stupid” failed ideas all become unicorns in the 2010s as Facebook, Zynga, Yelp, Groupon.
- So why am I talking about this? As we discuss what use cases will gain traction.
- It’s important to talk about the context. Certain types of fields can only hold certain plants. Environment and timing is as important. As idea, execution, and go to market.
- In conclusion, the banking will get disrupted in reverse of volatility. This is probably why Naval Ravikant invested in a stable coin.
- The likely map is the reverse of this: treasuries, muni bonds, real estate, bonds, stocks, junk bonds, mid cap stocks, small cap, VC.
- Tokenize everything but in reverse of volatility.