Why GameStop is not the new Bitcoin

When Robinhood disabled customers from buying GameStop, some people in the WallStreetBets subreddit suggested a need for a “decentralized brokerage.” Others said that “GameStop is the new Bitcoin.” Yet others decided to target the Dogecoin cryptocurrency, which spiked over 500% before it failed to process transactions due to overload.

The premise behind these ideas is hilariously wrong, but it’s worth exploring why.

It’s not surprising that young people growing up in the age of decentralized and censorship-resistant cryptocurrency exchange expect stock exchanges to be decentralized and censorship-resistant too.

Stock exchanges do exist to make business ownership accessible to everyone. Unfortunately, while trading stocks has become much cheaper and easier thanks to technology, the value of owning stocks has fallen dramatically.

To be listed on a stock market, a company has to pass many very expensive regulatory hurdles. But by the time a company goes public, much of the risk (and therefore profit) has been taken by venture capitalists and private equity investors.

The 2001 and 2008 financial crises led to the 2002 Sarbanes-Oxley and 2010 Dodd-Frank Act. These regulations made it much more expensive to go public, which has led to an over 50% decline in the number of publicly-traded companies. There are now just 3,530 publicly traded companies in the US. Anyone can buy a stock on their phone today, but by the time the government lets the company sell you shares, most of the profit potential has already been captured by wealthy venture capitalists and private equity investors. It’s no wonder people are looking at cryptocurrencies for more risk and return.

Back to the idea of a “decentralized exchange.” We think we own the stocks we buy, but that is not legally true. Cede and Co. legally owns all publicly issued stock in the United States – over 50 trillion dollars worth. It processes over $500 trillion and 325 million trades in these stocks on behalf of individual investors. New York State appointed Cede as the central securities depository in 1973, and all stock exchanges settle their transactions there.

You might think that when you buy a stock, Cede enters your name in a ledger somewhere, but that’s not true either. Cede only records the “street name” — the name of the brokerage which holds the security. The brokerage (ETrade, Robinhood, etc) is responsible for tracking who has rights to shares. You can request to get paper share certificates issued on your name (like investors used to get), but no one does this anymore.

This is a very simplified version of how stock ownership works, but I hope you can see why the idea of a “decentralized brokerage” is absurd.

On the surface, a centralized cryptocurrency exchange work in a similar way. When you buy Bitcoin on an exchange, you get a right to some amount of cryptocurrency. Until you withdraw it to your wallet, you only have a claim to your assets.

The big difference between a share of Gamestop and Bitcoin is that you can take purchase and take possession of Bitcoin without any intermediary. Whether you use a decentralized exchange, buy from a friend, or mine it yourself, no approval is needed for the transaction, and no authority can block the trade or take it away. It’s also impossible for anyone to devalue your Bitcoin by issuing more of it beyond the set mining rate.

These are the real reason why Bitcoin has value. Eventually, the GameStop share price will fall back down to reflect its fundamental nature as an outdated and failing business model, while the Bitcoin price will keep rising as users validate its fundamental nature as an alternative to the failing system of central banking.

What about Dogecoin? If the whim of the members of an investing community drives cryptocurrency prices, can Bitcoin achieve any kind of long-term stability? The Dogecoin outage is a clue.

The Doge network does not have enough nodes to process transactions. The reason Bitcoin has been able to hold a dominant market share since 2009 is that it has the biggest ecosystem of miners, users, and service providers. Unless another cryptocurrency obtains a compelling technical advantage, and the Bitcoin network is unable or unwilling to match it, Bitcoin will keep its lead.

Don’t panic: why Tether won’t destroy crypto

This article by “Crypto Anonymous” claims that Tether will bring a crypto “doomsday.” The author makes many good points in building his case, yet the overall conclusion is less than the sum of its parts.
Here’s the short version of why he’s wrong: Yes, Tether creates systemic risk for Bitcoin. But the key claim that new Tethers are fraudulently created without dollars to back them is pure speculation. Furthermore, the impact of a Tether collapse decreases as the ecosystem grows, so there’s no need to be “frantic” about a “crypto doomsday.” Finally, stablecoins like Tether should not be confused with true cryptocurrencies like Bitcoin, which do not fall in the same category of risk.
Speculation about whether Tether is backed by dollars has been going on almost since the currency was created in 2014. Tether is the primary onramp to buying cryptocurrencies on many exchanges, so during Bitcoin bull markets, Tether issuance does too. This fuels speculation about whether Tether is backed by dollars. It’s a fair question to ask. But note that Tether honored withdrawals from 2017 to 2018, when the price of Bitcoin fell from 20K to $3.2K. Total market capitalization decreased from $821 billion to $105 billion, and Tether’s market cap fell from 2.8 to 1.6 billion. I question the accuracy of all of these numbers, but it’s clear that Tether weathered a major selloff.
At this point, everyone in the know has accepted that Tether is less than 100% backed by dollars, but as long as the crypto selloff is not too severe, it has enough reserve to weather most storms. Even if Tether comes up short and becomes unable to honor all withdrawals, a partial devaluation will result in a haircut for Tether holders, not a doomsday for a market that is used to huge day to day swings.
Let’s speculate on a key question: if Tether isn’t a fraud, why don’t they perform an audit and come clean about their books? The answer is that crypto occupies a legal gray area, and exposing all their accounts would put Tether’s banking relationships at risk. Until about a year or so ago, banks categorically avoided any crypto business. They would close accounts of consumers who wired money to crypto exchanges and scan peer to peer payments for any mention of crypto. Legitimate crypto entrepreneurs had to stash vast amounts of cash like drug dealers cash because they couldn’t maintain any bank accounts for long. My partners and I were very fortunate to have relationships to open a bank account for our hedge fund in 2017.
Now imagine how difficult it would be for Tether to store billions of dollars in a fully disclosed manner. It’s clear now that Tether decided to obscure their banking relationships and use less-legitimate partners, and lost some of their funds as a result. Today, fully audited stablecoins such as USDC and USDG compete with Tether, but their market share is still a minority.
Regulated stablecoins are a great solution for many, but not all. For a stablecoin to be audited, their banking partners require strict KYC, and exchange partners that redeem those coins must obtain government licenses. This means that there is an ongoing demand for stablecoins that can be redeemed in a less-regulated environment. This is one of the reasons why Tether is so popular: it helps crypto traders work around currency controls in various Asian countries, especially a big one that starts with C. The other reason is that Tether allows less-regulated exchanges to exchange in leverage, market manipulation, and other practices that regulated exchanges can’t get away with. Still, the bottom line is that stablecoin competition is great and lowers the overall systemic risk posed by Tether.
Finally, a stablecoin like Tether should not be confused with Bitcoin. There’s no doubt that market manipulation, massive leverage, and fake trading numbers dramatically inflate the demand for crypto and market cap numbers during each bull run. However, unlike a Ponzi scheme, Bitcoin recovers after each crash, even as most other cryptocurrencies falter. Bitcoin serves a practical purpose and that in turn, drives legitimate long-term investors and institutions to Bitcoin.
Tether may collapse one day. But with ever-growing competition from audited stablecoins, there’s no reason to think that it will take the entire crypto market with it, that it will happen soon, nor that Tether holders will be left with nothing.
2022 Update:
A year later, Tether and Bitcoin are doing better than ever. Furthermore, Tether now represents a minority of stablecoin holdings, with the new players being fully audited and even US-based. Tether publishes details about its holdings and has completed *seven* independent audits that confirmed that Tether is indeed fully backed. (I tried to link to their audits, but Facebook blocks it as “spam”)
But most importantly, what all critics missed is that Tether *had* to be secretive about their holdings because creating a stablecoin had no legal precedent. Tether pioneered the field and made it possible for all of its fully-regulated and compliant competitors to exist.
Regulators are hostile to innovation, and entrepreneurs often have to take risks and prove that their ideas are sound before their business model is accepted as legitimate.

Stimulus checks are a dangerous game

What happens when the government sends out a stimulus payment? Politicians can print money, but they cannot wish all the goods and services that money buys into existence. They would like you to think that their money causes factories to hire workers and put idle production lines to work. But that’s not what happens.
Tens of millions of employees and warehouses full of raw materials are not waiting around for stimulus money to put them to use. What were those people, factories, and raw materials doing before the stimulus?
Absent government intervention, they were putting their time and capital into the most profitable ventures they knew.
Stimulus money can boost consumer spending in the short-term, but it cannot command the resources needed to produce goods and services into existence. The short-term boost in consumer spending comes at the expense of long-term economic destruction.
Here is what most people (and economists) don’t understand: When the government creates new money, it can only create a short-term boost in consumer production at the expense of eroding the capital needed to produce those goods. “Capital” is all the things that make consumer goods and services possible: factories, farms, bridges, trucks, trains, and cargo ships, sewers, mines, warehouses, and so on. By printing money or lowering interest rates, the government steals from savers to pay spenders. Those savings are what pays for capital maintenance and expansion. Without savings, factories can’t maintain or expand production.
Worse yet: the new money is not distributed evenly but goes mostly to those with political connections rather than successful or innovative businesses. Taxpayers get a shiny check, while trillions more go to cronies.
The result of long term monetary manipulation is infrastructure rot: factories, bridges, buildings that crumble, and an inability to invest in research and capital expansion. The government makes money available to consumers and investors, but it cannot dictate new people and machines into existence. The stimulus causes new big-screen televisions to show up in department stores, but the VR headsets that the stolen capital would have produced never come to exist.
Printing money is addictive: once one politician sends a stimulus payment, they raise the bar for everyone else. Unless voters revolt at having their savings stolen, the game keeps escalating: print just enough money to win votes without collapsing the economy.
For nearly 100 years, the U.S. government has been running all sorts of welfare programs for the rich and poor alike. It has been able to sustain those programs because technological progress and capital accumulation expanded productivity just enough to keep up with the increased burden of the welfare state. It’s a dangerous game of brinkmanship: steal just enough from producers to win the next election, without causing an economic recession that causes voters to change sides. The game keeps escalating as politicians find more and more ways to steal savings and redistribute the loot.
For example, using the COVID-19 pandemic as an excuse, the government started buying corporate bonds, running huge permanent deficits, reducing the bank’s reserve requirement to 0%, and now, sending increasing large checks directly to the public.
How does this game end? All monetary manipulation creates economic destruction, but as long as the world’s major central banks move roughly in tandem (as they have been), the destruction goes unnoticed. However, the heavier the government burden, and the more reckless and inflationary policy, the more fragile the economy becomes. 9/11, the 2008 financial crisis, and the 2020 pandemic were all used to justify massive expansions in government programs. Now that voters have gotten a taste of direct cash payments, we’re entering a dangerous new phase. The coming escalation of fiscal irresponsibility is predictable and inevitable.
So is the economic correction that will follow when capital is looted to such an extent that economic production collapses, and the government can no longer pay for welfare programs or maintain its debt. Whether it’s a terrorist attack, another pandemic, or something else entirely, the next “emergency” could push the economy beyond recovery.
The only question is what happens then: a return to sanity or the end of the U.S. as a superpower?