For example, bitcoin has a market cap of $320B. At its peak it was worth about four times that. Did $960B just disappear? Basically, yes.
The coin has no intrinsic value (in the way that a can of corn does, for example). It's worth money because people say it is. And market cap is just a multiple of what it trades for at the margins times the number of shares (coins).
To give an example, say that I bought a bitcoin 10 years ago and that it was my only possession. At its peak, I could have sold the bitcoin for ~$64k, so I had a net worth of 64k. If I didn't sell it at that point and still hold it, I'm now worth ~16k. No one made $48K of of me... there were no transactions in that time period. The "wealth" has simply vanished.
Let's take a different example. Let's say I have 100 foobar coins. I sell one of them to an associated entity for $1, the market cap is now $100, I have $99 in "wealth". That entity sells one back to me for $2, now the market cap is $200. I sell it back for $3, now the market cap is $300.
Do I now actually have $300 in wealth? No, because it's illiquid, and the bid for it more broadly is likely $0, I have to apply a large liquidity discount. It seems like many communities behind these coins have been doing something similar to the internal trading I've been describing here, and hyping them to find outside people willing to trade some of their real dollars for these worthless coins, and those few trades have been used to establish the broader market caps of these things.
All illiquid and somewhat illiquid have this property to varying degrees, ranging from startup stock (no, selling 20% for $1M to a VC doesn't mean your company is actually worth $5M, unless you could find a buyer for all the stock for that much) all the way up to Amazon, Tesla, Apple, etc, because there's no buyer waiting to absorb all the outstanding stock at the current bid. There would be a buyer willing to absorb all of it at some level, but it's likely at a level far lower than the current market cap.
Indeed. It's no different than if I kept a hand written ledger in a paper notebook and sold entries onto that ledger for USD. In this case, people would see its a piece of paper and scoff at the idea that having their name written onto this paper is worth any money, even if someone else paid money to put their name on the ledger, but doing the exact same thing with cryptocurrencies fools people because the fake spot price and fake market cap is broadcast across the internet as if it were real, obscuring the fact that each of these coins is just the digital version of someone's personal notebook.
There are a lot of people willing to lend you money on the back of less-liquid-than-cash assets, though.
It may not be "real wealth" but it certainly is spending power and psychological cushion, which means different spending choices, which means inflationary pressure.
I had a lot of coworkers who listed crypto holdings on their mortgage application in the past few years. They wouldn't have been bidding as high if the perceived value of those wasn't there.
Yeah, when money's cheap and easy, banks make bad loans. Don't depend on the ability to get asset-backed loans to get you through a downturn, though, banks tend to get tightfisted real fast.
> There would be a buyer willing to absorb all of it at some level, but it's likely at a level far lower than the current market cap.
For crypto, no one would want to buy the entirety of bitcoin, because it basically has no value if it isn't traded, so it's effectively worth $0 if someone owns all of it.
For companies, this isn't necessarily true. When acquisitions happen, the current market cap is usually the floor, not the ceiling. I agree with your overall point though.
> You create an NFT and sell it to yourself for $200,000.
> Now you have $200,000 and a $200,000 NFT
But you now also have a liability of $200,000. Your total asset is still $200,000 , not $400,000.
> If you can convince someone to buy that arbitrary NFT at 95% discount
so you just sold the NFT for $10,000. If somebody else got tricked into thinking they got a 95% discount - that's on them. A fashion store often marks up their clothing by 100%, and have "sales" of 50%!
>But you now also have a liability of $200,000. Your total asset is still $200,000 , not $400,000.
Assets are not liabilities, so you'll need to explain why you think it is a liability.
Fashion brands and their physical goods are definitely not the same as NFTs, insomuch as they at least have intrinsic value. NFTs only intrinsic value is they good for ripping off greater fools.
The described foobar coin was illiquid and couldn't be sold. But that's not true for BTC, ETH, and even a lot of the shitcoins that had some decent volume om multiple exchanges.
So in that sense, it _was_ wealth for the holders.
Twitter is a counter example for your tech stock scenario. However, you could argue that its hyper-inflated Tesla stock trading for hyper-inflated Twitter stock, much like a BTC millionare, trading BTC for ETH.
Right, if a company finds a buyer, then its market cap is suddenly realized. The liquidity discount is meant to reflect the uncertainty of that given no current bidder for all the stock, and the discount is lower for public companies with demonstrated interest than for private companies. And you can see the downward pressure that Musk’s selling Tesla shares has had on its price.
I trust money more than wealth. Unsold stock should not be quantified until the moment it is sold.
It's getting tiring to hear about "so and so billionaire lost X billion". No, they didn't lose anything that they didn't have to begin with. Having more stock than the trade volume of that stock means all of that "wealth" is mostly theoretical.
If you didn't count the "theoretical" wealth you wouldn't call them billionaires in the first place.
That "theoretical" wealth clearly has a massive impact on the real world, so it's silly to pretend it does not exist. For example, Elon didn't buy Twitter with a giant bag of gold coins -- he borrowed against his wealth, which is mostly in stock.
And his "wealth" shrunk far more than what he had to liquidate and pay twitter for.
Because no sane organization will lend out real cash over the same amount of collateral TSLA stock, and leveraged lending opens TSLA to extremely high risk as value dropping would means Musk will be forced to sell to cover/and or stake more TSLA. This is exactly how FTX failed - they counted their own token as their "asset". Spoiler: it didn't work.
Does this wealth have a high impact on the world? Of course it does. But does it has the same impact as same volume of cash? Absolutely not.
I totally agree... crazy times in the past few years. I have heard that some people were able to borrow against their "wealth" (stock holdings, crypto holdings, vested ownership shares) for homes, cars, boats and more since Covid. If their "wealth" suddenly evaporates in the form of losses, they find themselves on the wrong side of the trade. Super duper risky and the appetite for these "products" was immense from what I understand.
Many people have a net worth greater than the number of circulating dollars. Also, dollars are not risk-free. They target a few percent annual loss, after all!
He was talking about money, but I think meant wealth based on the context of his response to the OP. They are almost interchangeable, but not in this context.
> Unsold stock should not be quantified until the moment it is sold.
I don't know Elon Musk's finances, but I imagine that he's got a bunch of stock, (let's say) an amount of cash in the tens or even hundreds of millions and debts well above the amount of cash he has on hand. If you don't count unsold stock, then Elon Musk is poorer than most college students.
I agree the numbers are misleading (e.g. Bill Gates money is very diversified and he has already paid many of the capital gains on microsoft stock sales, so comparing his wealth to Elon Musk's with a single number is quite misleading). But you have to count unsold stock for something.
The "market cap" for crypto is just an illusion. There never was enough liquidity. The money was lost the moment you exchanged it to crypto. Some of it is in hands of other people. Some of it was spent to keep the show going (mining, employees for all the crypto businesses etc.).
You and every individual investor could have cashed out but that is as saying that Madoff customers could have cashed out. It's just an illusion. Most of the money disappeared once you deposited and Madoff, SBF, or some other scammer spent it on a new boat or house on an island.
> I had a net worth of 64k
No you didn’t. You had a potential net worth of 64k, but you didn’t take advantage. You can’t just compare to peak, your wealth loss/gain comes from comparing to the price you bought it.
What's a potential net worth? "Net worth" is already "how much money would you have if you sold all your assets and settled all your debts". Since for most people most of their wealth is in assets, it's totally normal for net worth to swing up and down as the market value of household goods/land/buildings/companies/bitcoins changes.
The catch is that even if your net worth is a certain amount on paper, you can't necessarily realize that as cash.
Take Elon Musk, for example. A lot of his wealth is in Tesla stock. But he can't sell that stock without also affecting its price. If he decided to sell all of it tomorrow, the price would plummet and he would only receive a fraction of what it's worth today.
This is what a lot of these companies are doing. I can create 100 tokens and sell you one for $1. In theory, my "net worth" is now $99, since I have 99 tokens that are worth $1 each. In reality, if I tried to sell all 99 of them, I'd quickly find that people are actually not willing to buy all of them for that amount.
How else would you understand wealth? Are people who have loans against massive stock portfolios but relatively little cash (spent on houses, cars, trips, etc)... poor? Obviously not.
OP was worth at least 64k at some point and now is worth at least 16k. The value and total amount of wealth (in US Dollars) has gone down.
I would say that bitcoin has extrinsic value. The value it has is because people agree it has value. Imagine I started a blockchain using the exact same code as bitcoin and called it Bitcoin9890812894. It would have the same functionality as bitcoin but a value of $0 since virtually no one else would agree that it has any value.
On the opposite end, a can of Cambell's soup has intrinsic value, because it's worth something to someone regardless of what anyone else thinks. The can of soup that Andy Warhol as the basic for his famous paintings has a mixture of both types of value (surely someone will pay significantly more for that can over any other identical can).
> The value it has is because people agree it has value. Imagine I started a blockchain using the exact same code as bitcoin and called it Bitcoin9890812894. It would have the same functionality as bitcoin but a value of $0 since virtually no one else would agree that it has any value.
That doesn’t seem like a contradiction at all, right? If your fork somehow became well known and replaced the original, then yeah, your fork would have some intrinsic value as a medium of exchange and a store of value.
> If your fork somehow became well known and replaced the original, then yeah, your fork would have some intrinsic value as a medium of exchange and a store of value.
Intrinsic value is a value outside of perceived value. A can of soup is calories, which we need to survive, as long as it is edible, it will always be worth something to a human. Farm land has intrinsic value because it can produce food. Diesel has intrinsic value because farmers need this to produce food. Bitcoin9890812895, my fork of Bitcoin9890812894 has no intrinsic value to anyone.
No, I'm not saying that the current market price of bitcoin is the same as its intrinsic value. I'm saying that you can calculate a value of bitcoin using objective measures rather than the current market price of bitcoin. Those objective measures can include things like the capabilities of the bitcoin network, the number of types of people using it, etc.
The value of Bitcoin is the sum of its intrinsic and perceived value.
Consider a hypothetical Bitcoin, without the objective measures you describe. Without the capabilities of the network, people willing to accept it as payment for goods/services —- it is a coin that nobody has a use or want for, i.e. an unadopted shitcoin.
The value of unadopted shitcoins approaches zero as fewer and fewer people use it. Therefore, the value of Bitcoin is entirely comprised of perceived, and not intrinsic value.
Another way:
Compare a Bitcoin with a banknote. A banknote has perceived value (it represents one, or several, dollars, which have a stable value and are accepted universally) and intrinsic value (it is piece of paper that you could burn to provide a small amount of heat, in a pinch). The Bitcoin doesn’t even have that tiny amount of intrinsic value that the banknote has.
During the Weimar Republic, people burned paper money because it was cheaper than wood. In that situation hyperinflation led to the perceived value falling so low that it was below the paper money’s intrinsic value. If everyone stopped accepting Bitcoin and its perceived value evaporated, that Bitcoin would not even have the intrinsic value remaining, of heat from a single burning banknote.
But you're using a far too narrow definition of "intrinsic value" that is not at all the definition used in economics in finance. It doesn't just mean something like "the value it would have to me if I were the only person alive on Earth." Computer networks, protocols, and other technological systems can still have intrinsic value even when they require many people to use them.
I'll debate that- the intrinsic value from exchange is less than the cost to pay the miners to run the network, therefore a negative net present value -- bitcoin is not a store of value, but fundamentally destroys value and relies on greater fools to buy for any price increase.
About the amount of work to make a toy banking system. I never tried, but there are some download and next next finish coin generators, right? So the bitcoin system is worth about a buck or so. (.. if I want to be very generous, we can add the value of the bitcoin brand, and that el salvador accepts it, some apps already can handle it, but really that's it. It's still negligible.)
You can prove you actually own how much you want to prove you actually own, without leaking any other information on your identity or current wealth. You can sign documents. You can mount complex escrow processes with it. You can send it worldwide to anybody without even knowing where they live (phone numbers fail), or what their bank is (IBANs fail) or what their email is (gift cards fail) or whether they are allowed by someone else to receive money (paypal fails). You can pool it with friends and set up conditions for safe withdrawal reliant on multiple people agreeing at the same time. And you can receive money from anyone, anywhere around the world, without anyone else's permission.
Yes, but how many coins fulfill those basic requirements? Why is btc special? Why would any of these coins be worth anything besides some fee to convert-to from fiat and convert-from to fiat?
You can pay Bitcoin (and only Bitcoin) to embed messages, typically transaction messages, in the global Bitcoin blockchain.
I was hoping years back that all of this would have taken off for payments rather than silliness. I was wondering if we'd see a (low) Bitcoin value determined by the need to pay BTC transaction fees and those fees being effectively locked up until the next block comes
Recommended reading on the topic of wealth destruction by fraud, John Kay "The Bezzle Years." An introductory quote to give you an idea:
More than a half-century ago, John Kenneth Galbraith presented a definitive depiction of the Wall Street Crash of 1929 in a slim, elegantly written volume. Embezzlement, Galbraith observed, has the property that “weeks, months, or years elapse between the commission of the crime and its discovery. This is the period, incidentally, when the embezzler has his gain and the man who has been embezzled feels no loss. There is a net increase in psychic wealth.” Galbraith described that increase in wealth as “the bezzle.”
Actually the wealth is gone. Not because bitcoin was a ponzi scheme (that doesn't destroy wealth or money, that indeed just redistributes it) but because a common way to get bitcoin or other cryptocoins is to destroy equivalent amount of wealth, burn gas, energy, make ASIC silicone to mine, etc. What a madness, really.
This is not wrong, physical wealth was indeed destroyed to make tokens of negligible* value to humans, but the meaning of OP's "wealth" is claims on real goods or services -- as in the houses bought by insiders a few weeks ago. Destroying the remainder of such claims is a real benefit to the world economy, reducing inflation of all legit currencies.
*negligible not zero, because some tiny slice of crypto transactions actually are done by useful workers in order to shield wages from kleptocratic regimes.
Not sure what you mean. If I buy some cryptocurrency coin for $10 somebody received $10 from me. If now the value of the crypto goes $0, I have lost $10 but the who I gave $10 to still has that money. It has not magically disappeared. Or do you mean something else?
> If I buy some cryptocurrency coin for $10 somebody received $10 from me. If now the value of the crypto goes $0, I have lost $10 but the who I gave $10 to still has that money
Here's an example of how this works:
FTX "minted" their own cryptocurrency. They minted billions of dollars of it.
When people purchased a tiny fraction of it, that established a price for one coin.
Once that happened, FTX could say "we're worth billions of dollars."
But keep in mind:
* the cryptocurrency was created out of thin air
* the value of the crypto crashed by over 90% in the past month
On top of all that, there was a "multiplier effect" when the "assets" were used as collateral on loans to counterparties.
The net effect is that the "assets" were worth billions at some point, but that value has evaporated. And loans were made on those "assets" which may have multiplied the actual impact several fold.
It's a banal comparison, but this is a lot like Beanie Babies in the 1990s. At one point the market was worth millions of dollars, and then it evaporated overnight.
That's deflationary, and if there's one thing the world needs right now, it's deflation.
But this is exactly how all assets are priced and that price signal is good enough to take loans out against the asset collateral and create even more money supply.
At start you had 10 bucks and he had 10 bucks worth of crypto for total assets of 20
Now you have crypto with value of 0 and he has 10 bucks for total assets of 10
Overall 10 bucks is gone and yes there are winners and losers
Edit: TikTok quiz abbreviated: you buy for 50, sell for 60, buy again for 80, sell for 90. How much did you win / lose? ... the confusion for some people being created since they sold at 60 to buy back at 80
When you buy $10 of crypto you are passing that $10 to another person, so the amount of money is unchanged. You receive a promise for $10 for some point in the future essentially. If that goes up, you now have a promise for $12, for example. If there is $1 trillion in crypto that suddenly goes up to $2 trillion then an extra trillion in promises were created that would put extra pressure on the existing amount of dollars in existence if they were all redeemed at once (inflation). If the money supply remains unchanged and crypto prices change, then it can increase/decrease the demand for dollars.
You're changing value stores in this scenario, which mitigates the loss but doesn't eliminate it. WHat makes you think that $10 accurately represents some set of physical goods for which it can be exchanged? What about when you start exchanging like-for-like at different agreed rates? If we equate wealth to money, and money is largely based on shared faith and acceptance, then when that agreement shifts wealth most certainly is created and disappears out of and into thin air.
Yes, $10 has "magically" disappeared. Consider this case. I buy a used car from you for $10000. You now have $10,000 and I have a car worth $10,000 (let's assume that i got a fair price and would be able to resell it for that amount too).
A day later the Russian army hits my car with a mortar. You have $10,000. I have some scrap metal. Rather than $20,000 worth of stuff, there's now $10,000 (plus some scrap metal) total.
It's more like we have discovered that our estimation that $20 of wealth existed was incorrect, and only $10 existed. Someone speculated incorrectly.
It's like a gold mine being revealed as barren. Whether you say wealth was destroyed or wasn't there to begin with is... distinction without a difference.
Actually… and here’s the really fun part… the wealth was always a social construct. It doesn’t exist physically, only in ideas. It is whatever we collectively say it is. When we think something is worth $20, it is! When we decide it’s worth $10, it is! Things are worth what people will pay for them. The money is all paper anyway.
I think you highlight the problem with crypto speculation, it does not produce any revenue, so the price appreciation is only governed by new speculators bet that a greater fool will buy it. When you trade there must be a seller and buyer, the value of the untraded part is only a potential value and not real value, as soon as you put it for sale, there will be more supply than demand and the price plummet, as it happened with FTT. The total supply may have been valued at billions of dollars even thought only few millions have been bought, so the collapse just transfered the wealth to the ones who sold above the real money that was put into it. I think it is a zero sum game as there is no revenue, only speculation.
While technically correct, I will point out that during "the crash" many with access to capital are able to secure a net long position either by way of savings or via real options -- LLC is an example of a real option where the capitalist only loses the investment value making the financial leverage an attractive and useful tool.
People losing jobs and thinking about their next steps are usually too late with not enough skin in the game to jump on the decade-long bandwagon. That's the "wealth" some of the commenters here seem to be pointing to. Essentially, inequality.
Sam Bankman Fried marked his 1 billion Serum (a dex on Solana) tokens at $2.1B on his balance sheet.
The last time Serum was worth $2.1+ per token, it was Jan 2022. At current market prices, that same stake is worth less than $250M (given liquidity conditions).
Serum was also a dex that SBF's company, Alameda, pretty much made in-house, and then allocated themselves 1 billion tokens.
So this "wealth" was created out of thin air. And disappeared into thin air.
Ergo, it was not real. It wasn't lost. It never really existed in the first place.
Not when the money never existed in the first place.
These shitcoins with billion dollar market caps never actually took a billion dollars into any accounts. The volume is fake, the activity is fake, the price is fake.
Technically, Jerome Powell did. Currency valuation is complex because it is relative so the lens of perspective becomes everything. The primary nuance in your example is that currency devaluation through inflation is not the same as currency devaluation through a decrease of adoption (and therefore overall buying power): this is very clearly reinforced by the IMF's criteria for what a currency requires to become the global reserve. Any modicum of "objective" value can only be reached through multiple relative comparisons. For example:
- How many Dollars does a bitcoin buy?
- How many Bitcoins does a Dollar buy?
- When the exchange rate varies, what does that say about the relative value of each currency?
- How many Potatoes can a Dollar buy?
- How many Potatoes can a Bitcoin buy?
- How many Drugs can a Dollar buy?
- How many Drugs can a Bitcoin buy?
The above is extremely oversimplified but much like a global foreign exchange relies on shifting exchange rates, so does the value of all currency in terms of relative buying power. In terms of absolute buying power - my personal highly subjective bid is that a currency's "value" is a compound of its' exchange rate as well as the amount of people willing to exchange it, and the amount of it in circulation as well as the breadth of people willing to accept it in exchange for goods and services.
The person who sold it to you for $1 (or, possibly, the person who sold it to them, recursively).
If A mints a coin for free and sells it to B for $0.25, B sells it to C for $0.50, C sells it to D for $0.75, and D sells it to E for $1.00, at which point it crashes to zero, A, B, C and D have all made $0.25 each, and E has lost $1.00, but nothing of value was created or destroyed.
E incorrectly believed that the coin was worth $1.00 and thus that more wealth existed in the world than was actually the case, but that doesn’t mean wealth was ever destroyed, just that his incorrect estimate was updated.
