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Showing posts from 2021

Crypto's Weimar

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  A cryptocurrency has just re-enacted the Weimar hyperinflation. Yesterday, the price of the cryptocurrency TITAN crashed to zero, and its related stablecoin IRON fell off its USD peg, trading as low as 69 cents to the dollar. It was a sudden and dramatic collapse that left investors shocked and bewildered. Equally shocked and confused, the coins' issuer launched an immediate investigation:  Iron Finance issued its post mortem a few hours later. This is the key paragraph: Later, at around 3pm UTC, a few big holders started selling again. This time, after they started, a lot of users panicked and started to redeem IRON and sell their TITAN. Because of how the 10mins TWAP oracle works, TITAN spot price drops even further in comparison to the TWAP redemption price. This caused a negative feedback loop, as more TITAN was created (as a result of IRON redemptions) and the price kept going down. A classic definition of an irrational and panicked event also known as a bank run. At the ti

Bank capital and cryptocurrencies

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The BIS's draft proposals for capital regulation of stablecoins and cryptocurrencies have just been released. The headline proposal was a risk weighting of 1250% for what the BIS called "Group 2 cryptoassets", which includes all cryptocurrencies, all algorithmic stablecoins, and reserved stablecoins  that don't meet the capital, liquidity and disclosure requirements for "Group 1 cryptoassets" specified in the same document. Bitcoin and Ethereum, the two major cryptocurrencies, would fall into Group 2, along with most (possibly all) existing stablecoins.  The proposals were widely misunderstood in the crypto community. As ever, much of the misunderstanding was about the nature of bank capital.  Many people confuse bank capital with reserves. Reserves are cash deposits at the central bank and vaulted currency. They enable customers to withdraw cash and make payments out of their deposit accounts. Without them, banks would have to go to the market for funding

Tether’s smoke and mirrors

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Tether has issued what it calls a “ breakdown of its reserves ”. It actually consists of two pie charts. Here they are: Seriously, this is all Tether has seen fit to reveal.  Furthermore, the pie charts only purport to show the breakdown of Tether’s reserves on the 31st March 2021. We do not know whether Tether’s reserves still have the same composition now.  Nonetheless, the crypto world took these charts as an indication that Tether was, if not fully cash-backed, at least mostly. “76% of its reserves are in cash or cash equivalents, whereas banks only have 10%!”, crowed several people. In both the reserve report and the monthly attestation , Tether takes “reserves” to mean total consolidated assets. The monthly attestations from Moore Cayman essentially say:  1. Tether’s total consolidated assets exceed its consolidated liabilities  2. Tether’s total consolidated liabilities exceed the quantity of tokens in issue  3. Therefore Tether’s reserves exceed the quantity of tokens in issue

Calculus for Economists

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Gabriel Sterne complains about economists' loose use of mathematical terminology:  Of course, it's not just economists who use "increase" and "accelerate" interchangeably. But economics is a mathematical discipline, and in mathematics, "increase" and "accelerate" mean different things. So is Gabriel's observation true, and if it is, is it a problem? To test Gabriel's hypothesis, I ran a little Twitter test. I asked this question:  This was of course far from rigorous: the sample was self-selecting, there was no way of restricting it to economists (though I did ban finance tweeps from answering), and it all depended who was on Twitter this morning. And the terminology I used was itself confusing - deliberately so, since this is how economists often write.  But the results were nevertheless interesting. Most non-economists got the answer right. Physicists, in particular, understood it straight away. But most economists who answered

David and Goliath

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Yesterday, someone who had been watching one of my (all too frequent) Twitter arguments about money made this comment:  The "unknown person with few followers" was my protagonist. And the blue tick "classical expert" was me. I am Goliath.  But ten years ago, I was David. Armed only with Blogger and Twitter, and my knowledge of banking and finance, I set out to slay the financial Philistines that rampaged across the internet in the aftermath of the 2008 financial crisis. I published my first Coppola Comment post on 20th February, 2011. It throws slingshots at a media pundit who had written an article about short selling, on which he was far from expert. You can still read it , if you like.  My early posts were rough and ready, and my terminology is at times excruciatingly loose, but I was sure of my subject. I understood British banking and financial markets well, though I had left RBS nearly ten years before. It was evident to me that the 2008 financial crisis in th

From Carbon To Metals: the Renewable Energy Transition

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The world is transitioning from a carbon-intensive to a metals-intensive economy. Low-carbon technologies use much larger amounts of metal than traditional fossil fuel-based systems. Demand for metals is thus rising exponentially, fuelling a boom in mining and production. But this creates an environmental challenge. Metals extraction and processing is a significant contributor to global warming and a major pollutant. Unless more environmentally-friendly ways of generating energy from renewable sources can be found, saving the planet from carbon emissions may prove extremely costly for our fellow creatures and even for ourselves.   Climate change is driving a metals and mining boom The Paris Climate Agreement , which was ratified by 174 countries and the European Union in 2016, aims to keep global warming “well below” 2 degrees Celsius this century and ideally not more than 1.5 degrees Celsius. Achieving this challenging target is dependent to an unknown degree on factors outside gove

The dismal decade

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Earlier today, the Governor of the Bank of England, Andrew Bailey, gave a speech at the Resolution Foundation outlining the nature of the Covid-19 crisis and the challenge that it poses for monetary policy. But as his speech progressed, it became clear that the Bank faces a much larger challenge. Covid-19 hit the UK economy at the end of a dismal decade. Returning to "where we were" before the pandemic won't be good enough.  Just how dismal the 2010s were is evident in this chart from Andrew Sentance:  Even before Covid-19 struck, average GDP growth was well below its historical average and heading downwards. The 2010s were, to put it bluntly, a decade of stagnation.  The 2000s were slightly worse, but that was because they included the deep recession after the financial crisis, during which the economy shrank by 6%. For the 2010s, there was no such excuse.  So Covid-19 hit an already under-performing economy. As a result, Sentance's forecast for the 2020s is frankly