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Have Steem Dollars Taught Austrian Economics?

Posted in Cryptos

The following article covers a token or element in the cryptosphere. The cryptosphere is new and exciting, but changes rapidly and often in ways that do not benefit users. By the time this article is published, changes may have already occurred. Most tokens in the cryptosphere are complete scams that are get-rich-quick-schemes for insiders. Often, we cannot know this beforehand and only later discover this. A person should only trade with money that they’re willing to lose because losses are guaranteed. If you choose to participate in purchasing a token in the cryptosphere, you should do so with the full expectation of a loss and you should also expect it to change in a manner that does not benefit you. There are very few good ideas in the cryptosphere. Finally, by reading this post, you agree that you’ve read our disclosure.

Introduction

The following article covers Steem Dollars – a cryptocurrency that is a part of the platform SteemIt. The cryptosphere may be new and exciting to some investors, but it changes rapidly and often in ways that do not benefit users. In addition, you will see a lot of hype in the cryptosphere that is either ignorant or dishonest. By the time this article is published, changes may have already occurred in the instrument we discuss – this happens frequently in the cryptosphere. A person should only trade with money that they’re willing to lose because losses are guaranteed. If you choose to participate in purchasing anything in the cryptosphere, you should do so with the full expectation of a loss and you should also expect it to change in a manner that does not benefit you. There are very few good ideas in the cryptosphere. This article was originally written in the last week of November 2016.

The Basics

We wrote the most accurate and informative article about the platform SteemIt and our article highlighted that SteemIt could change in the future – for example:

Steem has 100% inflation per year forever, unless they change this.

As we noticed recently, Dan and Ned have proposed changes to SteemIt. While other media were “fanbois” of SteemIt who helped many people lose massive amounts of money investing in Steem, we were the sole voice of reason calling out the platform. Many people lost money and time, but our readers lost neither – this is why you always want to stay on top of what we write.

Let’s Talk Steem Dollars

SteemIt comes with Steem, Steem Power and Steem Dollars. For the sake of this article, we will only look at Steem Dollars and some of the changes we’ve witnessed. We correctly pointed out in our article that Steem Dollars are not actually fixed to the US Dollar. This is both good and bad. In my course, Retire Early With Cryptocurrencies, I showed students some techniques that I use since it does differ. However, this could hurt the SteemIt platform in the long run because it can’t actually peg its currency, whereas Tether-USD can (or is more accurately pegged to the US Dollar). Most cryptosphere ideas are completely worthless because they create their own tokens or currencies, when in reality, they don’t need to – they could use an already existing idea. Steem Dollars in the past have been like this, what’s the point with them if they can’t even do what they’re supposed to do? Why don’t Dan and Ned use Tether-USD or another superior product that’s actually pegged?

When we wrote the previous article, Steem Dollars paid 10% AP[Y] (APR is for loan interest); however, Steem Dollars recently changed to 15% APY, and the value of Steem Dollars rose, and they lowered the interest rates to 10% APY and 9% APY as the value of Steem Dollars rose. What happened?

Austrian Economics and Savings

Keynesian economists believe that economic growth comes from C + I + G + Net Exports, while Austrian economists believe that economic growth comes from Savings, which leads to Investment, which leads to Capital Accumulation, which then leads to a higher standard of living.

If you ask modern economists when central banks should lower interest rates, they’ll tell you that they should lower interest rates when we enter a recession. This is false. The only time that interest rates should be lowered (and never below 8%) is when there is too much savings. Interest rates are a function of the demand for savings; if there is too little savings, interest rates should be high, whereas if there’s a lot of savings, interest rates should be low. Interest rates should never be below 8%, as anyone could dump all of the currency and buy living items – like trees and livestock – that reproduce.

Steem Dollars paid 10% interest, so people would want to hold them right? Wrong. People were dumping Steem Dollars like crazy and I noticed at one time the money supply of Steem Dollars was as high as 2,000,000 (at the time of this writing, Steem Dollars’ money supply is down to 1,300,000). It appears that Dan and Ned have decided to raise interest rates to create demand for Steem Dollars – in other words, to stabilize the peg. If there’s not a demand for the currency (savings), by raising rates, Dan and Ned are encouraging SteemIt members to retain the currency.

The data show us exactly this: the price of Steem Dollars began to stabilize, as after the interest rate increase, the price moved closer to one US dollar and even rose above it several times. This is still not a stable peg, but it did finally start to tie closer to the US dollar.

Why the Peg Is Important

The US Dollar is in its final bull market and while idiots all across the internet stupidly think that China is devaluing the Renminbi, we are the only site that is aware that the Renminbi is only falling because China unpegged their currency from the US Dollar in 2015. China doesn’t want to sell their US bonds when the Dollar is low in value (absolutely retarded), they want to sell their US bonds when the Dollar is high – and the Dollar is in a bull market!

For SteemIt this matters because if Steem Dollars can’t stay pegged in the long run, no one will trust any peg if it later changes. People may like to think that Steem Dollars will always be Steem Dollars, but if the US Dollar starts to decline – and it will at some point because the US government owes $21 trillion US Dollars in debt – what happens if the community decides to peg it to another currency, like the SDR or Chinese Renminbi? If no one trusts the original peg, they won’t trust the new peg. It’s important to realize that the community wouldn’t vote to support that now because the US Dollar is in a bull market – everyone thinks the Dollar is king right now. But this won’t always be the case and when the Dollar begins to fall, and it will, people may vote to peg to another currency.

Can SteemIt Model Austrian Economics?

Most ideas in the cryptosphere are get-rich quick schemes for insiders (like Zcash and Synereo) with very few ideas based in reality. This is a sad reality of more waste because the cryptosphere is the perfect opportunity to show people that Austrian economics works and is far superior to the Keynesian and Monetarist economic theories. The recent move by SteemIt to raise rates to close the peg is similar to an Austrian model and I will be watching to see if they keep mirroring this model. The rate of 15% APY seemed to attract people to save, not dump. If that didn’t work, they would have to raise rates again. While the goal of SteemIt may be to peg this currency, it’s teaching some fundamental lessons of Austrian economics related to savings, interest and money.

What people might be missing at this point is what happens when Steem Dollars attract savers and these savers start growing their savings by earning interest? If SteemIt commits to this Austrian economic model (huge if), what we will begin to see is a commit of savings to investment, mirroring the Austrian economic growth model of Savings => Investment => Capital Accumulation => Higher Standard of Living. At the root of all economic growth, a saver is fundamental to the economy because he demands that all ideas from money must reproduce, which expands the supply, creating wealth for all. Just like we would kill an apple tree that won’t reproduce apples and replace it with a tree that does, we should welcome and be excited when bad ideas fail. The saver fundamentally expects this return and this expected return separates the good ideas from the bad ideas.

Of course, there’s risk involved with trusting SteemIt. Unlike other media who hyped the platform, we’ve been cautious about SteemIt and whether its founders and investors are really interested in offering a platform that will create wealth for all users. I’ll repeat what I often write: the cryptosphere is full of get-rich-quick-schemes that serve most users poorly.

SteemIt’s Other Problem: Integrity

Since seeing is believing, you can see in the below video one of the accounts that I mention in this post. Since I don’t sell anything in this account, we can verify if it’s actually paying the interest that the SteemIt platform is claiming.


Of course, all of this assumes that SteemIt honors its word in the long run, which so far it’s completely failed to do – as you can see in the above image. I have multiple accounts on SteemIt and due to vague tax rules in my country, don’t sell Steem, Steem Power, or Steem Backed-Dollars (people who do and live in the United States could end up facing major tax problems later). This has allowed me to see if SteemIt actually does what it says on interest. For instance, the above image comes from an account that’s been on SteemIt about 7 months. Even though the account has had over $130 Steem Dollars since four months ago, you’ll see that it hasn’t paid interest consistently in those four months. Worse, the total interest the account has received equates to about 4-5% APY, not the 10% APY that the account was supposed to pay for a long time (they only recently switched it to 9% APY and for a while it was 15% APY). If savers catch word that SteemIt doesn’t pay interest afterall, it could get ugly for Steem Backed-Dollars. Before anyone thinks that maybe the interest is paid occasionally, let’s look at what some of the people on SteemIt have said:


As we can see, SteemIt does not pay interest like a bank and it doesn’t seem to pay the rate it promises; if the latter person is incorrect, it’s yet another example of how the rules aren’t that clear – how often does it pay interest? From the interface, it claims to pay the interest monthly, but as we see this is not the case.

At this point, this particular account is several Steem Backed-Dollars shy of the interest it should have accumulated at this point and we also see that this interest is paid inconsistently – if at all. Not only is this unreliable, it calls into question the integrity of SteemIt; does it really pay the interest it claims?

Let me remind citizens of the United States here: if you’ve been selling and using Steem Backed-Dollars, you have invoked tax gains, so make sure you report these. If you want to keep it simple, I suggest that until there are clear rules, just keep the money in the account (trading Steem Backed-Dollars if you know what to do can be profitable, as I showed students in my course Retire Early With Cryptocurrencies during one month of exclusive subscriber-content).

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