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1/ How will the banking system be affected by crypto?
2/ First, we have to see what how the current banking system is laid out.
3/ At the core of the modern monetary system is the central banking per country.
4/ The role of the central bank is the manage the money supply, interest rate, and currency in reaction to the economy.
5/ The goal of the central bank is to change these instruments in response to inflation, economic growth, and employment.
6/ The monetary supply and interest rates defines the monetary velocity and supply to the country first and its constituents.
7/ These constituents are the commodities (petro dollar) linked to the currency (otherwise known as tokenization in crypto).
8/ Other constituents include the trade partners (i.e China and US, US and Euro).
9/ This is why the entire world holds its breath whenever the Fed chair speaks because when he/she talks, it affects the world.
10/ Currently, the monetary supply is based on fiat, which means that the central banks can print as much as possible.
11/ The old central banks were based on Gold, but that tied the central banks hands when crisis happened.
12/ Nixon moved the USA off of the gold standard to enable flexibility for the central bank to change the monetary supply/velocity.
13/ Why does the central bank matter? The interest rates affect the interest rates of your mortgage, credit card, and savings account.
14/ The central bank lends to the commercial banks (JP Morgan), and they buy equities/bonds or lend out money for mortgages/CCs.
15/ Central bank -> Banks -> Commercial/Retail banking -> Mortgages/Private banking/Credit cards/Loans/Insurance
16/ So, how is this market segmented? It's by volatility and ability to take volatility as a consumer/business.
17/ 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
18/ Therefore they can primarily invest in less volatile financial instruments. Mostly stocks, bonds, munis, or real estate.
19/ 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.
20/ It's no surprise to see from one statistic that only 300k people hold more than $5k USD worth of Bitcoin $btc.
21/ As you get more volatile, it tends to correlate with wealthier individuals and institutions.
22/ From least volatile to most volatile is: treasuries, muni bonds, real estate, bonds, stocks, junk bonds, mid cap stocks, small cap, VC
23/ 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.
24/ Yes 0. Most companies that venture capital invest in, either become zombies (cannot return capital, or cannot exit) or die outright.
25/ With such illiquidity, it's no wonder that the industry is myopically focused on unicorns coined by @aileenlee
26/ 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.
27/ So how is this related to crypto? Right now we're in the very right of the spectrum of banking products.
28/ 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?
29/ 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.
30/ As $btc bitcoin is the reserve currency, you will increasingly have other products that will be built as a "loan" from the central bank.
31/ Remember this? Central bank -> Banks -> Commercial/Retail banking We are in the left side right now. We're not even in step 2.
32/ As $btc become the lending instruments, it will be lent to more products.
33/ From most volatile (most reward) to least volatile (lowest yield): ICOs, tokenizing startups, tokenizing venture capital ...
34/ Then as the more consumers get in they will demand less and less volatile products.
35/ Remember this? treasuries, muni bonds, real estate, bonds, stocks, junk bonds, mid cap stocks, small cap, VC
36/ The next products will be tokenizing equities, junk bonds, mid cap equities, and bonds and this is exactly what's happening right now.
37/ @OverstockCEO is leading the charge. They are creating a marketplace where ICOs and stocks can flow through enabled by crypto.
38/ This process of tokenization will continue further and further down the chain of volatility until it reaches your consumer/mom.
39/ When will that happen? When will normal people use this? Well likely when most people used Facebook, which is ~16 years after Netscape.
40/ So long? Crypto is going to disrupt everything! Democratization takes time. Technology, use cases, and distribution have to line up.
41/ The use cases that people are looking for which is insurance (Geico) will take much longer than people think.
42/ Consumer markets are not just constrained by technology and use cases, but also go to market strategies.
43/ Most famously, @sequoia always ask "Why Now?" The timing within this sequence is as crucial as knowing the exact use case.
44/ There was a board game that was monopoly for failed dot com ideas.
45/ The "stupid" failed ideas were: social networking, reviews, group discount buying, social games.
46/ The "stupid" failed ideas all become unicorns in the 2010s as Facebook, Zynga, Yelp, Groupon.
47/ So why am I talking about this? As we discuss what use cases will gain traction.
48/ It's important to talk about the context. Certain types of fields can only hold certain plants. Environment and timing is as important.
49/ As idea, execution, and go to market.
50/ In conclusion, the banking will get disrupted in reverse of volatility. This is probably why @naval invested in a stable coin.
51/ The likely map is the reverse of this: treasuries, muni bonds, real estate, bonds, stocks, junk bonds, mid cap stocks, small cap, VC
52/ Tokenize everything but in reverse of volatility.
