I don’t see why “no counter-party risk” matters for a speculative asset with a volatile price. It seems like you’re distracted from the main risk?

Yes, Bitcoin is volatile but on a risk adjusted basis it is still the best performing asset in the world over the past decade. This excludes the stratospheric rise over its first four years of existence.

For the past 10 years, it has grown in value at an average rate of 200% per year.

In portfolio theory there is a measure of risk adjusted return known as the Sharpe Ratio. Over the past ten years the best performing portfolio based on Sharpe Ratio would have been 97-99% US Treasuries and 1-3% Bitcoin.

You don’t have to store 100% of your savings in Bitcoin, but having a little in your portfolio might be an idea worth considering.

Very few understand this, at their own peril. I would like to add that it is now the second best performing behind Ethereum. It's unwise to ignore it.

No counter party risk but considerable self-party risk; its difficult to keep proper custody of your crypto.

> they present significant counter-party risk for _depositors_

I’d say the risk is for _bearers_, not depositors, and even then the risk is (mostly) that of inflation, like you mention.

No one has lost their deposits in the current events. Even with the FDIC upper limits, I can’t think of many scenarios where a human person would need to hold more than $250k in liquid assets (other than in the short term), and if they did, they could split the sum over several banks.

Now, I’m not saying that the system is heading in the good direction, that the FDIC will make depositors whole in the face of systemic widespread bank failures, nor that such an event wouldn’t affect the economy in other negative ways. I’m saying, however, that the counterparty risk for the average and not-so-average person holding USD stems mostly from who controls the money supply (govt and the Fed).

The recent events show that the financial sector is a significant counterparty risk for participants in the economy, but I’m not persuaded that BTC would solve that because the problems come from institutions engaging in risky behaviour, which is independent from the currency being used to represent value. Case in point: the numerous crypto exchanges and totally-not-a-bank investing firms that crashed in the last 12 months.

Edit: Incidentally, you can self-custody USD just fine (it’s just not very practical for large amounts)

So far FDIC insurance has protected depositors, even those with millions in the bank (right or wrong, I won’t make that call).

Notably, the FDIC insurance fund only holds $128 billion to backstop over $17 trillion in deposits. We know now, and the Fed knew since at least September, that close to 400 banks are in a similar situation to SVB (basically insolvent on a mark to market basis).

What happens when more banks fail than the FDIC fund can backstop? The only question is will it be depositors, US taxpayers or all dollar holders globally left holding the bag?

> What happens when more banks fail than the FDIC fund can backstop?

I’d hope we don’t have to find out. Regardless of who holds the bag, it’ll be bad. (In an ideal world, depositors will be depositing in banks with finances matching their risk profile, but I digress.)

How would crypto make this better though? Yes, self-custody eliminates the counterparty risk, but just like with USD, self-custody is just not practical for many people. Many people choose to hold their crypto in exchanges (because of convenience) or lenders (i.e., equivalent to banks, because of yields.) So doing results in similar or higher counterparty risks.

If we abolished fiat and moved to BTC, a financial system will arise on top of it which will likely closely mirror the USD financial system (actually, it already does now). If that happens, the counterparty risk for depositors remains.

I’m all for crypto, but I think it’s naïve to think that just because self-custody is a possibility, counterparty risk will go away.

If you have a significant amount of USD, you can mitigate the risk of your bank failing on you by holding physical cash or by holding T bills.

I agree with everything you are saying. Self-custody isn’t as easy as leaving your money in the bank. Also, although I see the benefits of Bitcoin I don’t think it should be the only currency option.

I would like us to take this opportunity to recognize that fractional reserve banking where depositor funds are used (with leverage) to make speculative bets (on mortgage backed securities or even T-bill interest rates) is a fundamentally unsound model.

I would much prefer a model where I have the option to store my funds in a full-reserve bank and would happily pay for the service.

As for self-custody, it is a skill like any other and one that I think more people should learn. Self-custody is fundamentally no more difficult than say building a sound backup strategy (3 copies minimum, stored in at least two formats with at least one stored offsite) There are ample tutorials on the internet and I hope more people recognize that counter-party risk is real, whether it be fiat or crypto.