Honestly stablecoins - specifically tether - is about the only thing about crypto that genuinely frightens me.
Crypto rollercoaster - up down sideways and in circles - sure I'm game. Tether that is stable until it implodes...hell no. Even without direct exposure the blast radius worries me.
Honest question. How's Tether imploding different from e.g. a public company suddenly shutting down and its stock price going to zero? I imagine the two scenarios being similar in the sense that anyone holding tether would eat a big loss, but aside from the event obviously affecting investor sentiment, wouldn't it just be more or less business as usual for other coins? As in, couldn't BTC/ETH/whatever people just use other stablecoins instead?
I feel like the risk of full-on panic selling seems more and more unlikely as time goes by and more institutional investors get into crypto. And even if everyone did take out their money at the same time, isn't most of the value actually backed by the dollars of whoever was the biggest fool?
Tether imploding isn't at all like a public company closing shop, because public companies are Real Things and have public data about sales, revenue, employees, business relationships, etc. And even the ones that implode go through bankruptcy court where their assets are doled out to debtors and shareholders.
Tether imploding would be more like a bank run, where you can see YOUR MONEY as a number on the screen then when you go to cash out, you simply can no longer access your money. Or maybe you can withdraw $100 a day, but no more. If and when that happens (or threatens to happen), everyone freaks out and tries to get their money at once - which is exactly why the banking system in the U.S. is backed by the federal government so this doesn't happen.
The higher risk is that a good swath of crypto investment is done on leverage, which can increase with the more money you have. So with $100MM and a bit of lying you can go invest 10x your money in crypto and get some fat returns - lets say you go all-in and put $1B in Tether and get an 8% return on your money - thanks to leverage you are actually making 80% return on your $100M (sample #s, but you get the idea). This works great until things blow up, because you don't just lose your $100M, the BANKS that gave you leverage ("margin") lose $900M too, so one idiot taking this gamble can have a massive impact on the banking system as a whole.
And that wasn't even fallout from a Ponzi scheme, but simply from: bad risk management + leverage + minimal oversight + lying. The real stupidity is that these banks have continued to provide margin loans at very low rates with loose oversight, which should remind you of "race-to-the-bottom" mortgage market that blew up housing around 15 years ago. Except now we are talking about hedge funds and billionaires and a billions of dollars being thrown into shitcoins and NFTs. So when this implodes there won't be any collateral at all to rely on.
Wasn't that GC's point though? The run-on-a-bank analogy only applies if you are holding Tether when it happens. If you are rightfully paranoid about Tether and therefore don't hold any, what is the damage for you?
Isn’t this like saying a run on the banks won’t damage you if you keep your money in a mattress?
Even if you don’t keep any money in a bank, banks collapsing would still hurt you. The stock market crashing hurts more than just people who own stock.
Right, but a run on a bank does not necessitate collateral damage.
As an example, let's say Capital One has been fractional banking (as they all do) but for some reason people get paranoid about it and there is a run on the bank. Everyone tries to withdraw money Capital One doesn't have. As long as the govt doesn't step in and socialize losses on the back of the taxpayer, you're left with a bunch of people who had "deposits" at Capital One that are now non-existent because Capital One doesn't have any money left. Those people are of course hurt, but the person who only banks with Chase would be hurt how?
People who only bank with Chase are likely owed money or expecting income from Capital One customers who now unexpectedly do not have any money.
Also, Chase customers start worrying about the security of their money, and they start to withdraw from Chase faster than Chase debtors pay off their loans
They would benefit from the deflation and maybe actually hurt by the guns of the Capital One customers.
But looking at the low percentages of equity on banks balance sheets I think one bank run would easily jump over to other banks just because of the fear that they might happen
Except that it is not “one idiot taking this gamble” that can have a massive impact. The second and eventually third tier idiots are the banks and the government/people for allowing the concept of “too big to fail” to exist. An additional layer of idiots are the central banks that incentivise all of this by kicking the can down the road.
It’s not banks but I think the GP is trying to describe a margin loan. Basically you give (say) an exchange $100, ask them to buy $1000 worth of stuff using your $100 as margin, and if the stuff you bought looks like it is going to be worth less than $900 (ie if they would make a loss by selling all your stuff) they will call you and ask for more collateral or, if you are too slow, sell all your stuff for eg $925, leaving you with a less of $75.
A large company going bust doesn't imply that demand for other public companies was somehow fabricated.
The more apt comparison here would be something along the lines of the recent run up in TSLA being the result of purchasing from the infinite margin bug from Robinhood a while back. It would turn out the demand wasn't real, only there because it was free.
The implications for Bitcoin and other crypto also purchased with Tether, or with Bitcoin are a lot bigger than you'd imagine.
I just listened to a podcast about this and the guest Bennett Tomlin said these are things that may happen if Tether was shut down by the US government:
* Price of BTC/USDT ETH/USDT explodes as people try to exchange Tether to another liquid asset
* BTC and ETH start to drop on non-Tether exchanges as people sell and try to get out to fiat currency
* Tether collateralises futures contracts, when BTC/USDT spikes, some strange behaviour may happen in derivatives based on Tether.
* Tether allegedly is a meaningful percentage of the commercial paper market, if those assets are seized, it may affect that market.
* Some S&P500 companies have a lot of Tesla on their books. As BTC/USD drops, that would impact their stock price, and potentially the index overall.
* Some shadier crypto exchanges may go under or abscond with client funds in the confusion.
A lot of this could happen in a matter of minutes.
You could imagine a similar flight to safety happen if Tether was revealed to not have the reserves they claimed to and were unable to redeem client funds.
For what is worth, there's a huge blast radius if any of the top 3 collapse, with Tether (as the 3rd) likely having the smallest one - think of what happens to everything else when bitcoin crashes or even dips significantly.
Bitcoin crashes and dips all the time. It's lost over 80% of its value at least four times since it launched, plus the recent big 50% drawdown. It slows the cryptoeconomy for a year or so, but doesn't stop it, and then there's another bubble again ~2yrs later.
Bitcoin's high but natural volatility is not the same thing as the price collapsing due to the system itself fundamentally breaking. For example, the Global Financial Crisis was the result of the system itself fundamentally breaking, not natural volatility, and its blast radius was immense.
Tether or other major stablecoin collapsing due to being exposed as a fraud, or a fractional reserve with no reserves, or similar, would be more analogous to the GFC. And the blast radius could be worse than any of Bitcoin's 80% drawdowns, both economically and wrt to regulatory and legal attention.
While tether is shady as hell, the fact that it is not deflationary, that the weaknesses in its balance sheets are more visible and that it is tied to a monetary policy that doesn't encourage hoarding makes it tamer than deflationary coins in many ways. Yeah if it collapses, some other cryptocoins are going to be more volatile than usual but even Musk tweets can do that (and this volatility may actually help prevent these coins from becoming systemically important and dangerous).
Deflationary coins on the other hand are super insidious, they can get hoarded on a wider scale to the point of displacing productive investment in the economy. With deflationary coins it's not the volatility that's dangerous, it's the lack of it creating gridlocks in other investment markets.
> Deflationary coins on the other hand are super insidious, they can get hoarded on a wider scale to the point of displacing productive investment in the economy. With deflationary coins it's not the volatility that's dangerous, it's the lack of it creating gridlocks in other investment markets.
I worry about this too. Essentially, new money creation can go toward financing three objectives - production (manufacturing & innovation), consumption, or asset speculation.
If you have a financial system that’s financing mainly production, and somewhat consumption, you achieve widespread and equitable growth without inflation. This is the ideal. It’s how the Japanese rebuilt their economy after WWII, based on the theories of Osamu Shimomura, focusing new money creation on production.
But if your financial system is financing mainly consumption, you get inflation without growth.
And if it’s financing mainly asset speculation, you get financial instability and crisis, wealth concentration, and inflation.
This is all from Richard Werner’s work and research [1][2].
Deflationary cryptocurrency, at least in its early days, is financing mostly asset speculation.
However, that may be an unavoidable part of bootstrapping a new kind of money technology. But as your blog mentions, at some time in the future it will reach a steady state, no more rapid appreciation, and then what.
One of the big public debates is about whether transaction fees alone will be enough to finance mining and thus security of the network, after both the mining subsidy ends and the price appreciation levels off.
Another less public debate is how “HODLers” may then need to reinvest more of their gains into building value-adding services for the network to continue economic growth, despite the individual incentive being to hoard.
I don’t think the story has been completely written on deflationary cryptocurrencies, and am still watching to see how they deal with this eventual problem. But the sound money religion surrounding some of them is preventing an honest assessment of these problems.
I just don't see it being worse. There are plenty of replacements in place - USDC is also in the top 10. BTC crashing 80% is at least similarly drastic (many losing 'faith' or all their savings in crypto) and I don't expect the recovery from a Tether crash (which is also a much smaller part of the market and again, has replacements) to be worse or take longer.
In the GFC, the financial system locked up because banks stopped lending to each other, which is otherwise a primary activity in a working financial system.
They stopped because the collapse of Bear Sterns and Lehman Brothers made them realize that anyone could be next and they all had massive counterparty risk with each other. Why lend to someone who could be bankrupt literally the next day?
They all had taken on massive leverage, collateralized with mortgage-backed securities the ratings agencies said were high quality. But those MBO's weren't and began defaulting en-masse, correlated in ways both the ratings agencies and the banks either didn't understand or willfully ignored.
If central banks and governments hadn't stepped in to provide emergency liquidity support, interbank loans would have defaulted en-masse and the entire system gone bankrupt and collapsed. That's what it looks like when a financial system breaks - it literally stops working, activity ceases, like a core dump or blue screen of death.
Natural volatility happens all the time even when the financial system is not broken or breaking. It's just the price discovery process in action, where different buyers and sellers with different views on the future value of the things are trying to find the best deal. Price shocks can be part of it, abrupt movements in price due to some event, but as long as the underlying mechanics of the system continue working smoothly, it's not an example of the system breaking.
Maybe the banks should upgrade to trustless systems then? On the otherhand they just should face that they trusted the wrong parties and go bankrupt otherwise the incentive system gets rigged (thats where we ended up nowadays)
Yeah, the alternative was for the Feds to let them fail, then take them into receivership similar to the S&L crisis back in the 80s. But after decades of dismantling Glass Steagal and consolidating into megabanks, they had enough political power this time to orchestrate a bailout.
I'm not sure any technology can solve the fundamental problem, but the post-Great Depression regulatory regime did for decades until it was dismantled in the 80s and 90s. It's no surprise that less than a decade after Graham-Leach-Bliley dismantled the last bits of Glass-Steagal in 1999, that we get another financial crisis similar to the Great Depression. Glass-Steagal mostly worked, and served to decentralize the banking/investment banking/insurance industry.
I find it weird that any person 'hodls' any crypto. I pick the rallies (like the one last night) and ride them, then sell. I cannot, besides stress, understand why anyone would hold crypto currencies at this point. It is too young and Wild West. That's why riding waves is easy and if you trade half decent you can make fortunes. But it can be gone tomorrow; for instance if Tether gets called on it's bluff.
Yep, but I am not holding the burning bag of poo. So yes I know that but I am not going to be that religious person that does that first and I do not get why anyone would.
People hold crypto for the same reason that someone would hold any investment, they believe it will go higher. Of course that could be wrong with crypto, but the same applies to any investment. Risk/Reward.
Well, let us see in 10 years. You might be very rich or have $0 from crypto. I will have my money even if it tanks and be very rich if it does not. If you hodled, you lost on days like 19 may, I almost doubled up. I just don't get the religious part: if Biden 'takes on ransomware criminals', btc could drop to 0$ today and it will crash the rest with it. And it will not jump to 1m$ overnight, so buy low sell high is also generally the quote on this.
The frightening things are the most transformative. Decentralized stablecoins represent a huge class of use-cases for blockchain. You don't have to tether the value of a stablecoin to a fiat currency necessarily.
Tether imploding would just mean a couple more years to stack up.
People who don't understand the technology would flee, thinking it was just a fad, those that do understand it would stay, stack up and wait a few years.
Ah yes, the "technology". Any day now. Won't know what hit them. Around the corner really, alongside cold fusion and the chewing gum that replaces toothbrushes.
The same criticism applies, a global distributed consensus is fundamentally flawed as a payment system, and the current ad-hoc organically grown mess of different centralised payment systems interoperating is somehow still more suited to processing payments quickly and reliably than ‘crypto’.
Fast transfers, trusted partners, regulation, audits, identity verification, fraud prevention, backing, sound money. All these things are important and valuable, and while our current system is really flawed in some ways (in particular the control of politicians over money supply and the monetisation of debt), cryptocurrencies do not offer a solution to the most pressing problems and introduce too many of their own.
How are credit cards not the most terrible thing ever? Some random number with an expiry date and an additional number is the key to your wealth (subject to a lot of terms and conditions)? I would rather go with a cryptography based solution, where all the terms and conditions are open source code, all day
Yeah, like online shopping. Remember that fad? Luckily the .com crash showed us that the critics were right and nobody ever got rich from that dumb idea again.
I’m certain I’ve seen examples akin to “people want to touch and see the products before they’ll consider buying them”.
I think the difference with crypto is that over time as more people look under the veil the number of naysayers grow, whereas with online shopping the naysayers have gone extinct (maybe RMS uses only cash or something).
Last night I stumbled across a group freestyle rapping and hung out for a bit. At one point one of the rappers talked about putting money into AMC and how it was a bumpy rollercoaster of a ride.
It really put a face on the other side of a lot of these cryptos and meme stocks. It’s entirely possible the fellow was a savvy investor (he certainly could freestyle very well) however judging by how his posture went from exuberant and confident to deflated as soon as he mentioned AMC in his own freestyle I’m fairly confident he bought in at the top.
And it certainly didn’t surprise me that at my local stomping grounds I’d be hearing the dismayed crewing of the fleeced.
Not obvious to me that it would be catastrophic. There are other stablecoins even if Tether is a 75%-funded scam (and honestly, who in crypto _hasn't_ taken a 25% haircut at some point?)
Some people holding cash* would get hit, but there's no real magic to starting a 1-1 backed stablecoin. Someone will fill the space, since it's obviously needed.
Tethers own press release last month showed them as having around 5% cash and treasury bills (more or less as liquid and stable as cash). Most of the rest is unspecified "commercial paper" - if that is commercial paper from, say, Apple, no problem. If its a debt issued by unregulated, offshore, heavily leveraged crypto exchanges, it could be more or less worthless. The general consensus is that if it was the former, they'd say so, so its far more likely the latter.
> The general consensus is that if it was the former, they'd say so, so its far more likely the latter.
They specifically describe their loans as "secured loans (none to affiliated entities)". There's no such annotation on their "commercial paper", giving the impression that this category (which amounts to slightly under 50% of their overall holdings) may consist in large part of loans to other crypto exchanges, possibly in the form of Tether tokens.
Crypto rollercoaster - up down sideways and in circles - sure I'm game. Tether that is stable until it implodes...hell no. Even without direct exposure the blast radius worries me.