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Comment by panarky | Hacker News Reader

When something doesn't make sense, usually it's because information is missing.

Every market participant knows that Tether doesn't prove their reserves, and yet the market exchange rate to USD stays in a tight band between 0.98 and 1.02 across multiple exchanges.

If the market doesn't trust Tether, then it should trade at a deep discount to USD, not at parity.

Similarly, the conventional wisdom says cryptocurrencies are in a massive speculative bubble. The negative sentiment on Bloomberg, WSJ, NYT, Twitter (not to mention HN) far outweighs the fanboys.

This is the most unregulated free market we've ever seen with many exchanges in many countries, person-to-person facilities like https://localbitcoins.com, margin trading, short selling, futures, options, etc.

If everyone knows the whole thing is a Ponzi-bubble-hype-scam, why isn't that information reflected in the markets?

There must be missing information that would make this make sense.

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Bear in mind that this is bitcoin. People continued pumping money into mtgox for _months_ after it was clear to anyone who’d been paying attention that it was dead.

And currently bitcoin’s in an unusually large bubble, so there are lots of people buying into it who’ve never previously had experience of it. I see ads for, basically, “get rich quick with bitcoin” every day now. The people clicking those are not the world’s greatest critical thinkers; if the site on the other end says “buy tethers with our affiliate code to BUY BITCOINS AND GET RICH”, they’ll do it.

There are sufficient people buying tethers at face value, from the company, to keep parity. And I don’t think there’s really a facility to short sell them (that might change things a bit)

As it stands, according to Bitfinex (who is has same management as Tether) individuals do not buy tether from the Tether (the entity). They buy from Bitfinex, with dollars, transfer internally to Tether, Tether generates new tethers, they transfer to Bitfinex tether hot wallet, who then deposit in customers trading account.

One issue, is that they just revealed this arrangement. The Tether website makes it look like you can both buy and redeem tethers through an online wallet on that site, but apparently nobody has done so.

The core issue is, that despite promising to do so, Tether has not released an audit proving that they only issue new tethers on receipt of dollars.

If in fact they are issuing them unbacked, they can easily fake demand for Bitcoin. Tethers are transferable via block chain between exchanges, and are used by exchanges without access to real US dollar banking to conduct trade in (nominal) across cryptocoin-USD(T) pairs.

It’s unclear whether there have been any significance redemptions of tethers for dollars. There have been ~$800m tethers issued this year.

> Bear in mind that this is bitcoin

It's still a market, so market logic should apply.

> get rich quick with bitcoin

I see the same shit with real estate.

> sufficient people buying tethers at face value

It's a market. Smart money can sell tethers. When there's information that all market participants know, the market price should reflect that information.

Markets are wrong all the time. See the dotcom crash, the 2008 crash, etc.

So a crash is a market being wrong?

A crash is a market realizing it had been wrong about something, yes.

Or, a "crash" as defined a dramatic plunge rather than a downturn over time is usually some kind of feedback loop where prices falling creates expectations that prices will drop even further and so on, often if the market is mostly driven by greater-fool-theory herd behavior.

To a large extent, yes, often. See the dot-com bubble, for instance.

Why are markets inherently "smart?" And why is a crash not the market being "wrong?"

What even is the market? If it's the people in it, and they're smart, why did they buy subprime loan investment instruments and nuke the housing market and lose all their money?

> What even is the market?

A democracy where people vote with their money. Since their is significant risk involved, said people are assumed to do at least some due diligence/research before placing their "votes." And for that reason people have confidence that markets are right/smart, because why would so many intelligent people put themselves at enormous risk by placing their confidence in a bad investment?

Of course if the original investors get rich, eventually this leads to ignorant people (i.e. people who have not done their research) jumping in and the smart market becomes something else.

I know I am oversimplifying

Is it really the mindset in the current decade that those that "vote with their money" put any more consideration into their decisions than those that "vote with their vote?" AKA very little whatsoever?

I only ask because most of what I've been reading has assumed the market is irrational.

> I see the same shit with real estate.

And that, famously, _never_ crashed.

Housing prices didn't crash after many years of vastly disproportionate negative sentiment.

Housing prices crashed after most of the negative voices capitulated and bought into the speculative fervor, until there were no more buyers.

Today, nearly everyone's gut instinct is that cryptocurrencies are scams, frauds, bubbles, Ponzis and tulips.

Popular sentiment has been negative for years. How will this thing unravel before the majority capitulates?

Actually, housing crashed when lots of people who had bought housing on credit turned out to be unable to service the debt. I don't think there's a similar scenario with bitcoin.

On the other hand, a large secular demand will always exist for housing. The same is not true for bitcoin.

> Actually, housing crashed when lots of people who had bought housing on credit turned out to be unable to service the debt.

For completeness, "housing crashed when lots of people who had bought housing on credit turned out to be unable to service the debt and couldn't sell to someone else for more than they paid"

That italicized part is what caused the downward spiral, and that's the part that's relevant to Tethers and cryptocurrencies.

Most people with worries about escalating real estate prices had capitulated and bought in before the crash. With no more buyers, the self-reinforcing cycle went into reverse.

With cryptocurrency, the vast majority of wealthy people already think it's a scam, bubble, Ponzi or fraud. Unclear how a bubble can form when most people think it's a bubble.

A "bubble" doesn't require the participation of all or even most market participants. As long as prices are being driven by short-term speculation, it's a bubble.

I think that bitcoin prices are being primarily driven by long-term speculation - if everybody hoping to flip BTC for overnight profit exited the market tomorrow, it wouldn't make that much a difference in the end. Wouldn't surprise me if I am wrong though.

I think there is always a demand to instantly transmit value across any distance or borders, which cryptocurrencies do very well as long as they have any value at all.

At least for Bitcoin, it’s going to be cheaper and easier just to go to a traditional bank or money transfer company. Unless you somehow have a notion that using it will hide the money from the taxman...

> Smart money can sell tethers

I don’t think that many people are really holding onto tethers all that much; who has tethers to sell? Bitfinex itself?

Current issuance of tethers is ~$850m, according to the story told by Tether/Bitfinex, these should be held mostly by users. There’s no reason for exchanges to hold (unless they were buying for their own account).

Presumably when redeemed for money they go back to tether/bitfinex?

> It's still a market, so market logic should apply.

How many levels of deranged libertarianism are you on? The market never makes mistakes?

> I see the same shit with real estate.

Right, and the real estate market spectacularly imploded and took the global economy down with it when it turned out the market was wrong. Is that your point?

> When there's information that all market participants know, the market price should reflect that information.

It should, but it empirically does not. "The market can remain irrational longer than you can remain solvent" - i.e., smart investors know that you don't bet against a bubble, even if you're 100% right that it is a bubble, unless you have very deep pockets, because you can't know how long it will continue to grow (and thus how much money you'll lose) before it pops.

Even if you know it's a bubble, the rational thing to do is to ride with it, make as much many as you can and try to get out at the right time. Hence bubbles can exist and grow even if every participant knows what's going on.

The market can stay irrational a lot longer than you or I can stay solvent.

the market is extremely illiquid. even if you know it's a scam you have few options if you want to cash out.

you can trade bitcoin for cash balances at various exchanges but actually withdrawing those balances is subject to miniscule daily/monthly withdrawal limits and if there's a run on the market those exchanges will almost certainly collapse. there's no significant over the counter market. you can swap your bitcoin or tether for other crypto currencies but none of those have independent exchanges/markets. the best you can probably do with them is trade them back for bitcoin.

if you're a market participant who thinks things are a scam your best option is to withdraw what you can while you can and do everything you can to prop up the price until you are liquidated

> the market is extremely illiquid

Trading is dominated by smart money -- whales, arbitrageurs, etc. Coinbase may have a lot of newbies buying 0.002 BTC, but these aren't the ones trading Tether.

Whales and arbitrageurs have many facilities for withdrawing national currencies. They've completed the AML/KYC process. They have access to multiple banks in multiple countries.

If the smart money knows Tethers are fractional reserve, if they know cryptocurrencies are bubbling, wouldn't they withdraw?

Wouldn't the smart money put downward pressure on exchange rates?

And if the market is that illiquid, a little downward pressure would be magnified into even more severe price drops.

Since that's not happening with Tether, BTC or ETH, there must be another explanation.

Maybe the smart money knows something that isn't obvious to the rest of us.

I don't understand how people can confidently characterize the nature of crypto trading volume. How do you know where the bulk of trading volume is coming from? There's nothing whatsoever stopping wash trades. With sufficient capital you can massively manipulate trading volume.

To put downward pressure on the exchange rates the smart money would have to be holding tons of tether to liquidate in the first place -- is there any reason to believe they are?

Who holds Tethers, the Reddit guy who just bought $200 of BTC on Coinbase? No, it's the guys trading large blocks on exchanges.

> you can trade bitcoin for cash balances at various exchanges but actually withdrawing those balances is subject to miniscule daily/monthly withdrawal limits and if there's a run on the market those exchanges will almost certainly collapse.

Afaik Bitstamp doesn't have any withdrawal limits for verified users.

Cool, so Satoshi comes along and says "I'll have $100 Million please" then Bitstamp have the cash to cover it?

For an exchange there needs to be a counterparty. While Bitstamp is known as 'an exchange', they are not the counterparty AFAIK.

If Satoshi rocks up with 1 meeeelion BTC, if faith evaporates, the bid price could well be zero.

Unlimited wire transfers out of Gemini, too.

Tether is how you short bitcoin -- it's hard to move USD out of exchanges, people are worried about a bitcoin (or "all cryptocurrencies") drop, so they move into tether hoping to buy back in after bitcoin goes down without having to do the expensive/difficult bitcoin-usd move.

This assumes that the price of bitcoin will go down but the rest of the system (exchanges, tether, mining, etc.) will stay intact.

As long as people want to short bitcoin there will be lots of demand for tether at a little over a dollar that the tether company will be happy to supply. These people will balance out anyone who wants out of tether in the short term, and it's impossible to lever your "tether goes down" position.

In the future, when people decide to turn around and sell in bulk for a little under a dollar, tether might not be able to make good, particularly if they were holding their balances in bitcoin instead of USD like they claim.

Bitcoin shorters might be willing to gamble that they can move faster than the tether market will collapse in that situation and not be the bagholder.

There's no way to short "the whole mess" aside from just not getting involved in the first place or trying to get your money out while you can.

> Tether is how you short bitcoin ... so they move into tether hoping to buy back in after bitcoin goes down without having to do the expensive/difficult bitcoin-usd move.

"Shorting" means borrowing bitcoin and then selling the borrowed bitcoin. What you've described is simply selling bitcoin for USDT, unless I'm missing something.

It's short in the sense that you're selling before you buy and profiting off the thing bought/sold (bitcoin) going down between the two trades. Sell -> wait -> buy as opposed to the 'long' position of buy -> wait -> sell.

Since nobody-ish lets you borrow for bitcoin margin trades you have to "borrow from yourself" (already own bitcoin) and be long-bitcoin in the long run for that to make any sense.

But if you're a to-the-moon true believer that also thinks that bitcoin is in a bubble and going to make a temporary correction you could make a ton of bitcoin by being right... if you can actually make the trades and not get screwed by a counterparty.

Futures are opening for trading in the next two weeks on regulated US exchanges with daily / weekly USD cash settlement and central clearing. For every long futures position, someone else is short. I think that's a lot safer way to short bitcoin than holding tether.

> As long as people want to short bitcoin there will be lots of demand for tether

Interesting observation.

Most people here are say fractional-reserve Tethers are inflating the exchange rate of other cryptocurrencies.

But that doesn't really make sense, because buying cryptocurrencies means selling Tethers, pushing down the exchange rate for Tethers. But Tethers are trading 1:1 for USD, so something doesn't add up.

You say that Tether demand is strong because traders are selling Bitcoin, and that's propping up the exchange rate of Tether.

So what happens if a Tether fraud is revealed and traders want out of Tether -- does the Bitcoin exchange rate go even higher?

See https://en.wikipedia.org/wiki/Gresham%27s_law where Tethers are the "bad money" causing traders to hoard Bitcoin, the "good money".

I am not sure I follow you on people being worried about a BTC drop from their own selling of BTC. We are in a bull market; one person selling BTC for USD on an exchange is not going to have a significant impact.

"so they move into tether hoping to buy back in after bitcoin goes down without having to do the expensive/difficult bitcoin-usd move."

How does this help them avoid an expensive bitcion-usd move? They will still have to buy btc with tether and then do a transaction for USD incurring blockchain fees.

>Similarly, the conventional wisdom says cryptocurrencies are in a massive speculative bubble. The negative sentiment on Bloomberg, WSJ, NYT, Twitter (not to mention HN) far outweighs the fanboys.

Sentiment of people not in the market (readers of WSJ, etc) doesn't really affect the price all that much. They didn't want to buy bitcoin at $4 they don't want to buy it at $14,000.

For mature markets, short sellers might do such a thing. But bitcoin is hard to short and the market is so irrational its risky to try. The CME might fix the former, but it won't fix the later.

Your claim is one that the market should be efficient, and thus, there must be missing info. Remember that markets are only efficient if P = NP. (Strong form efficiency is impossible, and weak form efficiency is only possible if P = NP).

So, IMHO, the most likely possibility is simply that your market is inefficient.

Can you explain this a bit more?

> When something doesn't make sense, usually it's because information is missing.

Either that, or because too much irrelevant information is present, combined with an inability to separate the wheat from the chaff. In other words, it also quite frequently happens that the necessary information is there, hiding in the midst of all the noise.

Welcome to the real world. It's not "efficient".

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