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Comment by rsynnott | Hacker News Reader

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)

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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.

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