Hacker News Reader

>The US dollar hasn't been backed by anything since 1971 and is still ticking strong.

I think you might be overstating. The US dollar is not backed by an asset because it is an asset. At this point, the dollar is backed by the government, the government's authority, its military power, and the future value of its debt. That is not gold, but it is not nothing either.

By the same token, cryptocurrencies are backed by the computing networks underlying them, the potential future usage of these computing networks, and by your ability to buy guns, drugs, and hacks with them. This is also not gold (although you can buy gold-backed cryptocurrency: see Digix), but not nothing either. That's why cryptocurrency evangelists harp on adoption and new use-cases: the value of any currency is primarily set by what you can spend it on. Right now you can spend Bitcoin on a lot fewer things than US Dollars, but your personal profit potential from holding a currency derives from the rate of increase in adoption, not its current level, and Bitcoin has a lot of room to grow while the dollar has virtually none.

Tether intrinsically has none of these, but because of its adoption by many exchanges, it's convertible into other currencies that have more intrinsic value. So as long as it remains convertible, it will continue to have value.

USD is backed (among other things) by the government accepting taxes in it. If you don't pay, they will come to your house with guns and take you away. This creates a demand for USD that is completely unlike any demand for crypto.

...the same way that Bitcoin could, in theory, be backed by hired goons (or drones) that come to your house with guns and take you away. It wouldn't surprise me if that's how people in the underground Bitcoin economy (drugs, gambling, sex trafficking, arms dealing) actually operate, though I try to stay away from those peoples so I wouldn't actually know. There is certainly a difference in degree - the U.S. military is orders of magnitude more powerful than whatever goons you can hire with Bitcoin - but not a difference in kind.

> with guns

Umm, yes?

Again this weird argument. If the USD were valued due to its tax-demand, raising taxes would increase the value of the dollar!

Also the gov creates more supply to the dollar than the tax demand always, so its not really clear. And most taxation is a percentage of income or value measured in dollars itself.

This argument never clicked for me: where is it coming from?

This is correct, raising taxes would increase demand for dollars. Supply is greater than the tax demand, but much of the additional demand comes from the tax in dollars requirement. Since businesses have to pay sales tax in dollars, they're inclined to only accept dollars to avoid complex accounting and exchange rate liability. Being able to transact with US businesses is a large source of dollar demand.

It's also worth pointing out that income doesn't always translate to inflows of physical dollars. Complex corporate accounting standards often result in recognizing revenue before any cash is received, and non-cash transactions that affect income.

The argument is not that this is controls the USD value. Instead, the argument is that this gives an intrinsic base value to the USD. This base value means people have some reason to hold USD, which causes them to make other transactions in USD. The actual current value from USD comes from the other transactions, but that is not intrinsic to USD. Instead, it is an emergent property.

The intrinsic value of USD is consoling, because it prevents the value of USD dropping to 0, hence there will always be a possibility of the emergent value reappearing.

That's an interesting analysis. I hadn't thought of it that way before, simply because I wouldn't really value any other currency that way. I.e. I would not consider the growth in the ability to use euros in additional countries to have much impact on their value. I guess my thinking is that as long as there are exchanges, you can buy anything with bitcoin just like you can buy anything with dollars.

What sets that exchange rate is demand for bitcoins, and demand for bitcoins would be equivalent to what you can buy only with bitcoins. So, I guess in a way that tracks to exactly what you describe. The part that doesn't track is the profit potential. Currency speculation is an interesting thing, but it doesn't usually track with the use of a currency.

I am pretty bearish on the long term viability for cryptocurrency growth, though. I expect transact in bitcoins about as often as I transact in any other currency...almost never. There are no wages, products, services, or geographic areas that require the use of bitcoin.

Over the long term currency prices do track with currency use, where "use" is investment in securities denominated in the currency + a country's net exports. As the country's export economy grow, a foreigner can buy more things with the country's currency. The free-market value of the currency should rise. If it does not rise, then goods from that country will be underpriced relative to their true value, which means they will be overly competitive in the market, which causes a flood of cash into the country (a current-account surplus). Eventually the market rebalances as the currency becomes un-pegged and starts to float freely.

This is what has happened with the U.S. and China over the last 3 decades. As Chinese goods became more competitive on the global market, American export dollars started to flow into China. China refused to remove the USD/RMB peg, which created a long-term current account deficit in the US and made American goods & labor non-competitive with China. When they finally did remove the peg (after significant political pressure from the US), the value of the RMB rose significantly: it was 1:8 a decade ago, it's now 1:6.73.

Over the short term there are a lot of conflating factors - pegs, speculation, interest rates, wars, creditworthiness, etc. But over the long term, the "backing" for any currency is what you can buy with it.

> We'd expect to see a rise in the price of BTC at USDT-based exchanges as Tether holders need to convert to Bitcoin to get out, along with a fall in BTC at fiat exchanges as they sell that Bitcoin. To some extent this is happening (Coinbase Pro's BTC price is almost $100 less than Tether-only exchanges like Binance or Bitfinex), but it's less severe than I would expect from a true run on the bank.

The small spread is very interesting. I would also expect it to be much higher.

Tether seems to be pegged at $1.00 on Bitfinex but trading (increasingly) below that on Kraken [1].

Do you know of a better free resource for monitoring the situation by chance? No stake, just curious.

[1] https://www.cryptocompare.com/coins/usdt/markets/USD

Bitfinex reports their prices in USD but I'm pretty sure that's bullshit. It's like saying "Each Tether is worth $1 because we say so." The Kraken price is much more accurate.

I suspect the price is holding up because most holders of Tether don't consider this a big problem. Either they believe that the NY AG will find that there are adequate reserves backing Tether after all, or they believe the reserves don't matter at this stage and other holders of Tether will continue to believe it's worth a dollar. Comments on this HN thread seem to support that. It's unlikely to change unless some exchanges go under entirely, and authorities in the U.S. don't really have the jurisdiction to do this.

I've been following coinmarketcap.com and openmarketcap.com, and also have a Coinbase Pro account that I'm using to track the Coinbase price (which actually diverged pretty significantly from the CMC prices this afternoon...must be a time lag). I don't have enough invested in crypto to get particularly emotionally attached either way.

This is much worse than not having reserves. In reserve banking there may be insufficient liquidity to handle a significant withdraw event but theoretically the money in the bank balances, it is just not liquid because it is lent out.

The situation with tether is much much worse. About 30% of the money invested in tether is gone and unlikly to come back. The books do not balance, it is not a timing issue, it isn't a liquity issue tether or bitfinex is insolvent.

This is important to realize, tether or bitfinex is insolvent/bankrupt if that 850m is truly gone. It is covering up this with loans between related parties, but the legality of those loans is probably questionable at best but bitfinex and tether are intertwined such that they likely have shared liabilities legally.

Someone is bankrupt right now. Maybe both.

The fact that tether or bitfinex isn't dropping or outright dead confuses the hell out of me. Is it so critical to crypto now and so central that even if it is involvement we have to believe in it or the sake of this whole market? This market isn't rational or I must be missing something.

I think a lot of people who have accounts at USDT-only exchanges may not realize this affects them. Tether has been marketed as a replacement for the dollar and a safe place to park your wealth when you are "out of the market" in cryptocurrency. Because it's not viewed as a crypto or speculative asset in itself, people might see the headlines but not make the connection that potentially all their assets on a USDT exchange are at risk of becoming inaccessible.

Also, unattended arbitrage bots might end up equalizing the price now but becoming major bag-holders later. Right now, the spread between the Coinbase & Bitfinex BTC prices is > $300. The logical response of an arbitrage bot is to buy Bitcoin on Coinbase (spending USD) and sell it on Bitfinex (receiving USDT); they provide the Bitcoin liquidity that people who want out of Tether need. This creates a counterflow of BTC from Coinbase to Bitfinex, spending down their dollar reserves at Coinbase and accumulating a Tether hoard at Bitfinex. If the bottom falls out of Tether, their accumulated profits (and any capital invested) becomes worthless.

US government has the power to tax the entire US economy, providing financial backing to the US dollar. This is why fiat currencies weaken with their national economies, and vice versa

I really want to underline this. This is the real power of fiat currency, the ability of a government to tax people in it's region.

And tax means the ability to force people to give the governmental organization a portion of their productive economic activity.

People always point this out. The astute ones point out the other half of this - the power to tax is based on the military's ability to compel payment.

One other way to look at this is physical security being a service - a fundamental one - being procured by your tax dollars. This is actually mentioned explicitly in the first sentence of the U.S. Constitution: "We the people...to insure domestic Tranquility, provide for the common defense...do ordain and establish this Constitution." By being a citizen of the United States and complying with its tax laws, you enlist the full force of the U.S. military in securing your rights.

You could easily imagine someone offering to provide military services for Bitcoin. Depending on how they wield these military services, this could range from welcome to highly inadvisable; if it turns out they are in opposition to the interests of more powerful militaries (i.e. the U.S, or other major nations), they could quickly find out just how powerful the U.S. military is.

This is the weakest theory I've read yet; people aren't exiting tether because it's too inconvenient. Forgetting that they would've already gone through the KYC process when they entered the crypto market, and there's little hassle in a market sell-order and withdrawal request. The only inconvenience is the time the bank withdrawal would take to process, which isn't necessary unless your plan is to exit the market entirely, as exchanges are covered by FDIC insurance.

Many of the non-fiat exchanges don't do KYC. I've signed up to a bunch (and was able to trade, subject to certain volume limits) with just a burner email address and Google Voice number.

This is a fascinating view of things. It's not totally incongruous that Tether could just be worth approximately 1 USD indefinitely, "by convention" or in the same way that Bitcoin has value.