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.
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?
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.
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.
This isn't just theory either, something akin to this happened about a month ago: https://www.thestandard.com.hk/breaking-news/section/2/16880...
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.
- when a company goes bust you still have shares your share -- no one wants to pay for them with dollars.
- when tether implodes you still have your tether, but you can't turn it into dollars because there aren't any dollars to convert it too.
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.
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?
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
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
https://anchor.fm/aviv-milner/episodes/The-Tether-Situation-... at 30:57
* 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.
Fun times!
Agreed. Tether is special though because it's very big and (imo) very sketchy.
So it's more of a "too big to fail - banks" company goes down than some random company. Thankfully other stablecoins are gaining ground
No idea about the rest, but I'm buying.
Conceptually I think this has gained critical mass. i.e. There are enough people with enough belief to make crash to zero unlikely
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.
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.
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.
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.
This happened before when there was attempts at stabilizing gold and it caused the Great Depression: https://benoitessiambre.com/specter.html
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.
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.
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.
Credit cards have a really peculiar, fascinating and turbulent history. The original credit card was nothing like what we have today. Yet here we are.
I can easily see everyone rolling their eyes at and being dismissive of the original credit card idea.
Can crypto follow the same path?
What will it be in 20 years? 50?
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.
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.
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.