Comment by qeternity | Hacker News Reader

Comment by qeternity | Hacker News Reader

The entire crypto world is like this.

MtGox pumping and wash trading with Willy bot. Bitmex trading against and liquidating customers. Coinbase hiring Litecoin creator Charlie Lee and having him frequently wash trading 99% of LTC volume. Each of these has been _the_ preeminent exchange at some point in time, just as OpenSea is for NFT.

FTX was born from one of if not the largest crypto trader/market maker, and one of two known Tether customers (who apparently account for a large majority of Tethers). Alameda was the only/largest liquidity provider on FTX for some time. Binance has been similarly accused (without solid proof) of trading against customers. Of course they claim to have walls between these relationships. But then again, so did Mt Gox, Bitmex, Coinbase, OpenSea and loads of others that would take too long to mention.

Crypto is a casino where there are a handful of dealers that are running thousands of tables. They are all colluding. The grift is to exchange real fiat currency for chips at their casino.

It has been proven at a shocking number of blue chip institutions (dare I say a majority). Given our expected likelihood of uncovering these things, it seems highly probable that it’s happening everywhere.

I wonder if this is actually unique to crypto, or if it's common in any industry where participants have a massive financial incentive to "cheat"? There's plenty of instances of hedge funds and stock traders acting like this. I bet there would be more if they were under as little regulation as the crypto exchanges..

Well, I spent most of my career as a hedge fund trader so I can also comment on this: of course everyone is looking for the upper hand and people will bend or break rules to achieve this. But this is universal to all games, and fundamentally the game is fair.

In crypto, the game is not fair. The refs are players and there are no rules.

Could you be more specific about what makes crypto less fair than the other markets hedge funds trade in?

Read my original comment. For all of the Occupy Wall Street rhetoric, overwhelming majority of people in finance are law abiding participants. That’s not to say that they’re particularly moral or honest people. But in regulated markets, regulators seek to make rule breaking a negative EV outcome, so rule following becomes the logical behavior for a self interested actor. Regulators might not always succeed, but it still shifts the outcome distribution massively.

In crypto, the opposite is true. Because there are no penalties, otherwise malicious behavior is encouraged. First and foremost: exchanges trading against customers. This would never be allowed in a regulated market, just like we would never allow judges to wager on the cases over which they preside. It creates a horrible conflict of interest. But in crypto, conflicts of interest are the most successful business models (across a load of projects).

Crypto is mostly regulatory arbitrage. I’ll be the first to change my mind when the facts change, and maybe I’m just not as visionary as every other lambo hopeful. But as it stands today, this is the reality.

Let’s say hypothetically all financial regulation is lifted tomorrow, I have a hard time believing the current “honest” participants won’t have a similar free for all.

We may be saying the same thing: the difference is the regulation, not the moral character of participants.

But the entire value proposition of cryptocurrency is how difficult it is to regulate via traditional law enforcement mechanisms.

Which can be used for good, of course - the standard example being things like "transferring money across immoral embargoes". But in this case, if the difference is regulation, then the question for ordinary folks who are not themselves trying to pull a scam is - would you rather work with dishonest con men who believe they will get in trouble with law enforcement if they actually con you, or with dishonest con men who believe they can get away with it?

I think the underlying value prop is totally orthogonal to this thread. The fundamental value prop is that software can trustlessly, directly, and irreversibly make financial transactions, which certainly does enable regulatory arbitrage. I understand why other applications haven’t convinced most people, but that’s a different discussion.

“regulatory arbitrage” is a pretty hilarious way to spell “extremely profitable crime”

It's not a crime, that's the point. The regulation does not exist (yet)

Your value prop has to outweigh the potential negatives or there is no value prop. What OP is saying is that you can't have unregulated markets in this space the incentives to cheat are too great.

Sure, and I'm not making an argument against regulation. My point is that there is nothing inherent in cryptocurrency to create these forms of fraud except the lack of regulation, otherwise the same fraud would exist in traditional markets.

But that point doesn't support the message you're trying to say.

Suppose I were to say "Elbonia is a dangerous lawless country, where corruption abounds and you're not safe on the streets," and you were to respond by saying "There's nothing inherent to Elbonia to create those conditions except the lack of laws against corruption or mugging. And corruption and mugging happen in the US, too, and you'd see more of it if there weren't any laws against it. There's nothing about the Elbonians as a people that makes them more inclined to crime."

I would respond by saying "Thank you for proving my point that Elbonia is a dangerous place."

So in this hypothetical, Elbonia has no laws against corruption and mugging, and we truly believe the only thing missing is the laws? Then sure, that's a fair comparison. In that case one might think that Elbonia could be a great place to visit once a less lawless regime steps in.

What message do you think I'm trying to say? I'm certainly not claiming crypto is free of scams and self dealings.

I think he's trying to say that regulation will discourage conflicts of interest even if they don't entirely prevent it. The key point is that right now people are able to do things they couldn't in traditional markets that they can do in the crypto market and there are no penalties for it.

But your value add is that they are unregulated, right?

>trustlessly

In theory. In practice, it seems to have just moved the trust problem.

You are saying the same thing

Insider trading in Defi is rampant and unregulated for starters

I think we learned in 07/08 that even when the game isn’t fair, no one cares, and no one goes to jail :)

> The entire crypto world is like this.

I've heard that there are a bunch of companies in the space paying their blockchain engineers minimum wage (when their salaries should have been at least 250k), and instead compensating them by letting them insider trade on their press releases. The reason the people in these cases rarely get fired when found out is that it's literally their compensation package.

IMO people overestimate how much alpha is in knowing your customers’ positions (as exchange owner).

Open interest, volume and price data down to seconds is available via APIs in real-time, from which it is absolutely possible to build a model of positioning.

If you launch a new exchange, your biggest problem is lack of liquidity, meaning limit orders won’t fill ‘timely’ and market orders slip, which is very bad UX obviously.

That is why it is fairly obvious that one of the best market makers in the industry launched their own exchange; Alameda could provide excellent liquidity for FTX from day one.

> IMO people overestimate how much alpha is in knowing your customers’ positions (as exchange owner).

I’ll say this as respectfully as I can: you’re wrong. Aside from algos, positions are the most closely guarded information in trading. If you know someone’s positions, you might be able to assess what their risk tolerance and stops would be, and you can exploit that.

If you’re a crypto exchange with huge highly leveraged perpetuals trading, you don’t have to guess where the stops are: you know exactly where those positions will be liquidated. Hell, you built the system to execute the liquidations.

So you just run an algo (you don’t even need funds/margin because hell you’re the exchange) to whipsaw people around and trigger this liquidations while you profit massively.

I’m very sure that there is more money (for big high volume exchanges) in providing an environment with low liquidations (which amplify price moves against the index, again bad UX) instead of driving customers into them and profiting from trading these wicks.

The biggest risk to established exchanges is ‘regulatory alienation’ — and having millions of USD in daily liquidations probably is not helpful here.

Won’t say these trades aren’t done (data needed to build positioning models is public), my only point here; v unlikely by exchange owners.

You don’t need the exchange to do this. You simply need corrupt employee of the exchange with access to the information.

Agree. If someone knows your margin situation, they know where they need to push the price to stop you out. Simple as that. And when the exchange stops you out, they unload the position in the market at any price. This is not unique to Bitcoin. In China plastics markets same things happen. Opponents learn enemies’ margin situation from corrupt exchange and push till he is liquidated. I don’t think there is much new to Bitcoin in terms of trading and all the games being played. It has gone on in all the other markets long before this.

The entire crypto world is not like this. Crypto is not all about making money.

citation needed :)

Reply on news.ycombinator.com