This is true for every pile of toxic crap that's ever been financially engineered.
The problem is the entangled financial health of the backer (in this case, Bitfinex and other crypto exchanges) with the backee (Tether). If creditors to the system (in this case, lenders to and customers of the exchanges together with holders of Tether) don't have transparency into the health of the nodes, a small crisis of confidence can prompt a run. (How do you know the parties are "well capitalized"?)
Critically, this can occur even if the original impetus was survivable. The opacity causes people to doubt the system's survivability, which avalanches into a run that no system can survive. Perversely, everyone knows this pattern, which increases the chances of small perturbations careening out of control. Add in that a crisis in any part of this system creates a systemic risk and the outcome becomes, as it's been across history, inevitable.
Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.
I have a radical idea that I'm fairly sure would get me killed if I ever stood a chance of implementing it: A complete ban on all non-productive financial schemes. We have an entire parasite class that grown unfathomably wealthy while providing no real value to the rest of society.
The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this.
They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante.
> "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more
Great example. In 1958, the Congress banned "the trading of futures contracts on onions" [1]. By the 2000s, increased price volatility--which had to be borne solely by farmers and distributors--prompted "the son of a farmer who initially lobbied for the ban to advocate a return to onion futures trading" [2].
There is a middle ground between banning and a free for all. In the former, useful financial products and innovation is suppressed. Finance is about allocating real resources in our economy. Bad finance is bad. But on the other end, everyone steals everything, and investor self-interest gives way to the animal spirits we saw leading up to the Panic of 1907, the Great Depression, the S&L crisis, the Financial Crisis and whatever we'll call crypto.
[1] https://en.wikipedia.org/wiki/Onion_Futures_Act#cite_note-fo...
[2] https://archive.fortune.com/2008/06/27/news/economy/The_onio...
For example, bank prop trading bans went into effect but really how does one differentiate prop from “customer facilitation” or heding. Its a sliding scale of grays.
So instead of Citi having a trader going “I think I’ll buy some S&P calls today and bet on the index” he instead can only do that if 1) a client wants to sell some & he takes the other side, or 2) there is some other exposures accumulated do to customer facilitation such that he can justify buying S&P as a hedge.
The same risk is being put on, but for different reasons. Or you could say the only thing that is changed is who has initiated the risk - customer, instead of bank.
Futures of course exist for very good, historical reasons. How do people think their home heating oil company offers you fixed price contracts for the season, etc?
Reducing the number of players in a market usually only increases volatility, transaction costs and illiquidity.
Providing basic banking as a public utility so most deposits by individuals, local governments, and small businesses are not stored with investment banks engaged in speculation. Public banks can be limited to originating loans on 100% security of material personal property such as crops, livestock, cheese, gold, lumber, steel and prohibited from originating loans on security of state property such as money (which might be obtained via leveraged loan from another lender) or on security of common property such as excess real estate values attributable to land scarcity.
The problem isn't getting loans on one's crops. It's transferring the price risk to someone better able to bear it.
Farmers want a guaranteed profit when they plant. Loans don't address that. Futures do. (It's why they were invented, in the 17th century, by the Dutch and Japanese.) The only real alternative is government guarantees. Those bring their own host of problems.
the problem isn't the existence of the futures markets, but the same kind of over-consolidation that corrupts every laissez faire market, making them inefficient and brittle in the long-run. if regulation encouraged primarily mid-sized firms, rather than a few large ones, we'd have better informed and more efficient markets, albeit less lucrative since the firms wouldn't have undue (read: corrupting) influence.
note that insurance is another alternative to futures or gov guarantees, though i'd question the need to externalize risk, which manifests a critical market-shaping signal.
The problem is excess credit available to financial firms engaging in leveraged speculation and financial services investment, resulting in financial sector employment and compensation that is super-proportionate to any real savings generated for non-financial producers. This leverage is enhanced by the lack of free (zero-fee) public alternative for basic banking services. It is not necessary for public banks providing basic banking services to guarantee profits for farmers. Provide savings, transfers, and liquidity loans at present values at what an option to sell existing previously planted crops would be worth might be sufficient to reduce deposits held by banks engaging in leveraged speculation. Providing basic banking as a public utility is the middle way the parent commenter advocated because it does not require banning anything.
This is just the finance sector subset of the larger problem of bullshit jobs. We know a substantial fraction of jobs are bullshit (non-value-creating), but which ones? I have a strong suspicion this is unsolvable because any metric you start using to decide which jobs are bullshit will instantly be gamed. The system will work as hard as it can to prevent you from figuring it out, and since it's made of people it is at least as intelligent as you are.
The only foolproof way we know of to reduce the number of bullshit jobs is brutal recession, but unfortunately that also takes a ton of fragile but very innovative and promising things down with it. Recession is a bit like extreme chemotherapy. It might kill some cancer cells but it also kills a shitload of healthy ones and sometimes the treatment ultimately fails because it doesn't kill enough of the former to justify the latter.
Similar principles exist in other areas like advertising. There's a saying in the ad business: "I know I'm wasting 80% of my ad spend. I just don't know which 80%."
That is a very convoluted way of implementing negative yields.
Because people want to avoid losses associated with negative interests they instead do the inflation thing and pretend there are no losses, the discrepancy between book value and real world value grows ever bigger as the book value is not representing losses in the real economy. The moment sentiment even dares to look at a downward trend poof reality has come back from its slumber. Negative yield is coming out of hiding, all at once.
If I am a farmer and I want to lock in a price for my crops right now, who am I supposed to sell that future to?
Sure, a small percentage of the time, I can sell to someone who knows that they need my crops on exactly that date of delivery, but a lot of the time there simply won't be anyone who knows at that exact moment that they need exactly what I am selling.
Having traders in the system means that I always have a buyer when I want to sell (and similarly when a user of the item wants to buy).
>They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
So what? If, through the trader solely enriching themselves, we get something useful from it, why does their motivation matter?
A baker bakes solely to enrich themselves as well - this is the nature of capitalism. The end result is what I care about.
Any conman worth his salt can sell a lemon, a toxic financial product or snake oil.
In UK naive homebuyers bought leaseholds where service charge and ground rent increased EXPONENTIALLY every 10 years. They even had lawyers, and those greenlit the deal.
Or when banks handed loans to strippers and then sold the loan to 'investors' causing subprime mortgage loan crisis of 2008. S&P were meant to do due dilligence, the 'sophisticated investors' were meant to do due dilligence, but here we are
Measuring people by how much 'value' they bring to society is a real slippery slope, my friend
Good people as defined by a social credit system. I will decide what is a productive reason & what is the carbon threshhold!
People totally have the option of living under this type of government - it exists in top down centralized places like China.
Oh wait ...
I think for most rich people, having a lot of money means, as ironic as it sounds, not having to think about money.
Growing up fairly middle class and eventually making a lot of money once I made it out on my own, the types of tortured price comparison shopping & concerns that my parents made (and I did my first 5 years of career) are just not something I worry about.
Being able to just go to a grocery store and fill the basket/cart until I have everything I want (NOT need, and without checking every items price and cross checking every price option for every items competitors), and then pay whatever it rings up to.
Doing weird as it sounds things like - cross shopping a $40k & $120k car because, well, they both sort of hit different parts of my interest lists.. and maybe I just keep my current car + add the $40k, vs trading in towards the $120k.. or really.. who cares, just buy the $120k car anyway.
Being able to knowingly overpay for home repair/renovation contractors because they give you a much higher level of confidence, communication and convenience. We got 3 bids, the guy who was 2x the price of the other guys was just such a professional we decided to go with him. He was like dealing with a professional tech/bank project manager rather than a squirrel guy you can't get hold of.. He started on time, finished days early, went not a penny over budget and gave us start&end of day updates with plans of attack for the next day.
Meanwhile some of our friends who did not have budget to pick the highest bidder had contractors disappearing to do work on other houses, had to call their contractor daily to force him to show up, had guy starting the work day at 2pm and then taking an hour lunch break, and every other crazy home renovation story you hear where 2 weeks of work takes 3 months.
So for those outside the billionaire class, being rich mostly means not having to deal with the inconveniences of being on a budget.
you’re right, i much prefer to live under a decentralized government like the United States.
Small farmers hedging next years crop would like a word with you ...
... and there are one hundred examples just like that.
Did you ever convert foreign currencies in advance of an international trip when you saw the currency pair move favorably ? Have you ever bought an ETF ? Do you have a mortgage in the United States ?
All of these things are possible because of a highly liquid, regulated market with diverse participants ...
... which brings us to the obligatory Margin Call[1] quote:
"Jesus, Seth. Listen, if you really wanna do this with your life you have to believe you're necessary and you are. People wanna live like this in their cars and big fuckin' houses they can't even pay for, then you're necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really fuckin' fair really fuckin' quickly and nobody actually wants that. They say they do but they don't. They want what we have to give them but they also wanna, you know, play innocent and pretend they have no idea where it came from."
The bank in Margin Call was packaging MBS out of mortgages, not speculating on the price of commodities using derivatives to gain leverage.
Correct. That's my point.
It's not merely that you can't have one without the other ... it's that you very likely wouldn't want to eliminate the (margin call guys) even if you could.
This is how things like 30 year fixed rate mortgages, low fee index ETFs, target date retirement funds, fixed price home heating oil contracts, every form of insurance, etc can exist in the consumer space.
In the B2B space you have all the companies with needs to lock in prices for future inputs in order to control costs & plan their own output pricing, etc.
All of this has greatly reduced the boom-bust cycle of the pre-Fed economy. As bad as 2000 or 2008 may have felt, they were nothing like the great depression of numerous 19th century recessions & depressions.
fields, mines and factories. we don't need anything else
I would point you to Stuart Banner's Speculation: A History of the Fine Line between Gambling and Investing
https://www.amazon.com/dp/0190623047/
Excellent coverage of the history of the attempt to make a distinction.
One day, people who think like you will come to power and decide that under their administration, [activity your livelihood is based on] constitutes “extracting value from the system” and is no longer permitted.
Maybe you are a golfer, or a restaurateur. But “what you’re doing is solely about enriching yourself.” Your fine cuisine is not feeding the poor. It is immoral to play golf while children go hungry. You have clearly become wealthy while doing nothing for the greater good.
They will come to you holding guns and demand that you cease your activity, and hand over your “wealth” - maybe your house, your savings, the food in your pantry, the clothes on your bank, maybe your wife or your daughter.
“We will take back for the People what is theirs” they will say. If you refuse, you will starve in prison, and they will take your life anyway. If you accept, you will starve in the street.
Would a company controlled by their own workers choice to funnel parts of their profits to wall street traders? Probably not. Would there be any money to be gained on the stock market in such an environment? Probably not.
So a natural question to ask then is. What value is there in the stock market which does not rely on money being siphoned away from workers?
In efficient markets profits trend toward zero so having more traders will accomplish that goal better than banning traders. It is the same with interest, interest goes to 0% if there is enough saved capital to fund all investments banning interest makes it harder for the interest rate to go down.
It would be better if we built an economy that can handle low amounts or even zero profit by eliminating the dependency on yearly growth.
LOL yes I am assuming some sarcasm here. Sticking ones finger up to the man by.. holding cash equivalents in forms not eligible for FDIC insurance, yes!!
Me reaping the whirlwind: this is not what I was told to expect! It's just what I put in, but more whirly! Huge disappointment.
But tether only works if backed by well-capitalised entities, i.e. the Man, so you are sticking what?
Buy Iranian government bonds, Venezuelan government bonds, Bolivian government bonds, etc
Will you get a return? Not all that likely (not unlikely either) , but you would indeed be sticking it to "the man"
Buying tether? Ha heck no
Even if buying a bond issued by an unfriendly nation isn't illegal at a given moment, you might find yourself forced to divest if relations between your country and the issuer sour. I'm sure a few people who held Russian sovereign bonds lost their shirts when sanctions were levied and they had no choice but to dump their assets.
In the absolute worst case (e.g., if you held Japanese sovereign debt in December 1941 or Afghan sovereign debt in 2001), holding a bond might be grounds for you to be charged with treason or sponsoring terrorism.
That's been my personal conclusion as well but it led me to the next question of what # is the breaking point for these well-capitalized parties?
I tried looking at the size of other well-known collapses like Enron, LTCM, Lehman Bros, etc. LB reportedly had $700B in assets and liabilities before the underlying asset devaluation precipitated their cave in. Tether survived the recent de-peg due to trading shops like Alameda absorbing the free 1-5% with their cash flow, which I believe is also responsible for the recent 11% drawdown in Market Cap (I assume due to redemptions). That said I'm not really experienced enough to know how these backroom overnight liquidity issues get resolved.
My hunch is given the true global reach of the crypto market Tether could easily get to $nnnB or $nT before we experience a black swan event that results in a liquidity crisis. Assuming they survive these short-term recessionary pressures, my long-term prediction is we're just setting ourselves up for another roaring '20s again, with crypto eventually learning all the same fundamental financial lessons we did back then.
https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Opera...
That, in and of itself, is worth a lot -- potentially even more than having a large military.
They are so unbelievably powerful it blows my mind.
I think most of UK public would consider that a prime minister that plans using nukes in offensive capacity belong in a padded cell.
https://worldpopulationreview.com/country-rankings/military-...
At #5 world-wide by expenditure this may be a bit over-stated. Or else "vast military" is just a standin for "US or China".
Beyond the nukes another comment mentioned, the UK is also a permanent UN Security Council member, a founding NATO member and a productive member of the Five Eyes and AUKUS [1]. And it still has the world's fifth most powerful navy [2].
> substantial colonial possessions
No, but they have overseas military installations in Gibraltar and on Cyprus, the Falkland Islands and Diego Garcia. Smaller installations at Ascension Island, in Singapore and Brunei "provide important staging posts and logistical support facilities for British and allied forces passing nearby" [3]. In terms of practical force projection radius, they're in a very small club of nations.
[1] https://en.wikipedia.org/wiki/British_Armed_Forces#cite_note...
[2] https://worldpopulationreview.com/country-rankings/largest-n...
[3] https://www.europarl.europa.eu/meetdocs/2004_2009/documents/...
Roughly half of USDT is circulating on Tron, which is a dead chain. This TRC20 Tether is almost exclusively used for inter-exchange transfers (since fee is capped at $1/transaction)
On Ethereum, USDC is now bigger than Tether. Over a month, Tether on-chain supply has dropped nearly 12% [0]
There's a nuance here.
If Tether IS full collateralized, then it does not matter since a run on Tether is by definition impossible.
If Tether IS NOT fully collateralized then it may or may not matter depending on the size of the run and the ability of Bitfinex etc. to contribute capital.
How exactly do cryptocurrencies finance their DeFi yields to their investors? The only way I can think of is with the money of future investors, but that is a pretty blatant Ponzi scheme.
These DeFi yields must be funded in other ways than just loans.
Which is exactly how protocols like Compound work, although 'governance tokens' are also issued simply for using the system.
> These DeFi yields must be funded in other ways than just loans.
Which? DeFi stands for Decentralized Finance, which pretty much means the rules are easily available - as long as you talk about a specific example, not spherical cows.
Also ‘governance tokens’? This smells like another term for “money from new users entering the system”. Which is precisely how Ponzi schemes work.
EDIT: I went on a little scouting mission on google (well DDG actually) to find out if I could borrow some USDT on the Compound and how much it would cost me. But I mostly came across articles explaining how you could make money by doing the opposite (buying Tether and lending it), and numerous dashboards with all sorts of hard to understand data with the prices of various cryptocurrencies and some rates I couldn’t understand. I suspect that the only people borrowing USDT are actually also speculators that are invested in the cryptocurrency market (perhaps they are trying to short it).
USDC is at 2.3% APR, USDT 3.78%. I think you'll find that most people cannot obtain unsecured loans that low, and the forms of collateral a bank will accept are much more limited. The biggest reason is also the reason why people like Elon Musk have massive loans: avoiding taxes on realized gains.
https://compound.finance/markets
> Also ‘governance tokens’? This smells like another term for “money from new users entering the system”. Which is precisely how Ponzi schemes work.
Sure, just like how "startups" are actually Ponzi schemes with early investors preying on the later ones. Same people owning it, too!
That said GP’s claim was that these yields are “much better "passive" interest than bank deposits or treasuries” however that doesn’t seem to be the case for all but few of the currencies. I get better interest rates at my credit union. For those currencies that are actually yielding higher interest (USDT being one of them) are also being borrowed with higher interest then loans at my credit union. So I think GP’s claim is simply wrong. Yields are only higher if you offer your money in a lending scheme with abnormally high interest.
As for who takes these loans. I don’t see that though. You need up to 2× the loan amount as collateral in an asset that is already as liquid as the cryptocurrency you are getting. Normal people would just use the money they already have and pay 0% interest, not put it up as collateral so they can borrow half that amount. I don’t even see how this could even be used as a tax evasion scheme because the collateral is equally liquid to your lending amount and should be under the same tax clause. The only use case I can see are speculators. And the only way to make these higher yields, is if a speculator makes a financial blunder, which is not sustainable either.
aka obfuscated
does the yield come from anywhere other than funds deposited by new users?
The 2 sources I mentioned above are essentially flows that accrue during the bull markets. It's not magic, when people want to long assets they borrow stables. If you lend into these markets you'll get the yield. With liquidity pools you can get some transaction fees even during market volatility and draw-downs, in the short term at least.
Unrealistic yield is one of the hallmarks of a ponzi scheme. The DeFi yield opportunities require more money to flow in than to flow out.
Apple stock, for example, pays a dividend that is not dependent on more people buying Apple stock but on the company profits for the next quarter.
Not exactly. In DeFi they just give you newly printed tokens. That's the "yield". Why wait for money to flow in when you can instead print it at will.
"stable" coins... yes, that's been an interesting ecosystem lately.
> access to DeFi yield opportunities with much better "passive" interest than bank deposits or treasuries
Not to mention much greater risk of losing everything.
When you deposit your Tethers somewhere, you're taking an additional risk, namely the risk that you might not get the deposit back. The interest that you get on deposits is compensation for taking that risk, but not for the other risk.
This is a ticking bomb.
Oh wait, I'm just getting word that Tether isn't a bank. I wonder what ratio you can have if you aren't a bank?
Weird to think about because I thought that it was very illegal to have an unregulated bank. Oh well, I'm sure nothing bad ever happened before bank regulation.
Crypto risks are highly correlated. The ability to bail out Tether is not a given.
This reads like the honest description of a Ponzi scheme.
As long as the originating parties, or newbie rubes, continue to prop up this sham it will not collapse.
More examples: Metamask, Moralis, Blockchain.com, Kraken, Binance
Doesn't that make Tether a fiat currency?
https://www.investopedia.com/ask/answers/08/george-soros-ban...
Nothing lasts forever, especially in cryptoland.