Comment by Barrera | Hacker News Reader

Comment by Barrera | Hacker News Reader

> A cryptocurrency lender backed by Peter Thiel and Coinbase Global Inc. suspended withdrawals, trading and deposits on its platform, citing volatile market conditions and financial difficulties facing key business partners.

> The platform, Vauld, said Monday that it froze the operations after users pulled almost $200 million over the last three weeks. A sharp decline in cryptocurrency prices that began with the collapse of two cryptocurrencies in May has spooked traders and caused knock-on effects in the digital asset world.

It's called "a bank run":

> A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. ...

https://en.wikipedia.org/wiki/Bank_run

Except this bank has no FDIC insurance, no backstop, nothing.

Oddly enough, I think US tax policy may play a factor here in motivating people to ignore the repeated and loud warnings about how this was a really, really bad idea. When you're facing massive capital gains taxes, and have an inkling that those gains will turn to losses, the idea of lending out the asset, spending the cash without incurring tax, then getting the asset back starts to look attractive.

Of course, the real problem was that those warnings got ignored. I mean, who reads something like this without alarm bells going off all over the place?

> Our interest rates and trading fees are among the best in the industry. You can earn interest of up to 11.57% (APY) on your cryptocurrencies, and borrow tokens with our spread being as low as 1%. We don't charge deposit or withdrawal fees, or fix a cap on your daily withdrawals. You can check all our fees and rates here.

https://www.vauld.com/home

> this bank has no FDIC insurance, no backstop, nothing

This was partly true in the S&L crisis [1]. And for depositors in e.g. Cyprus or Iceland in '08. The difference, however, was depositors in S&Ls and Cypriot and Icelandic banks were legally depositors. The banks' assets were insufficiently liquid to accommodate them en masse. But those assets had value. And that value went, almost first and foremost, to the depositors.

In crypto, there is no such protection. It is likely creditors, employees, tax authorities and secured lenders get paid ahead of users, who are at the end of the day simply unsecured creditors. (And bad ones at that.) Night and day. (Given Coinbase's debt trades comparably to Russia's [2], the smart money is betting users will get nothing in a failure.)

Aside: There is another way to look at it. Users' assets at these firms are CoCos [3]. After the crisis, regulators pushed these bonds which convert into equity when the borrower is distressed. Vauld is distressed. It has to make its loan payments, those lenders can shut it down if it defaults. But it doesn't have to pay users, or even let them withdraw their funds. So their funds "convert," in effect, into equity. Money Vauld can play with to buy time until their assets rally or right the ship with a lighter burn.

[1] https://en.wikipedia.org/wiki/Savings_and_loan_crisis

[2] https://markets.businessinsider.com/news/bonds/coinbase-cryp...

[3] https://www.investopedia.com/terms/c/contingentconvertible.a...

>(Given Coinbase's debt trades comparably to Russia's [2], the smart money is betting users will get nothing in a failure.)

The intention of your comment is to paint coinbase debt as worthless, but after doing some research I came to a different conclusion: that russian debt isn't as worthless as I thought. Right now 10 year russian bond yields are at 9.15%[1], which is only a little over 6 percentage points above the "risk free" rate of 2.96%[2] for US treasuries. For reference that's about the rate for B rated US corporate bonds[3].

[1] https://tradingeconomics.com/russia/government-bond-yield

[2] https://www.cnbc.com/quotes/US10Y

[3] https://data.nasdaq.com/data/ML/BEY-us-b-rated-corporate-bon...

> intention of your comment is to paint coinbase debt as worthless

That was not my intention. Coinbase's debt is viewed as risky. That has implications for the risk junior creditors (e.g. users) are taking.

Furthermore, the bonds' 10% yield is comparable to the 13% Vauld was offering [1]. Except the Coinbase debt is senior to its users claims. Assuming Vauld and Coinbase are comparable, which I think is generous to Vauld, that gives you a sense for how misplaced the risk/reward was for Vauld users.

> 10 year russian bond yields are at 9.15%

Russian debt is trading weirdly. There are various domestic and offshore quotes, since the reason it's trading down is because of sanctions, not Russia's creditworthiness. Still: risky.

[1] https://techcrunch.com/2022/07/04/crypto-lending-platform-va...

PSA that the (severely underreported) inflation is ~8%, so both these yields are meaningless in real terms.

Inflation in Russia is more like 14%.

> I came to the conclusion that russian debt isn't as worthless as I thought.

the reason russian bonds is considered worthless is due to politics, not due to the lack of or capability to pay from the russian gov't.

Politics can change on a dime, but a company's financials isn't gonna improve suddenly without warning tbh.

Russian bonds? That's the best investment vehicle you could come up with?

When an asset class increases in value for a long enough period of time there is no shortage of explanations for why it's different this time. Real estate, commodities, tech companies, it makes no difference, It's always the same.

Real estate is an outlier in your examples due to there being limited supply and people need shelter.

During the GFC of 2008, real estate values went down, despite the factors you mention.

Some markets were less impacted than others, San Diego for example went down a mere 20% at the trough. Over a longer timeline, housing has appreciated by hundreds of percentage points in SD.

WeWork was only possible because of 2008. This wouldn't have worked on that scale anywhere else.

> due to there being limited supply and people need

Just like a commodity.

> Real estate is an outlier in your examples due to there being limited supply and people need shelter

People need lots of things. The principal constraints on real estate are political. (The entire concept of real estate is a social construct.) Not physical space.

> People need lots of things. The principal constraints on real estate are political. (The entire concept of real estate is a social construct.) Not physical space.

Even if (the amount of) physical space isn't one of the main constraints on real estate, any particular location may be more desirable relative to others, e.g. a gorgeous view, away from factories or highways.

Nah, it's social constructs all the way down. A location might have gorgeous views, but if it's in a rural area and urbanization intensifies (think pre-pandemic), it will left in the dust as jobs and businesses dry up. Same goes if it's in downtown and it gets hollowed out (eg. white flight).

Do animals have social constructs? Because they have dens and territory that they use to survive as well. Property is a pretty universal value.

> they have dens and territory that they use to survive as well

A bear's den isn't its property any more than a park bench slept on becomes the slumberer's own.

Property, specifically, the system that relates a person to some land via a bundle of use rights, is a deep human construct. It likely goes back to the dawn of agriculture and civilization [1].

[1] https://books.google.com/books?id=f_roIy7ceEsC

> A bear's den isn't its property any more than a park bench slept on becomes the slumberer's own.

A bear, however, will use (and indeed seek to monopolize) violence to defend its den. That makes it property, at least until the bear relinquishes its claim (or something - or someone - else challenges its monopoly on violence).

> bear, however, will use (and indeed seek to monopolize) violence to defend its den. That makes it property

That makes it territory. The simplest definition of property might be use rights one doesn’t need to use violence to defend. (Countries don’t have property.)

> The simplest definition of property might be use rights one doesn’t need to use violence to defend.

For something to be property entails all of:

- usus: the right to use it;

- fructus: the right to profit or otherwise benefit from it; and

- abusus: the right to destroy it, alter it, or otherwise exclude others from it

Abusus is in and of itself violence (specifically, theft) unless consented to by all other members of society. By "use rights" you might be thinking of something like usufruct, which is distinct from property and (as you correctly assess) does not necessarily entail violence or the monopolization thereof.

> Countries don’t have property.

Of course they do: their sovereign territory. It is indeed that property, enforced via a country's / nation-state's monopoly on violence - from which all land ownership derives (hence: that piece of paper called a "deed" that would be useful only as kindling or sanitary napkins if not for the state enforcing it).

A bear's den isn't it's property, it's somewhere the bear lives. If a den were a bear's property, the bear would have paperwork.

> any particular location may be more desirable relative to others, e.g. a gorgeous view, away from factories or highways

It's politics, usually, keeping the factories and highways away. More fundamentally, the notion that a piece of paper (the deed) gives you certain rights (but not others) over some land is totally made up.

This is true. It’s also true that “your body” is just a social construct. The rabbit hole of “property is just an idea” doesn’t end well for humans who seek agency.

That "property" is just a series of laws and agreements that we can change arbitrarily is neither a tricky concept nor a slippery slope. A body is not a series of laws and agreements that we can change arbitrarily, it's a hunk of meat. "Your body" can be a social construct if you want it to be, but that probably means that you're having a disassociative episode.

Chattel slavery wants a word with you.

> Chattel slavery wants a word with you

Chattel slavery underlines the point. What is and isn’t property is decided, arbitrarily, by people. Because property is a social construct.

What is and isn’t someone’s body does not depend on others accepting it has meaning. How it’s treated does. But my body has inherent value to me independent of others’ perceptions of it. This is, at its core, the problem with slavery.

If we reject property being a social construct we reject the fact that the government, a social construct itself, could have legalised and then outlawed slavery. Because if property is inherently meaningful, how can the government poof it away?

Land exists independently of your labor, predating and (hopefully) postdating your existence by billions of years. Your body does not.

"Your body" is a hierarchy of cells, cellular processes, and organs, all of which consume energy. And in increasingly many cases, "your body" has prosthetic augmentations or very difficult to produce medicine, without which you will cease to survive. If you can argue that those things are "human rights", then I can easily argue that "human rights" include shelter, peace of mind, a basketball court, ad infinitum. Perhaps more accurately: property is simply an extension of humanity that is granted by other humans. Again, taking away "property" won't end well for humans who wish to control their destiny, as parts of "your body" could gradually be deemed "property" and now you're at risk of life and liberty.

> It's politics, usually, keeping the factories and highways away.

I don’t see how this changes the fact some locations are more desirable than others.

> More fundamentally, the notion that a piece of paper (the deed) gives you certain rights (but not others) over some land is totally made up.

It is very useful though, otherwise how would I know where to sleep tonight? By lottery a few hours before the sun sets?

> is very useful though

Totally agree! Most social constructs are! That’s why we keep them. Something being a social construct isn’t a diminishment of it. Governments, laws, families and religions are all social constructs and all highly useful.

Is not also the "idea of a social construct" a social construct? And by extension is also arbitrary and meaningless?

And surely then every idea of any category is dissolved as meaningless and arbitrary, and then reason itself is absurd?

When you then see yourself as a social construct, then you are on the path to enlightenment

Just because something is a social construct does not mean it's arbitrary and meaningless.

Social constructs have developed over time under evolutionary pressure. Useless or damaging constructs eventually disappear since they contribute negatively towards survival.

The constructs that remain have demonstrated a certain level of fitness towards the environment.

...but it's important not to assume that just because a particular social construct is still in use today, it's "fit" to remain for the foreseeable future.

Sure.

Social constructs likely follow the Lindy effect.

The longer one exists, the longer it can be expected to continue to exist.

Old constructs have proven their fitness simply by persisting over a long period time.

I think it's easier to make the mistake the other way around, to wrongly assume that a relatively new social construct will remain "fit" far into the future.

The non-obvious point is that the value of real estate hinges on this social construct. Even the exact implementation details of it. It's not as simple as vecinu implied, that people need shelter therefore my investments will moon. And this isn't just a theoretical exercise, it's rather something that affects the market.

Right, I just tried to simplify the thought experiment to counter the argument that tech and commodities are as important to the consumer as housing is.

Regarding real estate, there have been plenty of examples. See Japan in the 80s as prime example.

Most bubbles start based on some fundamental value rationale. For real estate, the ebb and flow of supply and demand are what sparks the initial price increase.

A bubble occurs when speculators pile into that investment vehicle and drive up demand even further. This becomes a reinforcing phenomenon until the number of new speculators dries up and it suddenly whipsaws the other way.

Nothing is immune from a bubble, but housing is particularly prone to it based on the lag between demand and available supply. It also means the hangover is often decades long while it clears the backlog.

Yes, people need houses. But people don't need 4 or 5 houses as speculative investment vehicles that "pay for themselves" by renting out while they hold it for a couple years before flipping. That's the demand that crashes hard when markets turn.

Matt Levine always likes to say that cryptocurrencies are relearning hundreds of years of financial lessons in just a few short years. He describes the current crypto crisis as a repeat of the 2008 financial crisis.

Every single problem that cryptocurrencies face are extremely well known and studied phenomena in traditional economics. It is all very predictable.

Seems more like the U.S. Bank Panic of 1907.[1]

"The panic might have deepened if not for the intervention of financier J. P. Morgan, who pledged large sums of his own money and convinced other New York bankers to do the same to shore up the banking system. That highlighted the limitations of the US Independent Treasury system, which managed the nation's money supply but was unable to inject sufficient liquidity back into the market."

This led to the creation of the Federal Reserve System.

[1] https://en.wikipedia.org/wiki/Panic_of_1907

https://en.wikipedia.org/wiki/Wildcat_banking

Do you really think they're "learning" it? Nobody is all that surprised by these events. People have been pointing this stuff out all along.

It's like crypto enthusiasts honestly believe that the problem with the financial system is that the buildings have the word "Bank" on them. Then they turn around and offer to take your money promising absurdly high interest rates. Surprise! The only way to do that is to invest in risky assets, except this time there is no FDIC insurance, no capital requirements, no regulations whatsoever to protect your money.

Crypto enthusiasts will be doing fine having bought in many years ago. The trouble is for the randos who just jumped on the bandwagon and use all the weird risky add-on services.

I'm pretty sure at this point the majority of crypto "investors" are underwater.

https://debthammer.org/cryptocurrency-survey/

The majority of crypto "investors" aren't crypto enthusiasts. They're make-me-rich-quick investment enthusiasts.

Or, it's like they're incentizied to believe and promote what they're doing and new and different because it's a way to short circuit the current financial system and make money without having to have all the same connections and rules required to make that work in the current system.

Some are lying about it being different, some are willfully ignorant, and some are just clueless, but they were all excited to start something up in this new and exciting industry where people were literally throwing money at them.

Wrong. What “crypto enthusiasts” refer as the problem is the trust on a third party, banking or watherver. Therefore people who got burned trusting centralized lending castle of cards cannot be referred as crypto enthusiasts.

Classic no true scottsman.

If that's the definition we want to use, 'crypto enthusiasts' are practically extinct. There's a tiny handful of them, and they don't have any pull, political, economic, or otherwise in this space.

"Enthusiast" just means someone excited about crypto. Whether we like it or not, they far outnumber the small group that still preaches the original philosophy of decentralization and trustless finance. The reason is because that original philosophy failed: crypto did not really invent anything new, so they have been recreating the same structures that have existed in the finance industry for decades.

If that's true, at that rate crypto will blaze past traditional finance in only a few years, and be hundreds of years ahead of traditional finance in a couple decades. Sounds pretty good to me.

But if we really take the analogy to heart, not much has changed fundamentally with finance since 2008. There are now more regulations, which is the exact same thing that will happen to crypto after all of this has settled. Maybe it zooms past traditional finance in a couple decades...but it needs to survive the next few years first.

By that logic, we should all be taking our paychecks in tulip bulbs.

People should stop mentioning that highly exaggerated cautionary hoax created by calvinists.

https://www.finance-watch.org/lessons-from-history-vii-tulip...

https://www.smithsonianmag.com/history/there-never-was-real-...

The logic applied by OP was that crypto will become trad-fi in a couple years and was basically rapidly moving in that direction. The extension of the logic was that at the same pace, it will quickly outpace traditional finance in innovation.

You are unwittingly making the argument that traditional finance, or the future thereof, is (/ "should be") tulip bulbs. Perhaps not the worst of arguments, but probably not your intention to advocate as you have that traditional finance become tulip bulbs.

Sure, but the solution will end up looking just like traditional banking, only more expensive to run.

In the ashes of cryptolibertarianism, Krugman is right again.

A comment that finally explains HN's sentiment on cryptocurrencies. I take it then that crypto is the financial equivalent of a fax machine (as Krugman described the early internet)? Well then, let's see how it all works out...

This Krugman?

https://www.nytimes.com/2020/11/19/opinion/joe-biden-economy...

> He describes the current crypto crisis as a repeat of the 2008 financial crisis.

That's optimistic.

Agreed. No one is coming to the rescue. No one backed by guns really cares a ton.

The idea is solid, but a wiping of the slate will allow for a new generation. One that will better benefit established powers.

This doesn’t make a lot of sense. Bitcoin and ethereum are still up and processing blocks with little regard to what is happening in the financial system.

Those lending companies closing down are basically centralized platforms very much like the legacy financial system. This take is the same type of uneducated comment that someone does while attributing actions done by say Coinbase to crypto as a system.

>Bitcoin and ethereum are still up and processing blocks with little regard to what is happening in the financial system.

Those are internal database tasks. I'm sure the IT staff at Lehman Brothers could have run defrag jobs and swapped backup tapes until the Sun went out. That wasn't the problem at Lehman.

The bitcoin network can process blocks when a bitcoin is worth $10,000 or $1 or $0.00001. The problem is that in the last two cases, economically, nobody would care if bitcoin is still processing blocks.

When BTC was trading at 1USD, there was an alive and vibrant community making it all work. Your point is sound almost regardless of fiat price. Here's a 2011 @ 6USD interview https://youtu.be/Ta73DofiT7o

Well, the treasury kept printing money and stores still took dollar bills during the 2008 financial crisis, too. I am not saying the whole system fell over. I am saying the ‘banks’ became over leveraged with risky assets whose risks were correlated in surprising ways.

> Oddly enough, I think US tax policy may play a factor here in motivating people to ignore the repeated and loud warnings about how this was a really, really bad idea. When you're facing massive capital gains taxes, and have an inkling that those gains will turn to losses, the idea of lending out the asset, spending the cash without incurring tax, then getting the asset back starts to look attractive.

Yeah, my Roth, and other domestic tax exempt entities trade much better with crypto. My Puerto Rico tax-free colleagues also make more holistic decisions, but are generally much better connected to begin with than normal crypto traders.

My taxable accounts definitely trade differently, I want to make long-term capital gains but I never can hold that long, except by accident. Definitely more temptation to try to use the assets as collateral to hold longer, but then you have to pay back the collateral when it gets liquidated and you still have to report the capital tax treatment on the forced sell (gain or loss). But I do like tax-loss harvesting, and before this year there was no wash-sale rule applicable for crypto, so any random panic dip you could sell and get right back in the position and keep holding, locking in an offset for things you did sell at a profit too soon.

There have absolutely been things that I didn't sell because I didn't want the tax yet. Things I couldn't use as collateral. I resorted to donating things in profit to my tax exempt entities, even if I didn't get a fair-market-value deduction (still got a cost-basis deduction, same deduction as just donating the initial cash instead of buying an investment to begin with), I was still fine letting the tax-exempt entity sell tax free and just have more cash, because there is still a massive delta between the purchase price and current price and the government doesn't get a cut (I don't get the impression that any of their security and infrastructure and courts helped in these trades, something I do factor in since I have more legal choices in which action generates a tax/revenue event for them). But I personally still missed out on simply having more money to spend. For me that's okay, slightly miss the idea of some more play money or pushing that into a dope house after paying the governments a tax, but mostly just an observation while on the topic.

>When you're facing massive capital gains taxes, and have an inkling that those gains will turn to losses, the idea of lending out the asset, spending the cash without incurring tax, then getting the asset back starts to look attractive.

The better strategy (and the one used by the super rich) would be to borrow against the asset, as the loan isn't taxed. And if the lender's only recourse is your collateral, then you're insured against the cryptocurrency's collapse.

With the strategy you've described, you're still keeping a long position in the cryptocurrency, and have increased its volatility.

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