Shorting Tether
fakemoneynews.substack.com
fakemoneynews.substack.com
This time they're looking into possible bank fraud committed by Tether [1], while their previous case was settled without admitting wrongdoing [2], but their investigation showed Tether wasn't fully backed for activities in NY, while their records of their backed assets have been sealed and CoinDesk / others were denied their FOIA request to access them due to "adverse business impact" - so it seems like there's a whole hell of lot of smoke around their likely fire...
From [2]: "Meanwhile, Tether has resolved government accusations that it overstated its holdings. From June to September 2017, Tether never had more than $61.5 million in funds while about 442 million coins were in circulation, the Commodity Futures Trading Commission said last year."
[1] https://www.bloomberg.com/news/articles/2022-10-31/tether-ba...
[2] https://ag.ny.gov/press-release/2021/attorney-general-james-...
https://web.archive.org/web/20210513120449/https://tether.to...
Of course, Tether does not tell us who are the "I's" in the IOUs. They could all be affiliated entities (like Alameda was to FTX) or other crypto startups. Does it make any difference who are the entities, or individuals, that have promised to pay.
The problem is that everyone in the system is so deeply reliant on USDT that they will do everything possible to prop it up.
Honestly, the only thing that can bring down Tether at this point is either the collapse of one of the major central players (such as Binance) or government action.
For those interested, Coffeezilla did a piece on Tether:
And yes, it’s a scam.
Hodlers seem to tolerate it because crashing Tether would impact their net value. It’s sad.
if anything happens to Binance, Coinbase, or Tether, it’s most likely going lower
I feel like a lot of people who still dollar cost average into cryptocurrencies shouldn’t. If you make $300k/yr, you can do whatever you want with your money in my opinion.
If you make $15/hr working part time, you probably shouldn’t touch crypto. The risk is too low. What’s the upside chance?
that and r/bitcoin comment sections are very delusional cult to me
* I only trust BTC. There are some noteworthy projects like Ethereum who have earned benefit of doubt, but its better to stay away from rando shitcoins. Also stay away from centralized exchanges (Binance, FTX and the likes).
Or help keep them there as they keep getting "scammed" out of their money.
Think about $15/hr people who bought anything other than Bitcoin when Bitcoin was at $60k+
Crypto has most likely been harmful for a bunch of lower class people.
Actually let's think about them. What could they buy in Q4 2021 (when BTC was 60k+)? If they were in the US, then probably some random stocks or some index fund, which has gone down in value (-20% for S&P, to -65-70% for "blue chip" ones like TSLA or META). Definitely not real estate. And forget about commodities.
Outside the US? I'd wager similar scene in other advanced economies. I don't even know what good options they have in developing markets.
Even today, I'd wager that BTC* will have a better outcome than S&P over the next 10 years.
*to me, BTC is the only reputable crypto. ETH, if you understand how it works. Forget about everything else.
In the past, the bitcoin price sometimes increased when there were rumors that a centralized exchange was insolvent, as people liquidated their positions and bought bitcoin to get their assets out of the exchange.
I don't have any assets on exchanges, but if I did I'd want to get them out now. If I have to choose an offline store of value that will still be worth something in five years, should I use Tether or bitcoin?
Tether has remained relatively unaffected by major exchange collapses and disappearances over the years, including the very recent implosion of the world's second-biggest (after Binance) crypto exchange FTX. Barely a blip on their radar.
So I posit that Binance is probably the only exchange whose downfall may (may!) collapse Tether. And even then, Tether would be one among many, in that scenario.
Apart from that, the only entity whose collapse might also end Tether is perhaps "Tether itself". Unless anyone has other ideas? So it would seem to me that the government action is more likely to impact them than anything else at this stage.
People seem to say this every time one of these big crypto companies fails, yet it’s just plainly false. Tons of people put money into these companies and are left holding the bag when things inevitably collapse. At what point do we run out of rugs to pull and just agree the whole thing was a mistake?
thats why people keep saying it
it just isnt different enough to say that frequently occurring new problems that were introduced by the concept discredit the entire concept. ATMs never solved skimming, lets write an article about user or bank losses every day about that and pretend it doesn't work well most of the time for most people just because you dont see articles about that and never use it yourself, silly idea right? It still works fine. Analogies compare dissimilar things with at least one similarity, in this case its an introduced problem that isnt solved but didnt change the course of its existence. Same for debit/credit card payment processing over the internet, lots of fraud, whether the user experience of reversal occurs or not, the problem isnt solved and the course isnt changed.
They actually did with the emv chipped cards and mutual authentication, not that this was your overall point but still.
Wouldn't your name start as "Special Agent ----"?
So is the issue that they just (allegedly) got greedy and made high risk investments? Can't Google or some company just make their own stablecoin overnight and have guaranteed profit then? Of course only if it fits with their PR.
1. https://www.paypal.com/us/webapps/mpp/ua/useragreement-full
> Any PayPal balance you hold represents an unsecured claim against PayPal and, except as provided below, is not insured by the Federal Deposit Insurance Corporation (FDIC). PayPal combines your PayPal balance with the PayPal balances of other PayPal customers and invests those funds in liquid investments in accordance with state money transmitter laws. PayPal owns the interest or other earnings on these investments. However, the claim against PayPal represented by your PayPal balance is not secured by these investments and you do not have any ownership interest (either legal or beneficial) in these investments. These combined balances are held apart from PayPal’s corporate funds, and PayPal does not use these balances for its operating expenses or any other corporate purposes. Additionally, PayPal will not voluntarily make these balances available to its creditors in the event of bankruptcy.
Note: quote obtained by proxy (https://www.paypal-community.com/t5/My-Money-Archives/Does-p...) as Paypal needlessly block my shared IP.
This is one reason why economic downturns always expose fraud.
We only need one case to be successful for the precedent to be set that you cannot fraudulently issue unbacked stable coins for there to be a sufficient deterrent effect.
It seems that with the FTX bankruptcy, SDNY is looking to set that precedence now.
What you are describing does happen, but it's not banks that do it, it's money market funds.
As I wrote in the other comment: Coinbase says the tens of billions of USD backing their USDC are in short term US treasuries. ATM the return on these is 4.7% yearly? 4.7% yearly they pocket on more than $50 billions. Without giving the returns back to the USDC holders (as far as I know people keeping USDCs in their own private wallets do not get any yeld).
Or is Coinbase not actually putting these tens of billions in short term US treasuries (which mean they'd be lying)?
Or am I misunderstanding what's the yearly return on these short term US treasuries?
For example a couple years ago, 1 year treasuries had a ~0% rate.
They only have to repay the face value of the deposited cash. Yes, the real purchasing power goes down over time, but that's not their problem!
They do if your USDC is in Coinbase account.
https://www.coinbase.com/blog/coinbase-customers-around-the-...
Of course you won't get any yields on private wallets, how would that even work?
That's what Centre (Circle+Coinbase) is doing. They're emitting USDC and publish the individual identification numbers of every single short term US treasury (and the bank at which they're held) they buy with actual USD from customers. I don't know, from their terms of services, what happens with the returns/yeld on these treasuries.
For now that interest rates went up suddenly Centre is getting several percent on tens of billions (!) yearly. They're certainly not distributing the yeld to each individual address owning USDC.
So it looks like Centre may be a very profitable company by now.
But tether's case is believed to be different: many believe they never had anywhere near the amount of real USD backing the USDT they emitted and that they emitted USDT mostly out of their arse, tens of billions of them, and used these to pump the price of BTC (and of the whole ecosystem).
Interesting that you contrast "greedy" with "Google". Why would Google want to ruin its own profits by investing in what you call "low risk crap"?
The problem with "low risk crap" is that it pays low interests. If Google were to invest in "low risk crap" then that would drive down Google's margins and profits. This is the opposite of what investors in Google want.
If Google could make large profits running a stablecoin, then they already would have set it up.
https://duckduckgo.com/?q=tether+fully+backed&t=fpas&df=2015...
Nobody believes them, especially since the company lied repeatedly in the past. They lied about the co-ownership by Binance, they lied about printing money out of thin air, they lied about getting a proper audit, and all but a few of the founders are fraudsters with a history of lying.
Yes they did. They claimed every Tether was 1:1 backed by US Dollars.
Not assets with equivalent dollar value but full on actual dollars.
They kept doing so until they lie was fully exposed. Then they changed their story.
But other than that, yeah.
Nowhere does it say every tether is backed by a $1 reserve.
You're falling for their slick scam words.
(Around 2017 I did a lot of research into tether, even reading their entire legal terms)
That probably isn't what Tether is doing. They're likely running a crypto-loan backed stablecoin pegged to the dollar.
A fiat backed stablecoin is a bit useless since it just looks like bank deposits and withdrawals. Lending USDT against crypto collateral is both what they've explicitly stated that they're doing and it makes them look a bit more like a central bank (and the issuance of Tether tends to fuel trading bots that push the price of crypto up which leads to more issuance of Tether in a nice positive-feedback loop in a way that should make any student of supply and demand perfectly happy).
They've named their crypto-collateralized loans "Commercial Paper" which has been a huge success and managed to get literally everyone searching and speculating about what kinds of CP they've been buying up in the real world, when the real answer is pretty much none--creating a great distraction.
The hard part is with a press of a button you can get enough money to keep your family living in luxury for several generations. The success of the stablecoin requires that you not press the button.
The second thing you have to worry about is Aave's liquidation mechanism: under the market conditions implied by a Tether collapse, will Aave's liquidation mechanisms function efficiently and effectively? The answer to that question would depend on exactly how the collapse unfolded (i.e. how quickly it was certain, the degree of insolvency, how much the market moved how fast, etc). However, it is important to note that the only thing at risk here for him is the profit from his short plus the collateral factor haircut, not the entire principal. The trade he did was to deposit $x usdc on Aave, borrow $y usdt, and then sell that usdt back to usdc. That means he physically has CF * principal USDC in his possession, and no matter what happens, Aave can't take that away from him. Now, he looped this twice, so it's actually CF^2 * USDC that he has, but that's still not that big a risk.
Finally, he has to worry about the solvency of USDC. However, USDC is regulated in the US and has fairly real audits. Almost nobody seriously thinks USDC is insolvent. I think there is very little to worry about here.
Personally, I think Tether is pretty obviously at least mostly solvent, and I think shorting it is a dumb trade that will lose him money. But he's going to lose money paying the interest, not losing his principal. People have been predicting a Tether collapse for literally years now, and despite all the market stress and volatility which should have clearly exposed their supposed fraud, they're still standing, and the peg trades with solid liquidity at $1 today.
My own theory of what's actually going on here is that Tether is intentionally obtuse, because it allows them to make seignorage profits against their own users. If you issue a stablecoin and you know you are solvent, then you can hint to the market that maybe you're not, and buy (your own) assets that you know are worth $1 at a discount, making a tidy profit in the process. I think this is their real strategy, always has been, and they've gotten very rich doing it. It's possible they've been under-collateralized at various times, and maybe are even slightly so now, but I seriously doubt they are currently insolvent to the degree people like this think.
From https://www.bloomberg.com/news/articles/2022-12-14/hedge-fun...:
> Tether concealed the loss of more than $850 million of reserves to a Panamanian entity called Crypto Capital Corp. as recently as 2018, the New York Attorney General found. In a separate case, the Commodity Futures Trading Commission found Tether didn’t have enough fiat reserves to back circulating tokens more than two-thirds of the time, in a period between 2016 and 2018.
so it's more than just being obtuse.
I don't think they're playing with the trust of their own stablecoin to get cheap USDT, it'd be better for them to be more trustworthy and have more USD to invest in safe investments with low interests, but they're probably losing some market share to more trustworthy (US-based) stablecoins because of how shady they look.
I think as of today that is a true statement, because yields on safe investments are now so high. But for the last decade I think it has been quite false. If Tether had only been investing in treasuries and had no other revenue strategy for the past 10 years, their profits would not be nearly as high as if they had pursued the strategy I suggested. And remember, for many years they were literally the only game in town, they had no competition to worry about.
This doesn't seem like a particularly great strategy, compared with the alternative of running a stablecoin and exchange that doesn't look dodgy (or indeed an actual fraud which is at least insanely lucrative). Don't think earning the spread on deviations from the peg (which Tether-believers compete with you for) is really all that great compared with the returns from having a lot more trusting customers paying a lot more in fees to use your exchange and the returns from safely investing a lot more USD given to you in exchange for Tether. And that's before taking into account the downsides of running something that looks like a criminal operation, like dealing with investigators
It is very much not insanely lucrative to run a normal stablecoin business. At least, not until very recently. Cash equivalent yields have been extremely low for the past decade, until the last year. USDC's net income numbers are public, and they suck.
I can't see why earnings from buying the dip on USDT would be more impressive than the cash equivalent yields and exchange fees they're forgoing by looking dodgy though, never mind lucrative enough to take on the substantially increased regulator hassle and risks of liquidity crunches, cash asset freezes or even jail time associated with looking like a scam.
I think the market making profits from Tether have been pretty substantial over the years. They charge very high redemption fees, which means that either they, or some close partner of theirs is the primary liquidity provider. Tether is usually mostly on peg, but it is frequently off by a few basis points, sometimes a few tens of basis points, and occasionally a percent or two. The liquidity at these levels is often quite deep, meaning you can earn fairly substantial profits by buying it up.
It's not just the headline moments when it's off peg, it's the daily liquidity churn of people willing to sell a few basis points below par, because they'd rather get out. Look at this price chart:
https://coinmarketcap.com/currencies/tether/
And look at the daily volume Tether experiences. During 2021 it traded roughly ~$100B in volume per day. One basis point on that is $10M/day. Of course, they're not a counterparty to every Tether trade, not even close, but even a fraction of that is very good money, and remember it was frequently off peg by more than one basis point. Also keep in mind the point of comparison here, which is essentially short term treasury rates over the last several years. I think the MM profit on Tether has certainly been at least close enough to match if not significantly exceed the yield on cash equivalents over Tether's lifetime (until very recently).
Note that Tether is also frequently off peg in the other direction, and they can exploit that too by minting and selling USDT into the market when that occurs. Of course, that has nothing to do with them looking dodgy or not (it's correlated to sharp, unexpected liquidity demands by retail).
Unfortunately, investigators, client banks and other people you'd quite like to use for short term liquidity or long term profit opportunities don't tend to take "actually we're only trying to look like a scam" as a nice straightforward answer to their questions, so you get most of the problems of actually running a scam without the money even if authorities ultimately fail to find something they can put you in jail and confiscate your assets for (intentionally looking like a scam to manipulate your asset price would get you prosecuted in more regulated markets anyway). Is that worth it to earn a slightly larger and more downward-skewed spread on smaller volume? Certainly not if it's only matching cash equivalent yields you'd get without that (though I'll concede just because a strategy isn't worth the risk doesn't guarantee a crypto company won't try it).
Obviously there's market making profit to be had, but as you acknowledge much of that exists due to short term liquidity fluctuations anyway. Short term liquidity is a motivation to exit some of your position at 0.997 instead of 1.000 as well as for others to pay over 1.000 to get their order filled instantly; the whole coin having looked like a scam for several years is a motivation to use USDC instead. And since there's no plausible separation from Bitfinex exchange, the appearance of dodginess also means missing out on larger volumes of transaction fees and market making opportunities on all other cryptocurrencies...
Even if the parent company of USDC (which is actually Circle, not Coinbase) were to become insolvent, that theoretically doesn't impact USDC at all, other than maybe USDC would have to wind down operations, and then people would just redeem for USD.
The only scenario where USDC holders would be in trouble is if Circle violated their agreements and started making unsafe self-dealing investments with the USDC deposited funds. That is something that theoretically could happen, but since the operators are in the US, they would certainly go to prison for it. And we have reasonably reliable audits that state clearly that, at least so far, this has not happened.
95% solvent at a bank-like entity (where you are supposed to be able to redeem at par) is a bank run.
> My own theory of what's actually going on here is that Tether is intentionally obtuse
They have been proven to have committed fraud and lied in the past (NY settlement). They have an incredible number of red flags, including management that has committed fraud in previous companies, refusing basic transparency and a shadowy executive team (e.g. refusal to identify CIO, CEO has basically never spoken publicly). I don't know of any organization in history of anywhere near this size that has had as many red flags. 100% guarantee that they have participated in major wrong doing beyond the NY settlement. Organizations on the up and up have no reason to act the way they do. Your theory that a bank-like entity would pretend to be insolvent is implausible: the main thing a bank depends on is its solvency, it's too 4-d chess to think you can somehow manage to persuade the market that you are a little-bit insolvent.
That said, as the article points out, making money on this apparent wrong-doing is more difficult for a number of reasons. One of which not mentioned in the article is that they may have done some fraud that doesn't affect the value of tethers. For example, they were undercollateralized for a time but now higher interest rates have made them whole. Or they are laundering money but are fully collateralized (though I would expect a money laundering charge to tank the value of tether also).
> What does that mean? Essentially that we’re exposed to the risk of something going wrong with Aave itself and not being able to get our money back. (Aave’s own explanation of its risks is here.) In order to withdraw our money from Aave, Aave actually needs to have the money we want to withdraw. When we deposited USDC collateral on Aave, Aave lends out that USDC to other users who deposit their own collateral on Aave. At the time of this writing, about 53% of Aave’s USDC is lent out.
Author states that they only have "a couple hundred dollars" risked on this trade. Seems that they're just looking to win Internet points by being able to say that they shorted Tether.
That is the exact opposite of the reality (and misses the entire point of the article).
The point is that shorting tether is likely to be enormously profitable, but you won't be able to collect your profits
This is because no well capitalized and stable broker or exchange will touch Tether, and the only counterparties who might lend you the Tether to short are extremely likely to go bankrupt when Tether does collapse.
So, you'll put your millions of dollars at risk on deposit, pay your interest, and end up with a $100 million or whatever profit, owed to you by a now-bankrupt exchange, so your profit will never arrive at your bank account, and your best case is suing the husk of a bankrupt exchange whose shady owners absconded to a non-extradition country.
The trade is bad because only disreputable and insufficiently capitalized counter-parties will touch it, not because Tether is great in any way.
Absolutely not. I think tether is garbage that benefits almost noone except its creators.
I'm just amused by the fact that stability of a bad thing is increased because betting against it is worse than for it.
> The point is that shorting tether is likely to be enormously profitable, but you won't be able to collect your profits.
Hence not profitable at all. :-)
Betting for it is risky, betting against it is risky. Maybe that's a huge part of its stability? Like stability on the edge of the knife held over lava pit. Nobody benefits from going to either side despite equilibrium being uncomfortable?
Also the question is, do people really want to call them on their promises. That's another thing noone would benefit from.
The most likely theory at this point is that most of it is FTX-style IOUs from other crypto companies marked at absurd pre -crypto winter valuations, which will collapse like a house of cards the instant they are touched or even exposed to light.
what's your source for that? Tether itself admitted that isn't true: https://cointelegraph.com/news/tether-to-reduce-secured-loan...
They announced they are curbing this activity so maybe it brought them more loss than gain?
They still probably didn't leak mucj tether this way. But I now see that it's not that 66 bln of dollars changed hands, but most of it in crypto valued at bull market prices. So if people wanted to cash out into dollars they would probably collapse. But why would people want to cash out into dollars en masse and pay tax on that?
And if they want to cash out into crypto there's no problem becuse the crypto is cheap now so tether doesn't need to give away much for each USDT they redeem.
Because they think Tether will collapse. It will happen slowly, then all at once.
Because they see it as a likely loss, and would rather get some return than nothing. A taxable gain is always better than a loss.
Even if the gains were in other crypto and are now being cashed out via Tether to $USD, it's better to realize those gains in $USD and pay 0%, 15%, or 20% capital gains taxes (depending on your income bracket), rather than lose it all due to Tether becoming worthless. Manageable but certain cost vs unpredictable likely total loss.
Yes I agree that those forces are minimal for Tether (and crypto in general) vs other investments. But it seems at most like a minor second- or third-order effect; technically existing but not practically moving (or stabilizing) the markets.
I'll take the long side of the Tether bet for 30% a year (I'll buy one-year Tether forwards at 70c).
I'm not as creditworthy as Goldman, but for small amounts, it's pretty close. I could collateralize the trade with my house, and in any case I don't have the kind of correlated portfolio that means if Tether goes bust, I can't pay you. But enough about me - some trader at Goldman will absolutely do the same deal! Maybe they can even do it for 72c.
There is a market-clearing price for this trade if done between two creditworthy parties. I don't know what that price is because there isn't a big public market for it, but if you shop the trade around, you'll find a price.
The people bemoaning they can't short Tether mean they can't short it at what looks like it should be the right price, say, paying 5% a year to borrow it. But that's not the right price! That's the price that already includes you taking a lot of wrong-way counterparty risk. Against Goldman, the price is 20% or 30% or something, and you can do the trade, but you don't want to.
So the fair price of one-year Tether forwards is 75c or whatever, but the spot price is clearly $1.00. How do you reconcile this in financial markets terms, that the prices don't converge? Same reason other commodity futures might have backwardation - holding Tether provides some value to its owners. Like having steel today allows you to build a skyscraper and start collecting rent, so spot steel trades higher than future steel if the construction business is good. In Tether's case, that value is the freedom to participate in other crypto trades, or perhaps to escape even riskier assets in China, or something else.
The whole ecosystem currently remains a giant confidence game, as Matt Levine described well in a recent article. This doesn't mean there isn't a lot of money to be made - casinos make a lot of money at an activity with no direct economic value - but right now you are best served only putting in money you can easily lose.
There are no broker that will survive to close the short, and you need a broker to short.
(Presumably there is a price at which they do, but also at which nobody's remained interested.)
It has been more than 5 years since they were audited. By their own admission, they have 10 billion of their 66 billion dollars in unsecured loans and "other investments".
An org whose entire raison d' etre is to hold money should be pretty open to outside audits. It should actually be a pretty easy audit.
Why have they been foot-dragging so long?
Money is also a giant confidence game. Any human system is that. It’s all made up.
Even for contemporary fiat currencies today this is neither historically nor theoretically true. Currencies gain their value largely from being convenient in settling trades and being a measure of value when calculating costs, risks and profits. Ultimately, it does not really matter what this money is based on e.g. gold, paper or digital information.
For anybody interested in this perspective and in a more general criticism of fiat money I strongly recommend reading "Ethics of Money Production" by Jörg Guido Hülsmann. (1)
(1) https://books.google.de/books/about/Ethics_of_Money_Producti...
Just because we made something up doesn't mean there aren't different levels of stability for that made up model, or different levels of real world results from acting on those models.
I know for my part, I made non-trivial money on Compound shorting MKR, LINK, and UNI (the Uniswap token) with BTC/ETH as collateral.
[1] Whether you replace "scam" with "confidence game" is irrelevant to this point.
Or is the whole idea that it's somehow deeply insightful to not make this distinction?
> Still, just over half the collateral on Aave is ETH or stETH, and another 13% is wBTC. Aave’s designed to liquidate positions before the become under-collateralized. Let’s hope that happens fast enough if Tether depegs.
That sounds like you still have counterparty risk with regular crypto going to 0 due to pool liquidation (your collateral is not custodially held, but is in a pool).
(The author reduces this value by levering up a cycle, but that's optional.)
Like the way the short works is you put in $20 usdc, borrow $100usdt, transform it to $120usdc. But those $120usdc can’t leave the platform as otherwise you could just never pay back the $100usdt loan.
Huh? With the way Compound and Aave work, the borrowed amount is already off the platform and can leave and forget about the debt (and collateral). Though you wouldn’t be able to borrow at that ratio.
If you put up 100 USDC, then 85 USDT can be removed from the platform and converted to 85 USDC. So yes, you’re still down 15% in the case of total platform colapse, but not 100%
The fact that it sounds like you have to show 100usdc to do the trade is irrelevant as you can do this trade multiple times to build whatever position. In a traditional equities setting they skip the “show 100 USDC then remove 85 usdc” by just saying that margin maintenance for an 85 usdt short is 15 usdc. When people talk about potential losses it is the 15 USDC that matters, not the 100 USDC you need to cycle (because 100 USDC is more of a mechanical inconvenience of not having a real brokerage offered short, not money at play).
If confidence collapses, tether will collapse and the rest of these ‘defi’ platforms will turn out not to be as decentralised as they thought, as they also depend on the confidence game.
How does "loss of confidence" translate into the smartcontract no longer working, and the USDC not being redeemable for anything of value? Those are completely orthogonal dynamics.
The entire argument is based on this magic thinking of "it will all go up in flames at the same time for the same reason because it's all correlated, man".
You're basically betting that the crypto market will collapse ... but the exchange/broker/whoever you're dealing with will survive and have the necessary funds to cover your short.
It all seems rather contradictory to me --- you think it's all going to collapse ... but at the same time you're willing to bet that your little chosen piece of it will somehow survive just fine. And not shutdown withdrawals at the first sign of trouble (like others have done) so you can collect your payout.
This is almost like playing the lottery --- winning is pure dumb luck beyond your control.
By coincidence, my wife was watching The Big Short (2015) with our eldest two kids tonight, it really is worth watching [again] if you've not seen it [recently].
> ... but the exchange/broker/whoever you're dealing with will survive and have the necessary funds to cover your short
Michael Burry has pretty much exactly that conversation with Goldman in the film.
> Tether’s most public executive, CTO Paolo Ardoino, uses a Twitter avatar that seems to be a pear with the face of the Joker.
and
> His wife, Claudia Lagorio, began working at Bitfinex as a Mobile Application/Frontend Developer in 2016. Three years later, she was appointed Chief Operating Officer of both Bitfinex and Tether.
Those are extremely weak claims. The latter is at least a meager allegation of nepotism, although, without more context, it's really not that strong. The avatar, on the other hand, is a distraction at best. Ending the paragraph on those claims makes the argument appear a lot weaker, if not even disingenuous.
It also _does not_ strike me as "weird in context", but I guess you're just hoping people don't actually read the thing (which, fair enough - no one does here).
[1]: 1.07/(1-0.12) = 1.22
He’s essentially gambling $46/yr to get a $450 payout if Tether collapses.
Just around 100%. That's not massive for crypto gambling.
You could just buy BTC and have 600% in less than 3 years if only BTC won't break out of its 12 year trend.
And that's a very conservative gamble.
BTC doesn't have to win mass adoption for it to set new highs, it just has to be the "store of value" (i know, i know) for enough people and for the next QE cycle to start in 3 years to get going again
That's like putting a match to gunpowder and claiming based on the trend of the first few microseconds, the flame will engulf the world.
It's more like putting a match to a gunpowder and theorizing that at some point some equilibrium will be reached at greater volume than currently observed.
Future returns on BTC cannot be compared to the S&P!
Do you believe a popular pyramid scheme has demonstrated utility? If a pyramid scheme made people a lot of money in the past does that suggest it has long term value?
I do speculate that part of the appeal of a non-loan/investment based store of value to very rich people is that hey wish they could keep all their wealth in a vehicle that didn’t involve investing in the overall good of society, but that is a childish wish - wealth is inextricably linked with the prosperity of the society in which it is enmeshed. A billionaire in a society ravaged by disease, hunger, and conflict, shorn of the comforts of science and technology, will be poorer by far, in terms of objective measures, than a billionaire in a society where the people are educated and science and medicine are widely available, especially over he generations.
That's why NFTs are not scarce even though they are unique.
Personally I would also wish that billionaires kept their wealth in things unrelated to the real world. Because when they put it in the real world they hike up the price for everybody by creating illusion of demand that really isn't there because they won't use what they bought.
(1) - If you buy bitcoin now you might be part of increasing the price of a bitcoin by increasing its rarity through the means of losing your private keys. But this doesn't benefit you.
(2) - We're reaching the point where our carrying capacity is starting to hit limits. Maybe in a few hundred years we'll have space colonies to keep increasing the population, but: 1) This won't benefit you, as you probably won't be around then; 2) There will be other collectibles that the then population may be more interested in. It is the case that certain collectibles are incredibly rare (single digit numbers), but also cost less then $10k, simply because there are not that many interested collectors.
(3) - If you sink most of your investments into crypto this limits the ability of your wealth to grow outside of your collection.
That's where the tulip analogy comes in. Not an implication that crypto is useless, just like tulips, but that a speculative mania can leave a novel and in-demand product (asset class, in this instance) with prices that are much higher than they will be at the steady-state in the future where both adoption and production is much higher.
I will probably buy Coinbase stock if Tether finally blows up, but before that the speculation is too much for me to commit to anything.
It took COVID to get Bitcoin back up. That's it
Not history, just a rare event.
No one cares about Bitcoin anymore.
(But feel free to short bitcoin of course - not the kind of risk I would take.)
Error. 1 long streak before COVID and a large decline then too.
And 2 times jumping around during COVID-19 = over a very short period.
The ~$300 one immortalized in this parody music video :
"Blame it on MT.GOX" :
(Note that this one was NOT about MT.GOX going bankrupt...)
Now you are seeing the opposite: Eg. https://www.barrons.com/articles/banks-fleeing-crypto-bitcoi...
I'm not replying here again fyi. I don't care about crypto anymore ( went out at 2018 before the crash), I do care about others losing money :).
If you think it will rise again, fine. Go for it.
As you say, borrowing was cheap. There was no reason for it to decline after 2018 till 2020...
Reminder: other speculative assets didn't decline then :)
As I said before, Covid, with boredom and free money. No one used Bitcoin as investment and not many would borrow money for buying crypto.
Still: no one cares about Bitcoin anymore except some select people that live in the past.
VTSAX-and-chill is gambling also. But the risks are so wildly different that Tether is closer to buying lottery tickets than index funds.
Everyone does what they want with their money but there seems to have been an explosion of “massive returns” content that I think is generally harmful.
(I’m neither saying that this post is or isn’t harmful.)
If your VTSAX ends up being worth nothing long-term, there is almost certainly no chance that your currency survived the same event.
Why do you think it’s similar to holding cash?
Basically, a bet on VTSAX is underpinned by faith in the dollar. If either one crashes the other is worthless.
It always sounds weird to me when someone uses the present continuous tense to refer to the rate of change of stock prices. Like, how are you taking the one-sided derivative of a fractal?
However, what it really means is that nobody can predict future performance, even with historical data. I think it's negativity bias that this phrase is used to apply to downside; it should also be used when considering upside. (The reason, I think, is many people prefer to miss out on upside rather than experience downside, ie we are risk-averse.)
Over some future time frame, the S&P will go up again. It doesn't feel like that will be soon, but as I always admit to myself: I am really bad at predicting the future.
Where it goes next is anybody's guess.
At such high interest rates, you need to close the deal soon otherwise you are bleeding your capital really fast. The interest compounding also means you are losing your money in a compounding fashion.
If the author started shorting Tether 5-6 years they’d never turn cashflow positive and they’d be nearing bankruptcy where they lose all their monies.
Hence the last line - "for the eventual pleasure of saying “I told you so”."
Tether effectively has a risk-free golden goose, it seems quite foolish to slaughter it in an attempt to gain slightly more alpha.
2. if they're not doing anything shady, how come they can't be more transparent than they are?
That's easy. I can assume US treasuries will be here in 3 month, or a year or 10 years, and almost everyone will agree with me.
Almost no one would agree with close to 100% certainty that Tether will be here in 10 years or a year or even 3 months.
Now, that does subject you to uncontrollable variation, but if you look at the chart, it's historically stayed at a very low level. Even the occasional spike you see is only for a day or two and has little impact on the annual average. [2]
Furthermore, the whole time, you're getting credited for interest accrued on your collateral. (1.18% on the USDC here -- so, all in all about a 2% annual carrying cost, not a bit issue if you think the crypto market are on borrowed time!)
"But what about the case where USDT borrowing surges and you have a persistent high rate?"
If that happens at all, it's probably because everyone else is dumping Tether, meaning its price is probably falling, and it's a great time to close the short anyway!
[1] https://app.aave.com/reserve-overview/?underlyingAsset=0xdac...
[2] People often miss that "omg high interest rate" for a few days translates into a very little expense in absolute terms. It was especially bad when banks were complaining about having to do one-off overnight loans on a very temporary basis for 4% rather than 2%, supposedly meriting Fed intervention!
That is assuming crypto rates are like USD bank rates.
Do you know any structural reason the rates can’t spike to a Megapercent (annualised) rate or higher? If you are being charged interest, and the rate spikes, you could lose your collateral quite quickly (and it seems likely trading would be stopped so you might not even be able to close out).
https://compound.finance/markets/USDT
It saturates at a pretty low level.
I have no idea what you mean by the expression "like USD bank rates" though. Fixed? (bank rates aren't that, necessarily)
Which is actually 10% if you include dividends. But it's about 6.56% if you adjust for inflation.
Every time it dips under $0.99, there's a chance it goes straight to $0 and cannot be cashed out anywhere.
Since Tether is fully backed the chance is really small.
https://www.coindesk.com/markets/2021/03/30/tether-takes-ste...
"as noted later in the article the composition of Tether’s assets is not spelled out in the attestation"
Meaning they may be backed by loans or fraud coins or anything.
being able to pay out some portion of "deposits" is obviously not evidence of being "fully backed".
If you want evidence of being fully backed they have attestations on their transparency page that breaks down their assets.
Have people actually seen the receipts for this? I'm skeptical that this actually occurs.
For example, they bet that a group of mortgages where the borrower had no proof of income and a mortgage with a very high interest rate in a location where prices were falling would fail. It seems like a reasonable bet, but they didn't take into account that the people taking these bets had no limit to how many times they could take the bet. Eventually they had enough money to just payoff the mortgages and win the bet.
I would be very concerned here that the same type of risk could happen
Stablecoins derive stability through a system. This system uses collateralization to present a fixed price. In its most simplistic form the system has $1 for every $1 in it. Unfortunately, in such a system, there is no point in the virtualization, which is called hypothecation in finance.
Hypothecated assets exist to allow asymmetric risk. Think of it this way:
* Alice runs a bank and has dollars in it.
* Bob runs a stablecoin and wants it to be backed by dollars.
* Alice says "you can mint $1 of hnUSD for every dollar I have in my bank."
* Bob mints 1 hnUSD.
* Alice invests the dollar in their bank into US treasuries to earn a yield backed by the full faith and credit of the United States Government.
* Bob is free to use his hnUSD for whatever he wants to do in his ecosystem and Alice will be able to redeem it when he brings it back to Alice's bank when she sells her US treasury.
The problem in all of these systems is actually hauntingly simple: Liquidity is king.
In the event that Bob needs dollars quickly, Alice may not be able to sell treasuries quickly. This is called a liquidity crisis.
Before we start pointing fingers at cryptocurrency, take a second and think about how banks work. All of banking is built on hypothecation and risk management. The businesses that stand the test of time in finance are the ones that manage risk most effectively. There is a time to be bullish, and a time to be bearish. Having the wisdom to know the difference is often won only with battle scars.
I am thankful for the public-private partnership that facilitates humanity's collective dream through finance. I am hopeful that we can learn the lessons of the past to not repeat history's mistakes.
The future of finance is on-chain governance/on-chain proof of reserves/on-chain liquidation.
Also, you can short crypto on CME. Is that rigged too?
I think your first point is fair, but I think you're overselling things here. Yyou can only short Bitcoin, not all crypto, but the real issue is that the Bitcoin futures curve is in backwardation, which implies a certain financing cost to go short.
The settlements for the various contracts can be found here[0]. Nearly all of the volume is concentrated in the front month contract (Jan 23 at the moment), so if you want to be able to trade any size at all, you'll have to do so by selling that contract.
However, the issue is that the future price is consistently lower than the spot price. So if you bought a Bitcoin today and then sold a future for the front month (i.e. so you locked in the price you could sell the Bitcoin at in the future), you would be guaranteed to lose money.
And you will effectively have to do exactly that every month: as your short contract approaches expiry, you'll need to roll it over for the next month's contract. As the front month gets closer to expiry, its price will trend to the Bitcoin spot price, meaning you'll have to buy it back at a higher price then you will get when you sell the next month contract.
I don't have access to the historical settlement prices for the CME contracts at the moment, so I can't estimate the exact roll cost you'd pay over the course of a year. If we guess that it's about $100 each roll, then you'd pay $1200 over the course of the year per bitcoin (as well as having to commit 50% of the price of bitcoin in margin).
The OP posted 185 USDC net as collateral and has a short position of 450 USDT, which he's paying about 13% on. In the CME case, the collateral requirements are higher (50% of the notional shorted) but the financing cost is lower (less than 10% of notional shorted).
[0] https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bi...
Otherwise someone would offer cheaper options and undercut all the existing market makers.
Is not true, you have been able to short in derivatives markets for ages and frequently get paid for it.
> I am 100% convinced that’s by design.
Nothing about crypto prevents to one entity from lending to another at a rate of their own choosing.
I'd bet on USDT failing in 3 years. But I'd want to understand how the close-out works under the assumption that the non-stablecoin collateral in Aave crashes and the liquidation process isn't able to preserve the value of the pool. I haven't studied that in depth. My guess is there's non-negligble risk of not being able to get that return on the last leg of the trade, even if the hypothesis is right.
On the technical point: USDT isn't used as collateral in the protocol, apparently, so the main risk is that other assets in the collateral pool like Ether drop so sharply that the liquidation mechanism can't keep up / that the price oracles get messed up. That's a known unknown, there are also unknown unknown, eg bugs/unexpected behavior in the protocol. There's also the question whether/how you'd be able to convert your crypto holdings back into fiat dollars at that point (most centralized exchanges might be in trouble, with USDC you need to create a business account with Circle, but still seems like a feasible off-ramp).
* Is looking at USDT pairs as well as USD pairs for a price oracle and doesn't handle USDT pairs going to infinity well (i.e. BTC/USDT skyrockets) when tether goes to zero
* Effectively hardcodes the value of Tether to $1 (can happen by accidentally treating a X/USDT pair as an X/USD pair)
I suspect that the major lending protocols (AAVE, Compound) have enough attention and effort to not make such a basic mistake but there's a whole wide world of less competent protocols out there.
This can happen to centralised venues as well of course but as far as OP is concerned those are too risky for the tether trade (an assessment I agree with).
In contrast, UST only had LUNA as collateral, and ended up minting more and more LUNA as UST fell off it's peg.
That's not to say that DAI doen't have it's own risks as they have a lot of potentially censorable USDC as collateral, there could be situations where they can't liquidate borrowers fast enough if a collateral falls in USD price too fast, and they run their own oracles which could fail or misbehave. Not to mention the DAO has a fair amount of governance drama on a regular basis. But those risks are quite distinct from what took luna/ust down.
DAI is not an algorithmic stable coin. (1) While DAI is based on smart contracts it is backed by a mixture of other cryptos and stable coins (not Tether but USDC, IRC). If you really want to keep money in the form of stable coins please use either DAI or USDC and not Tether.
I would recommend Polygon (Matic) or AVAX since they're much cheaper than Ethereum and have decent liquidity on AAVE.
They're also quite possibly inversely correlated (e.g. Tether collapsing could also tank Bitcoin).
BTC per Tether goes up, BTC per anything else is unchanged, without considering the loss due to yet another crypto blowup.
I wouldn't be so sure. Demand is denand, doesn't matter if it comes from $ or USDT. Exodus from tether will reduce supply for everybody that wants to buy other crypto even if they pay in hard currency.
Of course this could be offset by reduced interest in buying crypto from everyone else because tether is folding. Only time will tell hiw it plays out.
If I were to bet I think I'd bet on cryptos falling then. But I can't be sure.
Also I feel like there's plenty of people who would take the other side of the bet. Who wants to make it?
I went looking last year and couldn’t find anyone allowing this feature. Binance had something close but only on their .com site not their American .us site
The legal way to do it would be with an old-fashioned paper contract between two known parties. But as web3isgoinggreat.com has made clear to me, the more effective way to do it is to use some crypto site for the deal. If you're lucky, the tools/sites/curriencies you've used will just have gone out of business. And even if not, apparently you can just say, "Oops, I used the money to do other things so I'm not giving anything back to you."
https://www.coingecko.com/en/categories/decentralized-option...
AKA counterparty risk.
BTC goes up and down for a multitude for reasons. For example, Matt Damon going on tv makes BTC go up. You have an extremely simplistic view of the markets if you believe the only reason for BTC to go up is "Tether money printer goes brrrr". Yes, it's one of the reasons. It's not the only one.
> If/when BTC does go up you can simply short again at the higher level.
If you actually tried to put this proposal in an excel and model the returns, you would immediately notice that "short BTC" and "short USDT" have completely different outcomes and "simply short again" is not a remedy that fixes this issue.
You can model the expected value of all kinds of bets without knowing what the exact outcomes will be.
> if you believe [that Tether has solid reserves] ...
No, I don't believe that. Tether is a pile of burning garbage on a train wreck that's happening in slow motion over multiple years. Don't assume that I must be a Tether bull just because I disagreed with you on some related point.
> The reason people are attracted to this short is because they believe it is in fact the latter scenario, and that eventually some event (or series of events) will reveal the emperor has no (or at least not enough) clothes and the peg will collapse. My point is if/when it does it's going to take everything else down with it [...]
I understood your point the first time you explained it, and I already explained to you why you are wrong. Yes, if Tether collapses, everything else will crash as well. That's not the point of contention here. The point of contention is whether shorting Tether has the same expected value and risk as shorting BTC. It doesn't, because the risk that Tether goes up from $1.00 to $2.00 is practically non-existant, whereas the risk that BTC doubles in price is considerable. If you make any kind of simple EV calculations (with any assumptions you want!) you will immediately see that these bets are quite different in nature.
I assure you, we can trivially look back to see the variance.
I mean, how could we calculate a sharpe without knowing the return and volatility, we always use historical for both, its one measure of how we track portfolio returns, which again, are backward looking.
Though sharpe isn't used as much as it was 15-20 years go due to it penalizing volatility in positive returns as much as it penalizes volatility in losses.
Crypto has nothing to do with this.
Are you certain if your facts here because something doesn’t seem right.
VAR makes abut more sense but still uses a backward looking variance. Sharpe never uses a forward lookingvariance as this makes no sense as you don’t know your returns ahead of time unless you are Madoff
And for VAR we either typically use historical VAR or Monte Carlo, again because you never know your returns ahead of time so trying to do any risk measure with estimates returns is useless
Estimated Sharpe for a trade would be what you think the return should be (e.g. fair market value - current price) divided by the estimated future variance. This is what you estimate for VAR and compare to your risk tolerance. The eventual accuracy of the estimates will determine whether it's a ho-hum trade or a black swan that wipes you out. Black swans are essentially situations in which variance estimates were completely wrong (as opposed to return estimates).
Variance is a function of a bunch of things (and correlated with every damn thing). Simply taking historical variance and assuming it will be the same in the future is the laziest possible solution. Black Swan events have woken people up to platykurtic Gaussians and the fact that many real life distributions aren't even Gaussian. This is why you use Monte Carlo, because it doesn't need to assume a kurtosis or even Gaussianity, but is more computationally intensive, but not terribly so, but also suffers from low sample number at the tails, so it's not that accurate in extreme situations either. An additional red flag is that, if you have to use MC, then you don't know the distribution underlying the process, and if you don't know that there might be other things you don't know.
Crypto is one of the newest markets, so we understand a lot less about its extreme conditions and the tails are very uncertain. Even with Monte Carlo I wouldn't trust crypto Sharpes one iota.
Sorry if you know all this stuff. Thought I should clarify where we probably actually agree but may be thinking of it differently.
Not really. most of your money will be gone in just 6 years if nothing happens Obviously, borrowing in usdt is very good if it goes to zero.
Why would Genesis be still alive after Tether's collapse ?
In which case I am happy to extend my time horizon. We could go back 15 years, where all of this stuff was worthless. We could go back 20 years where the online currencies Beenz and Flooz had just collapsed into worthlessness. We could go back 150 years to the wildcat banking area, the last time we let chumps just make up magic money, which was such a disaster that it was foundational to the modern regulatory regime. Or how about we go back 300 years and look at the South Seas Bubble and Isaac Netwon's time reforming British currency so it was less of an exploitable clusterfuck.
You're right, extending my time horizon really does help put cryptocurrency in perspective.
It feels very similar to the thought stopping techniques that destructive cults use. Trump's word for this is "fake news".
After all, big money tried: spreading cheap FUD at the worst moment (FTX), betting heavy against... It didn't work out for them, but they tried and relative to their size, it didn't even cost them that much, I'm sure and it was worth the shot (as despicable as it looks).
Couldn't the same have been said of FTX right up until the moment its insolvency became public knowledge?
I'm curious what you consider safer ways to double ones money in crypto.
For the majority of folks to be convinced, Tether both has to exist for a long while, and provide a basic level of introspection into how the reserves are handled.
More generally, while Tether may be a house of cards that will eventually collapse, placing a bet on it has actual costs. And "the market can stay irrational longer than you can stay solvent" is an adage worth remembering. My 2c.
*either directly, by failing to deliver the winnings should the trade go the authors way; or indirectly, via clawbacks when govvies and lawyers go after those who made profits to (minimally) compensate those who was left holding the bag.
There is an argument that deflationary currencies are bad because people will not want to spend them as they accrue value, but that value has to go somewhere; either stays in your pocket with deflationary currency or goes to some billionaire's fourth yacht's heated seats with inflationary.
The 1970s were bad, but we had a 40-year period of low, stable inflation, which is the goal. Now's not great, but it's not the Federal Reserve's fault; between a global plague, supply chain disruption, and a land war in Europe, inflation is up across the globe: https://tradingeconomics.com/country-list/inflation-rate
Compare that to the economic chaos that was much more common before the rise of strong central banks and I'd say "Federal Reserve baaaaad" is somewhat lacking in nuance.
Printing 13 trillion dollars for corona stimulus, yep.
Though I guess that's more the fault of the legislature than anyone else.
The FED can't be totally blamed, respective governments share a big part of the incompetency
Should that really be a surprise when we see the growing disparity in income between the average worker and the CEOs? The rich have been keeping a greater and greater percentage of corporate profits for themselves. And it now isn't being siphoned off by the government because the rich have also lobbied to have the top-income tax rates lowered and lowered.
I bet that 109 years after Bitcoin/ETH/FTX/Dogecoin/etc will be created they will fare far worse.
I remember when this blockchain was created. People were transferring Doge to each other for fun. That was the whole point, it was just goofing around and making jokes. And now you can buy it at ATMs in gas stations. What a world we live in.
I also would not store value long term in dollars anyway - I would care more about other things. Where cryptocurrencies are even worse when compared to dollars.
You don't seem to understand how fiat money is supposed to work, and how a stable economy is supposed to function.
Deflation is bad (where the value of a dollar increases relative to the average cost of products). Your economy can enter a deflationary spiral which is super bad and disruptive.
So ideally you would have a stable value relative to products and services. But how do you deal with progress and productivity increases? A farmer 100 years ago was plowing fields with a horse, and now can handle much larger farms with a tractor. We're producing a lot more of other resources and finished goods as well, and these are purchased by a much larger population. Well, you increase the money supply to match the economic activity.
Keeping inflation to exactly 0% is very difficult, and erring on the side of inflation isn't so bad, so that's what we try to do. The point isn't to have each dollar stored in a bank to automatically (magically) increase in relative value (to products and services) without any effort. If you want more money, you need to make more money.
Sure, inflation is cool because it shrinks our debt to nothing, but then what is our economy and social structure based on? Only lies. Even children can see now how this system is collapsing under the weight of its own absurdity and demoralization. I've had it to here with these banker-centric rationalizations of why it's a good thing that the average employee gets screwed harder and harder each year.
The last major deflationary event in the United States was the Great Recession and personally that seems a little out of touch to be calling that a time of prosperity for the layman.