Note that the current Tether investigation just moved to the SDNY DOJ office that handles the biggest financial cases.
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."
According to the "public disclosure" they made back in March 2021 under the agreement with the NYAG, a whopping total of 3.87% of tether is backed by cash. Over 65% is backed by IOUs, i.e., unsecured promises to pay in 270 days or less, or, if one prefers certain terminology, commercial paper.
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.
I've been deeply involved in crypto the past 3 years and everyone in the space knows that Tether is a scam. No serious investor holds USDT over USDC in their personal wallets. Tether only exists as a way to trade on centralized exchanges.
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.
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?
Counterintuitively, the person making $300K/yr can just keep buying SPX every paycheck for the next 10-15 years and have a very cushy upper middle class lifestyle with a nice nest egg. For someone making $15/hr, crypto maybe their only lifeline to escape the quagmire of poverty. More so if that someone is making only a few dollars per day in a despot regime with weak currency management; then crypto* is truly a rare lifeline for them.
* 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).
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.
I just feel most people who are obsessed with crypto that I’ve come across in my personal life are some of the least financially responsible/educated people I’ve ever met
that and r/bitcoin comment sections are very delusional cult to me
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?
To finesse the idea of major central players whose downfall would collapse Tether:
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.
This would be true if most people in the space knew what they were doing, instead most crypto investors aren't very educated and were probably only informed about the Technolgy when Elon was promoting doge coin
Which is why I'm talking about the bigger guys - the "smart" investors. See their on-chain wallet activity and you'll find that they almost never hold any Tether at all. There are almost no major on-chain pairs for $X/$USDT - it's all DAI/USDC (if stables).
> everyone in the space knows that Tether is a scam
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?
because the best practices from 2011 are still the best practices in 2022 and nobody looses the assets held according to those best practices and everyone that doesn't follow them can be ignored
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.
So you've been involved in crypto since 2020 and not only are you at the top of the comment thread, you feel the need to "sanctimoniously" chair people on the subject? LMFAO. Yes please tell me more about how USDT is a scam and USDC isn't.
It's a game of musical chairs, and as long as trading volume remains high, the music keeps going. The vast majority of USDT -> USD sales happen on exchanges, not via redemptions, so the question of whether redemptions will be valid is somewhat academic. Until it isn't.
What exactly is hard about running a fiat backed stablecoin? Don't you just accept money for your token and invest it in low risk crap? Isn't this exactly what a consumer bank does? Even Paypal does this [1].
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.
> 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.
> What exactly is hard about running a fiat backed stablecoin? Don't you just accept money for your token and invest it in low risk crap?
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).
The stuff banks invest in isn't really "low risk", they invest in things like long-term loans that have a non-negligible risk of default. In order to be properly safe, a stablecoin would need to invest in much lower risk investments like money market funds and high quality commercial paper, which tends to have very low returns. The stablecoin would also need to have proper custodial arrangements in place which would cost money. Companies like PayPal do something similar as a way to avoid holding many millions in a bank account (which, as well as being subject to the credit risk of the bank, could attract significant fees and possibly negative interest). They almost certainly don't make significant profit from the practice.
What you are describing does happen, but it's not banks that do it, it's money market funds.
> invest in much lower risk investments like money market funds and high quality commercial paper, which tends to have very low returns
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?
> 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).
The return on US treasuries is usually lower than inflation. You lose real money by keeping only US treasuries. It could maybe be done with TIPS, but that would be a little tricky to accomplish.
For example a couple years ago, 1 year treasuries had a ~0% rate.
Just to expand on the comments made by other places: The holders of Tether lose money (effectively) due to inflation. The owners of Tether the corporation (Binance) can collect the interest, which is cash money. Billions is billions.
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!
Yes, but it doesn’t matter if the money you are losing to inflation is being lent to you for free. Although coinbase does pay a small percentage to usdc holders on their exchange I think it is one of the ways to convince people to switch away from tether.
What's hard is the temptation. If you are running a fiat backed stablecoin with a big market cap, and you are willing to be a bit dishonest you can make yourself obscenely wealthy. There is no one making you keep your hand out of the cookie jar. Resisting that is hard.
And here "a bit dishonest" is just a matter of leverage. Slightly increase the risk, and on average you'll come out ahead and have extra money you can siphon off.
This is one reason why economic downturns always expose fraud.
I think a wire fraud/bank fraud charge is on the table for people who give in to the temptation.
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.
"got greedy and made high risk investments? Can't Google or some company just make their own stablecoin"
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.
> What exactly is hard about running a fiat backed stablecoin?
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.
> What exactly is hard about running a fiat backed stablecoin?
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.
What's hard with Tethers stable coin business is anti money laundering and KYC regulations. That makes it hard to find banks and other such institutions that will work with them and why they are secretive and use odd hacks.
tether, at no point in its history, has pretended to claim a 1:1 ratio of tether to actual dollars received or in reserve. They regularly mint huge chunks of coin and give them to exchanges under legal agreements that have nothing to do with cash transfers.
If you read further, you will find that Tether is not currently claiming that "reserves" would equal "dollars". This used to be different, though, so your parent poster is still wrong (though they are wrong due to a different reason than the one you spelled out).
"Tether says" is the crypto equivalent of "Putin says".
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.
All the people mindlessly saying "counterparty risk" clearly didn't read the article. He has thought about this carefully. His counterparty in this case is Aave, a DeFi smart contract. Smart contracts famously get hacked frequently, of course, but Aave has been around a long time, and it's probably reasonable to be somewhat confident in its security, at this point.
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.
> I think Tether is pretty obviously at least mostly solvent.
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).
> 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
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
> 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).
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.
That's why I said that running a full blown fraud was insanely lucrative, not the normal stablecoin business.
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.
There is nothing illegal about looking like a scam. It is only illegal to be 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:
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).
> There is nothing illegal about looking like a scam. It is only illegal to be a scam.
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...
> 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.
> 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 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.
Provided USDC is indeed fully solvent and remains pegged, a run on USDT might even strengthen its position through an influx of new customers. However, if the USDT failure causes the crypto cataclysm some are anticipating, couldn’t Coinbase be exposed to such an extent that the company becomes insolvent?
Even in the event that Coinbase became insolvent, theoretically that shouldn't impact USDC. USDC has entirely separate reserves that are in short term debt instruments (i.e. T-bills) and cash equivalents, uncorrelated to the crypto ecosystem, and very safe.
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.
Huh, I didn’t know all those details about USDC. It’s strange to me that anyone would pick Tether over it, then. Is USDC more difficult to acquire, especially on international exchanges?
It's a clever trade, and I appreciate that the author pointed out the main drawback:
> 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.
The author's Internet point is that they think Tether is bust and why big money is not shorting it (you can't find a counterparty to make a big trade with that is any less dodgy than Tether itself). They then describe a mechanism for making the trade in which the counterparty is a DeFi protocol that is, of course, just as dodgy as Tether itself.
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.
USDT is super interesting since it doesn't behave like a normal market priced asset. You know it won't ever go up in value, and you know that if it goes down, it goes down to 0 VERY QUICKLY, with maybe a chance of a claim against unverified assets that might pay out after years of litigation.
In past USDT depeg to around 0.9$ for short time. This is very unlikely to be the case since even if they are insolvent they have a reserve.
You probably think that way because of LUNA crash which was backed by almost nothing. For example in defi stablecoins with issues do not depeg to zero or anywhere close to zero if they are still backed to some extent.
Our opinions differ in that you trust Tether's reserve. I don't.
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.
want vs reality. In fact, I would want to bet against USDT with a reasonable proportion of my savings, but there are no safe way to ensure such a contract will be honored in the case that it actually went to 0.
Some of the crypto platforms are scam[1], but no one seriously claims Aave Or Compound, the defi borrowing platforms you can do this with, are scams. There is, of course, always the risk of unforeseen bugs that prevent withdrawls, or crashes that happen so fast the collateral can't be liquidated in time. But that's different from saying that Aave or Compound are themselves "confidence games" that can't be expected to pay you back when you're right.
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.
I think the claim is that usdt crash will be highly correlated with all other crypto going to zero, so any crypto collaterized counterparty will fail. Ability to payout USDT short relies on confidence in other crypto.
I got that part. But the claim here would be that your USDC collateral would go to zero. Yes, USDC is "a crypto" and if you lump it in with all crypto, you will casually think it will magically go to zero too, despite being backed with non-crypto assets and a level of conventional oversight from the financial markets.
Or is the whole idea that it's somehow deeply insightful to not make this distinction?
You’re right that if the short is entirely usdc collaterized. But reading the blog:
> 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).
This comment[1] addresses counterparty risk better than I can: the risk is just that, in a crash, the collateral backing the USDC loans can't be liquidated fast enough. But remember, you're already borrowing 80% of the collateral and turning it back into USDC. Even if all of crypto dies tomorrow you keep that much, that's just a 20% loss. Further mitigated by however much of the collateral for the USDC loans can be converted into USDC.
(The author reduces this value by levering up a cycle, but that's optional.)
The money at play is the collateral he put up to maintain the position. Even though it is in USDC it is on the exchange which has pool liquidation. If the collateral isn’t on the platform then what would prevent people from just pulling usdc and never paying back their borrowed amount.
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.
> 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%
It sounds exactly how I described in terms of risk. Effectively you are putting up 15 USDC for maintaining an 85 USDT short. Your money at play is 15 USDC, and you can lose 100% of that amount.
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.
So, what's the mechanism there? You've got a smartcontract that robotically executes its code, and USDC collateral that lives on it and derives its value from US Govt Treasurys and some level of conventional-market oversight.
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".
Money largely gains its value from its ability to be used to pay taxes. If there is someone who controls land and an army and says "this is valuable and you have to pay a certain amount to me at certain intervals" then it is valuable, at least within that political configuration.
> Money largely gains its value from its ability to be used to pay taxes.
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)
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.
What it means is that there is no “real” justification for something to be valuable, is what people agree on. If enough people agree that crypto is valuable and want to buy it, then it is valuable for as long as people believe it is. Just like any other form of currency.
This isn't really true and the guy saying "If someone showed me a way to do it with Goldman Sachs as a counterparty, I’m in" is also misstating things, perhaps intentionally.
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.
There's also a scale issue. If a product is not standardized, that Goldman trader isn't going to work with 'a couple hundred dollars' mentioned in the piece.
What this post does more than anything (and I think that is the goal) is illustrates that for all the crypto bluster, it’s currently a terrible financial system that has all sorts of massive risks that are not just hypothetical but have already been realized.
It is not that simple. In many cases the money you receive from short selling is the collateral for your short position. You need to return the borrowed asset to get your collateral back.
Exchanges typically back client USDT/USDC assets partially with USD and partially with fixed interest products. If USDT goes to zero some of the big exchanges will make billions. These are your counterparties when you short USDT vs USD.
You want to imply that the short is unprofitable because the asset is so good that it'll never decline in value.
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.
> You want to imply that the short is unprofitable because the asset is so good that it'll never decline in value.
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?
No it’s stable because they’re lying about what it is backed by. It’s easy to make a scam look superficially stable if you are not called on it or make it impossible to call you on your promises.
It's exceedingly unlikely that Tether has anything close to 66B of "real money" backing it.
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.
That's very interesting. I wasn't aware of that. I guess in the crypto winter there's very little need for new tether so they found another way to make money. Risks are obvious, that the borrower defaults and collateral drops so they won't be able to recover full amount of tether. Risks and rewards in the form of the cost of the 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.
>>why would people want to cash out into dollars en masse and pay tax on that?
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.
Ah, so you are saying that it is such a mess that no one can/will take either side of the 'bet', so forces that would ordinarily more quickly push it off it's pseudo-equilibrium are absent?
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.
Yeah I was going to say these are ridiculously small numbers to try the bet with -- each of those transactions mentioned was around $3 worth of ETH, which adds up fast. I wouldn't try something like this for less than $5k.
Tether is the support mechanism underlying the entire crypto market.
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.
> You're basically betting that the crypto market will collapse
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.
It's a sidenote, but part ("Act") 1 has a strange structure. They start off with Tether doing dodgy business and most likely being insolvent (a very good and sound point), but then end with
> 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.
Agree with you on the Joker avatar being pretty irrelevant, but there's a bit more than just nepotism implied a growth-stage financial services company trading billions in assets which had already experienced serious regulatory and fund loss problems deciding the C level appointment their operational issues needed was someone with no prior finance experience but plenty of reason to be loyal to the founders who'd been hired a little earlier to implement the UI for their app. Even in the hacker-founder world of Silicon Valley, that would be an unusual promotion path, for a troubled company in a regulated field like finance it's a red flag...
It is written in the form of a casual blog post. Really, all he is saying is that he doesn't respect these people on a personal level and "knows the type" (or what have you). If you disagree, that's fine, but if you want a more formal type of discourse, pay some journalists.
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).
Even if your premise is right, your timing has to be right too. The SP500 has doubled since 2014 which lines up with the traditional 7% per year. Meanwhile they're paying 12% per year to short, so their approach is a compounded 22% worse[1] than VTSAX-and-chill (before even considering capital risk). This is still gambling, just not in the usual direction.
I agree with your premise but the s&p isn’t going up by 7% right now and the author is just taking a calculated risk. That’s his business. If he thinks Tether is going to collapse then he’ll make a massive return on his investment.
He’s essentially gambling $46/yr to get a $450 payout if Tether collapses.
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?
I bet you’re fun at parties. The right way to phrase it would be to throw in a “YoY” but clearly you care too much to ever let someone on the internet dare to make such a pedantic mistake. Try contributing to the conversation instead of detracting from it.
Humans are terrible at gauging risk. I think the parent comment was highlighting the risk component of this.
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.)
I don't have a deeply researched position behind this, but my feeling has always been that (long term, I say again, LONG TERM) VTSAX and chill is the same bet as holding cash.
If your VTSAX ends up being worth nothing long-term, there is almost certainly no chance that your currency survived the same event.
Curious about this. The geometric mean of return for the S&P500 is about 7% over several decades. The longer the time horizon the more likely you’ll hit 7%.
Not that its the same return as holding cash (clearly that isn't true), just that if VTSAX doesn't pay off as a bet long term, it will be because the dollar has ceased to be valuable.
Basically, a bet on VTSAX is underpinned by faith in the dollar. If either one crashes the other is worthless.
The most important line in finance is "Past performance is no guarantee of future results". This is generally treated as a warning label: Don't assume an investment will continue to do well in the future simply because it's done well in the past.
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.
Aave as a token might collapse but Aave is a protocol, and it will continue working as designed. When Ethereum collapsed to sub 900$ we could all see how robust these decentralized protocols are. The price of the token has nothing to do with how Aave works.
I am talking about the protocol. They are untested protocols with potential design flaws or potential hacks. We have seen these happening for tens of billions of losses for years now. Waiting for something to collapse in something that can collapse is total irrationality.
look i'm as skeptical as the next HN'er but the evidence of past history is against you and "ever" is a very long time...
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
BTC hasn't been around long enough for it to have a past history to be evidence against the belief it will downtrend. Not relative to other currencies or commodities.
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.
Bitcoin doesn't raise exponentially. It slows down over time. Each swing cycle is shallower than previous one.
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.
Instead of price history look at utility history: It’s never been anything other than a speculative asset or a temporary medium of exchange for criminals. There’s no future here.
Future returns on BTC cannot be compared to the S&P!
Gold used for jewelry or industrials is a fraction of the overall yearly production of gold though. So it's mostly used as speculative instrument to store value (assuming this sentence is allowed with those two clauses together).
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?
Replace "pyramid scheme" with "stock" and the argument still stands and is actually relevant to bitcoin. Can you please explain how bitcoin is a pyramid scheme? You can say Ponzi scheme or scam or just hate it because you haven't gained anything from it personally and wish you did when you first heard about it at $5, but pyramid scheme it is not. Thanks.
You got a nice lil dvote from our HN friends because you spoke negatively about stonks (they like stonks a lot!) and neutral about bitcoin (they HATE bitcoin! Mostly out of jealousy). I don't think either is a pyramid scheme but both often trade at inflated valuations.
This because something is scarce, doesn't make it valuable. Claims to the contrary are just another example of crypto bros not understanding economics or human behaviour. Otherwise, a whole bunch of people with boxes of Beaning Babies would be rich by now.
Please do mansplain to everyone about "understanding economics or human behavior", two topics that are barely understood and have wildly unpredictable outcomes on any given day. Back to grown up talk: scarcity doesn't create value by itself, no. A giant multi-billion $ bulletproof-ish network of millions of active users trading a scarce commodity does create value.
Isn’t scarcity relative to demand? I mean each cubic meter of soil is globally unique, but no one cares. And, in the long term, demand plausibly has a relation to utility?
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.
It's related to the demand. That's why unique things might not be scarce especially when there's a lot similar things.
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.
There are a limited number of pure collectors, or even FOMO collectors. And much of this collection value comes about through increasing limitation of an item(1), along with a population increase (making more collectors)(2), and increasing wealth of current collectors used to bid up the price on collectibles (wealth increase through means other than their collection, obviously).(3)
(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.
I've got some fresh toenail clippings you may be interested in! I only clip my toenails about twice a month, and probably will cease production entirely within 45 years.
Your tulip futures from 1637 would still be out of the money, even though global tulip consumption is much, much higher and the Netherlands is the world's leading supplier.
Finally! It took this many comments for someone to show, via the age-old tulip example, they know nothing about crypto except that there is hype around it. And thank you for adding the date to show you read the top of a Wikipedia article.
I think you misread me. I think crypto will be very, very big in terms of utilization and value, much bigger than it is today. But I also believe this does not imply that there will be much expected gain from purely speculating in the price of current cryptocurrencies.
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.
I don’t get how everyone misses this part. Assuming counter-party risk is 0. This is still not a risk free trade by any mean, even if Tether collapses at certain point in the future.
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.
Did we ... need proof of this concept? Here's a thread just on this forum, from over a year ago, explaining exactly how to short Tether via the trade the author is "proving":
My take was this is less about proving a concept and more a nerdy/amusing/I don't mind losing money way of saying "I strongly believe Tether is a house if cards that will blow over at some point".
Hence the last line - "for the eventual pleasure of saying “I told you so”."
I partake in this trade. There are other DeFi markets than Aave with better rates (6% to 9% range) for borrowing Tether. I also don't only use one market or one chain to hedge a bit smart contract risk. I also didn't sell Tether and just hold cash. Maxing out my I Bonds allocation and then buying treasuries has offset the interest on Tether such that I've been slightly net positive for the last 18 months on my position. This is all gambling money, no money I actually need day to day is tied up in this and my retirement/savings are invested an a traditional portfolio of stocks/bonds/real estate.
Even Aave itself has better rates -- the figure the author is quoting is from the the platform's option to lock in a fixed rate for your loan. Currently you can lock in 12.24% [1], but you can also borrow at the variable rate, starting at 3.15%.
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!
[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!
> People often miss that "omg high interest rate" for a few days translates into a very little expense in absolute terms
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).
Why do you believe that Tether is investing in riskier assets than treasuries and equivalents? With so much capital, and all the scrutiny they've had for many years and throughout many cycles it seems incredibly foolish to do anything else.
Tether effectively has a risk-free golden goose, it seems quite foolish to slaughter it in an attempt to gain slightly more alpha.
It is not click bait. It’s a thoughtful discussion of the challenges of shorting Tether, and a personal anecdote about attempting to overcome those difficulties.
It is a click bait because the articles goes: Shorting Tether is a great idea and ends with ah actually it’s not a good idea , expensive so I put 200 eur in something with extreme risk to short it. Yes, it is click bait
You know who already made tens of millions in profits and will continue to because of stories like this? Market makers that redeem billions of USDT for cash with Tether/Bitfinex every time it goes under $0.99. Borrow USDT on leverage, cash out at $1 to US bank, mint USDC with Circle, swap to USDT, repay USDT loan and bank the difference, rinse and repeat until it's back to $1.
I think that's likelihood is connected to the government resolve to rein in crypto shadiness, which given recent events seems like it's only starting to pick up.
nobody is redeeming tethers with bitfinex, they don't even have proper banking anywhere and their accounts are constantly shutdown by various entities.
During the '07 housing crisis people bought "Synthetic CDOs" which where actually bets on a particular set of mortgages defaulting.
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
I'm not being sarcastic, I think it is a huge waste of time to try to understand the details of a system that is specifically designed to be obtuse and confusing when if you zoom out you can understand the system just fine at higher levels.
That's tangential to the point. You accidentally posted misinformation to the internet and somebody corrected you. Don't go off on a raging tangent, just say "thanks" or something.
I feel like most people look at stablecoins and say "this is such an easy business!" and in a way they're right, but they're also wrong.
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.
AFIACT Tether doesn't even aspire to any fixed time frame for redemptions, so it's even easier than a typical money market scenario. If all their assets were 30 day treasuries or shorter you don't even need to sell them - just wait the 30 days and then pay people then. Though I expect that even at tether's scale, markets for short term treasuries are liquid enough.
It’s been more than a decade and it’s still not that cheap to short crypto. I am 100% convinced that’s by design. If you think equity is rigged, crypto is a complete circus. I rather not deal with it even if money can be made. It’s going to slam you at some point.
> 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).
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.
I guess most people who looked at crypto had that idea, and most people who thought about for more than a short moment probably came to similar conclusions as the OP (if you do it, do it through DeFi, and ideally only with what's probably play money for them). One thing they didn't mention that someone who just wants to play around should keep in mind is that you might incur tax reporting obligations.
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).
An potential failure case for defi is that some contract:
* 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).
This indeed happened to a few protocols that had the value of UST hard-coded at $1. The big players mostly use Chainlink though, which uses a diversity of price sources and doesn't make that type of assumption.
Man, I'd love to short Tether too. But that would mean giving actual USD to some other exchange, and I'm yet to be convinced that there are any exchanges who aren't running some kind of fraud scheme as well.
You can short tether purely with ETH collateral on-chain, and then you're not exposed to any exchange risk. Of course you are then exposed to ETH price risk.
Lots of people have been saying Tether is a fraud for years now. Even some very smart and highly regarded people; patio11 comes to mind. Yet in all those years, Tether had no major depegging event, bankrun or any other noteworthy chain reaction whilst big frauds unwinded, hacks happened and over-collaterized bubbles popped. I'm not saying Tether isn't a fraud, but I feel the chance it falling as an unbacked stable coin is long gone. More likely they will end up OFAC sanctioned (such as happened with tornado cash) for roleplaying as the federal reserve.
I still like DAI. Nobody seems to have heard of it or remember it exists, but it's a stablecoin that doesn't rely on "trust me bro". It's soft pegged to the dollar through its algorithm. While the crypto world seems to have been almost entirely replaced people interested in and having a basic understanding of the technological side of it with people who want to get rich quick while understanding nothing, DAI has remained successfully pegged to the dollar. Not perfect but also not likely to take a permanent dump.
The main difference between MakerDAO/DAI and Luna/UST is that Maker doesn't accept their native token as collateral. You have to use collaterals external to the protocol which won't inflate in response to where DAI is relative to a $1 peg.
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.
> Algorithmic stablecoins are not a good idea. See: Luna/Terra.
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.
Even if counterparty/protocol risk don't eat you, "the market can remain irrational longer than you can remain solvent" applies here and the interest can eat you.
”Tether’s large enough by now, and significant enough to the crypto ecosystem, that crypto’s major players will likely do just about anything they can to stop it from failing.” Where have I heard that before…
I, for one, think I'll get in on this trade with some play money just because this seems like a nice way to learn about smart contracts and defi and maybe get paid to do so.
Borrowing and lending requires a lot of transactions. Make sure to do it on a cheaper blockchain (NOT Ethereum) otherwise you'll end up paying a ton of money in fees.
I would recommend Polygon (Matic) or AVAX since they're much cheaper than Ethereum and have decent liquidity on AAVE.
Note that interest rates on USDT went down now and now it costs around only 3 % APR to short it. I've been short for a year now and will be fairly rich if Tether burns to the ground.
I'm not that sure. At least not in the short term. When people exit tether they'll mostly exit into other cryptos and this will generate demand vastly exceeding the supply.
In that scenario, I agree that the price of other cryptos in Tether will go up, if Tether seems like it's actively collapsing. However, that'd be due to Tether's perceived value being significantly less than 1 normal US dollar, or 1 of another US dollar stablecoin.
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.
You don't have to short tether specifically. If tether goes under, everything will go under. Just short whatever large ish coin which has cheapish carrying costs.
The difference though is tether can only go down and when it does it goes to zero. If you short a large ish coin you’re exposed to value increases and the unlikely hood of the count going to zero
Good luck with the shorting but 10% seems kind of steep. I guess if there's a >10% risk they go to zero in a year it's ok. I shorted Tether briefly on Kraken and then was horrified to find they were charging me ~25% per year for so doing.
Has anyone found a reliable platform in the US to legally short / take out PUTs on a crypto currency in the US?
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
You could do it the old fashioned way. You find somebody who thinks the value of their crypto will go up. You pay them to borrow their crypto for, say, a year. You then sell the crypto for dollars and in a year you hope you can buy it back for less than you made.
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."
Tether effectively denominates the entirety of all crypto valuations, so going to any exotic length to do a specific "short Tether" trade seems silly. Just shorting BTC/USD will have the same effect.
No, shorting BTC/USD has a completely different risk profile than shorting Tether (USDT/USDC or similar pair). The key difference is that BTC can spike up to basically any value (thus liquidating your short, even if it eventually comes back down), whereas USDT won't trade above $1.05 or so.
Considering the two risks as independent surmises that BTC goes up substantially (in USD terms) via some mechanism other than printing Tether, which AFAICT never happens. If/when BTC does go up you can simply short again at the higher level. If you're not sufficiently capitalized to handle margin calls you really shouldn't be doing shorts, but even small investors can do this trade by buying the BITI ETF.
> Considering the two risks as independent surmises that BTC goes up substantially (in USD terms) via some mechanism other than printing Tether, which AFAICT never happens.
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't just Excel the Tether short because the basic premise is no one knows the truth about them. Tether on the surface is a perfect business: people give them real money in exchange for tokens they mint themselves for free. They don't have to pay any interest, they get tons of float, they're denominated in the world's primary reserve currency, they have almost no regulatory burden, the tech is mostly other peoples problem, etc. It's literally impossible for them to lose money, even if the whole rest of the crypto world blows up--unless you believe they're being stupid risky with their reserves, or that they don't actually have 1-to-1 reserves in dollar denominated assets. But if you believe it is only the former (like they have it all in high-yield Chinese real estate developer paper) then why not just short the risky asset directly? 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: Tether is the market, its daily trade volume is roughly the sum of every other currency's, there is no way BTC/USD can shrug off a USDT depeg.
> You can't just Excel the Tether short because the basic premise is no one knows the truth about them.
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.
For it be worth doing for a hedge fund they'd need to be able to put on a sizable trade. Let's say $1mm but probably a lot more. Is there enough liquidity to do this? I have no idea.
Keep away. Obviously crooks involved in the tether from the beginning. These crooks are big financial institutions and you might get sucked in to a short squeeze.
The problem with shorting cryptocurrency is that you are assuming that market is fair, when this is absolutely not the case - the market is heavily manipulated.
Well, quite possible it will blow out at some point. Not because they are not 1:1 backed by USD and quality assets, they are. But because there is no KYC in USDT transfers.
Sharpe ratio uses a backward looking variance as it tells you how you traded wrt to the volatility.
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.
That is a backward/ex-post Sharpe ratio. Bankroll management requires knowing the forward Sharpe ratio for VAR. You can't know VAR without knowing the forward expected variance. This is why black swan events wipe out traders who think they know their risk but really don't.
Hmm
I worked in a bank and ran these calcs and we never use forward variances as you can’t know it for any instrument and you can’t know your return as well.
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.
just short coinbase, if tether blows up, the whole crypto market will blow up, therefore coinbase will blow up. There's no way coinbases stock price wouldn't go down if tether and bitcoin go to zero
> If USDT collapses to a price of, say, $0.01 USD / USDT, you can buy up 100M USDT for $1M USD, and hand back that Tether to Genesis to satisfy your loan.
Why would Genesis be still alive after Tether's collapse ?
Tether is 100.38% backed by assets. This means they can always trade Tether for USD. About 80% of their assets are liquid meaning that Tether's supply can shrink by up to 80% and they can still pay out within a couple of days.
More like "Shorting Tether for Fun and Slow Bleeding"... 8 years of FUD and still here, it doesn't take 8 years to do a safe 2x in crypto, not even in trad-fi.
Yes, if there's anything I've learned from the crypto markets lately it's that a few years of (apparent but vigorously unaudited) success is proof that it is very safe and won't come apart precipitously.
not sure whether this was sarcastic, but if it really is, then you shall just extend your time horizon. Those who bought bitcoin at the worst moment of 2014 are still now at a comfortable ~20x (and roughly ~2x on the spx)
How does that help whether to buy or sell in 2023? You could say the exact same paragraph last year, but someone would’ve bought and lost 2/3 now. That means it could happen again.
Hey now. The Bitcoin price is heavily dependent on financially naive people putting dollars in. If you're just going to run around countering hype with facts and reasonableness, how are they going to get the bubble to reinflate?
Oh wait, is the game we're playing Pick an Arbitrary Time Period That Lets Me Be Right? How fun, let me try.
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.
Must all criticism of Tether be FUD? Their past behavior alone makes me skeptical that it'll ever be trustworthy no matter how rich the gold mine they may have fallen into.
The thing is that any and all criticism can be dismissed with "FUD", and that the person can continue to live in their own bubble and avoid the bother of cognitive dissonance.
It feels very similar to the thought stopping techniques that destructive cults use. Trump's word for this is "fake news".
Nope, there is a lot of legitimate concerns but the fact is that they are still here. Taking a trade is about taking a bet with a probability to win/lose, and it's just that betting against Tether is worth at most a meagre 2x with a lot of related risks as outlined in the article, whereas there are much faster and safer way to do a 2x in crypto.
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).
Something existing for a long time increases the probability of it being stable, but does not guarantee it. It could be that Tether falls apart in a certain set of conditions that just has not happened yet, such as FTX/Alameda being exposed by bad crypto conditions in 2022. It took Theranos 15 years to fall apart.
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.
I admit that I only skimmed the article, but the first thing that jumps at me is counterparty risk; the same risk the author is trying to avoid in his rejected "just short Tether" option. The proposal seems to put a bunch of crypto exchanges in the transaction path which, thinks me, can bring trouble* should the Tether collapse the way FTX did.
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.
Money printers bad. Including the Federal Reserve (since its inception 109 years ago, the US Dollar has lost 96% of its value.)
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.
> In those times of economic chaos, a working class individual could afford a house and food for his family.
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.
> Money printers bad. Including the Federal Reserve (since its inception 109 years ago, the US Dollar has lost 96% of its value.)
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.
In a deflationary spiral, both unemployment and the cost of goods go down. It is considered a time of prosperity for the layman. Any worldview in which this is a bad thing can only be considered an evil one.
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.
Can you please provide evidence to your claim that deflation leads to lower prices and unemployment? That is a claim that contradicts most modern understandings of economics.
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.
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.
Note that I am not the person who started this comparison.
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.
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-...