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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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".
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.
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.
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!
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?
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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).
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
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.
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.
> 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.
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.
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."
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.
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.
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.
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 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.
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.
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.
”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…
> 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 ?
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.
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.
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.
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.
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.
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.
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
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.
332 comments
[ 6.2 ms ] story [ 311 ms ] thread> What does that mean? Essentially that we’re exposed to the risk of something going wrong with Aave itself and not being able to get our money back. (Aave’s own explanation of its risks is here.) In order to withdraw our money from Aave, Aave actually needs to have the money we want to withdraw. When we deposited USDC collateral on Aave, Aave lends out that USDC to other users who deposit their own collateral on Aave. At the time of this writing, about 53% of Aave’s USDC is lent out.
Author states that they only have "a couple hundred dollars" risked on this trade. Seems that they're just looking to win Internet points by being able to say that they shorted Tether.
That is the exact opposite of the reality (and misses the entire point of the article).
The point is that shorting tether is likely to be enormously profitable, but you won't be able to collect your profits
This is because no well capitalized and stable broker or exchange will touch Tether, and the only counterparties who might lend you the Tether to short are extremely likely to go bankrupt when Tether does collapse.
So, you'll put your millions of dollars at risk on deposit, pay your interest, and end up with a $100 million or whatever profit, owed to you by a now-bankrupt exchange, so your profit will never arrive at your bank account, and your best case is suing the husk of a bankrupt exchange whose shady owners absconded to a non-extradition country.
The trade is bad because only disreputable and insufficiently capitalized counter-parties will touch it, not because Tether is great in any way.
Absolutely not. I think tether is garbage that benefits almost noone except its creators.
I'm just amused by the fact that stability of a bad thing is increased because betting against it is worse than for it.
> The point is that shorting tether is likely to be enormously profitable, but you won't be able to collect your profits.
Hence not profitable at all. :-)
Betting for it is risky, betting against it is risky. Maybe that's a huge part of its stability? Like stability on the edge of the knife held over lava pit. Nobody benefits from going to either side despite equilibrium being uncomfortable?
Also the question is, do people really want to call them on their promises. That's another thing noone would benefit from.
The most likely theory at this point is that most of it is FTX-style IOUs from other crypto companies marked at absurd pre -crypto winter valuations, which will collapse like a house of cards the instant they are touched or even exposed to light.
what's your source for that? Tether itself admitted that isn't true: https://cointelegraph.com/news/tether-to-reduce-secured-loan...
They announced they are curbing this activity so maybe it brought them more loss than gain?
They still probably didn't leak mucj tether this way. But I now see that it's not that 66 bln of dollars changed hands, but most of it in crypto valued at bull market prices. So if people wanted to cash out into dollars they would probably collapse. But why would people want to cash out into dollars en masse and pay tax on that?
And if they want to cash out into crypto there's no problem becuse the crypto is cheap now so tether doesn't need to give away much for each USDT they redeem.
Because they think Tether will collapse. It will happen slowly, then all at once.
Because they see it as a likely loss, and would rather get some return than nothing. A taxable gain is always better than a loss.
Even if the gains were in other crypto and are now being cashed out via Tether to $USD, it's better to realize those gains in $USD and pay 0%, 15%, or 20% capital gains taxes (depending on your income bracket), rather than lose it all due to Tether becoming worthless. Manageable but certain cost vs unpredictable likely total loss.
Yes I agree that those forces are minimal for Tether (and crypto in general) vs other investments. But it seems at most like a minor second- or third-order effect; technically existing but not practically moving (or stabilizing) the markets.
I'll take the long side of the Tether bet for 30% a year (I'll buy one-year Tether forwards at 70c).
I'm not as creditworthy as Goldman, but for small amounts, it's pretty close. I could collateralize the trade with my house, and in any case I don't have the kind of correlated portfolio that means if Tether goes bust, I can't pay you. But enough about me - some trader at Goldman will absolutely do the same deal! Maybe they can even do it for 72c.
There is a market-clearing price for this trade if done between two creditworthy parties. I don't know what that price is because there isn't a big public market for it, but if you shop the trade around, you'll find a price.
The people bemoaning they can't short Tether mean they can't short it at what looks like it should be the right price, say, paying 5% a year to borrow it. But that's not the right price! That's the price that already includes you taking a lot of wrong-way counterparty risk. Against Goldman, the price is 20% or 30% or something, and you can do the trade, but you don't want to.
So the fair price of one-year Tether forwards is 75c or whatever, but the spot price is clearly $1.00. How do you reconcile this in financial markets terms, that the prices don't converge? Same reason other commodity futures might have backwardation - holding Tether provides some value to its owners. Like having steel today allows you to build a skyscraper and start collecting rent, so spot steel trades higher than future steel if the construction business is good. In Tether's case, that value is the freedom to participate in other crypto trades, or perhaps to escape even riskier assets in China, or something else.
The whole ecosystem currently remains a giant confidence game, as Matt Levine described well in a recent article. This doesn't mean there isn't a lot of money to be made - casinos make a lot of money at an activity with no direct economic value - but right now you are best served only putting in money you can easily lose.
There are no broker that will survive to close the short, and you need a broker to short.
(Presumably there is a price at which they do, but also at which nobody's remained interested.)
It has been more than 5 years since they were audited. By their own admission, they have 10 billion of their 66 billion dollars in unsecured loans and "other investments".
An org whose entire raison d' etre is to hold money should be pretty open to outside audits. It should actually be a pretty easy audit.
Why have they been foot-dragging so long?
Money is also a giant confidence game. Any human system is that. It’s all made up.
Even for contemporary fiat currencies today this is neither historically nor theoretically true. Currencies gain their value largely from being convenient in settling trades and being a measure of value when calculating costs, risks and profits. Ultimately, it does not really matter what this money is based on e.g. gold, paper or digital information.
For anybody interested in this perspective and in a more general criticism of fiat money I strongly recommend reading "Ethics of Money Production" by Jörg Guido Hülsmann. (1)
(1) https://books.google.de/books/about/Ethics_of_Money_Producti...
Just because we made something up doesn't mean there aren't different levels of stability for that made up model, or different levels of real world results from acting on those models.
I know for my part, I made non-trivial money on Compound shorting MKR, LINK, and UNI (the Uniswap token) with BTC/ETH as collateral.
[1] Whether you replace "scam" with "confidence game" is irrelevant to this point.
Or is the whole idea that it's somehow deeply insightful to not make this distinction?
> Still, just over half the collateral on Aave is ETH or stETH, and another 13% is wBTC. Aave’s designed to liquidate positions before the become under-collateralized. Let’s hope that happens fast enough if Tether depegs.
That sounds like you still have counterparty risk with regular crypto going to 0 due to pool liquidation (your collateral is not custodially held, but is in a pool).
(The author reduces this value by levering up a cycle, but that's optional.)
[1] https://news.ycombinator.com/item?id=34302128
Like the way the short works is you put in $20 usdc, borrow $100usdt, transform it to $120usdc. But those $120usdc can’t leave the platform as otherwise you could just never pay back the $100usdt loan.
Huh? With the way Compound and Aave work, the borrowed amount is already off the platform and can leave and forget about the debt (and collateral). Though you wouldn’t be able to borrow at that ratio.
If you put up 100 USDC, then 85 USDT can be removed from the platform and converted to 85 USDC. So yes, you’re still down 15% in the case of total platform colapse, but not 100%
The fact that it sounds like you have to show 100usdc to do the trade is irrelevant as you can do this trade multiple times to build whatever position. In a traditional equities setting they skip the “show 100 USDC then remove 85 usdc” by just saying that margin maintenance for an 85 usdt short is 15 usdc. When people talk about potential losses it is the 15 USDC that matters, not the 100 USDC you need to cycle (because 100 USDC is more of a mechanical inconvenience of not having a real brokerage offered short, not money at play).
If confidence collapses, tether will collapse and the rest of these ‘defi’ platforms will turn out not to be as decentralised as they thought, as they also depend on the confidence game.
How does "loss of confidence" translate into the smartcontract no longer working, and the USDC not being redeemable for anything of value? Those are completely orthogonal dynamics.
The entire argument is based on this magic thinking of "it will all go up in flames at the same time for the same reason because it's all correlated, man".
[1]: 1.07/(1-0.12) = 1.22
He’s essentially gambling $46/yr to get a $450 payout if Tether collapses.
Just around 100%. That's not massive for crypto gambling.
You could just buy BTC and have 600% in less than 3 years if only BTC won't break out of its 12 year trend.
And that's a very conservative gamble.
BTC doesn't have to win mass adoption for it to set new highs, it just has to be the "store of value" (i know, i know) for enough people and for the next QE cycle to start in 3 years to get going again
That's like putting a match to gunpowder and claiming based on the trend of the first few microseconds, the flame will engulf the world.
It's more like putting a match to a gunpowder and theorizing that at some point some equilibrium will be reached at greater volume than currently observed.
Future returns on BTC cannot be compared to the S&P!
Do you believe a popular pyramid scheme has demonstrated utility? If a pyramid scheme made people a lot of money in the past does that suggest it has long term value?
I do speculate that part of the appeal of a non-loan/investment based store of value to very rich people is that hey wish they could keep all their wealth in a vehicle that didn’t involve investing in the overall good of society, but that is a childish wish - wealth is inextricably linked with the prosperity of the society in which it is enmeshed. A billionaire in a society ravaged by disease, hunger, and conflict, shorn of the comforts of science and technology, will be poorer by far, in terms of objective measures, than a billionaire in a society where the people are educated and science and medicine are widely available, especially over he generations.
That's why NFTs are not scarce even though they are unique.
Personally I would also wish that billionaires kept their wealth in things unrelated to the real world. Because when they put it in the real world they hike up the price for everybody by creating illusion of demand that really isn't there because they won't use what they bought.
(1) - If you buy bitcoin now you might be part of increasing the price of a bitcoin by increasing its rarity through the means of losing your private keys. But this doesn't benefit you.
(2) - We're reaching the point where our carrying capacity is starting to hit limits. Maybe in a few hundred years we'll have space colonies to keep increasing the population, but: 1) This won't benefit you, as you probably won't be around then; 2) There will be other collectibles that the then population may be more interested in. It is the case that certain collectibles are incredibly rare (single digit numbers), but also cost less then $10k, simply because there are not that many interested collectors.
(3) - If you sink most of your investments into crypto this limits the ability of your wealth to grow outside of your collection.
That's where the tulip analogy comes in. Not an implication that crypto is useless, just like tulips, but that a speculative mania can leave a novel and in-demand product (asset class, in this instance) with prices that are much higher than they will be at the steady-state in the future where both adoption and production is much higher.
I will probably buy Coinbase stock if Tether finally blows up, but before that the speculation is too much for me to commit to anything.
It took COVID to get Bitcoin back up. That's it
Not history, just a rare event.
No one cares about Bitcoin anymore.
(But feel free to short bitcoin of course - not the kind of risk I would take.)
Error. 1 long streak before COVID and a large decline then too.
And 2 times jumping around during COVID-19 = over a very short period.
The ~$300 one immortalized in this parody music video :
"Blame it on MT.GOX" :
https://youtu.be/K2ku1A5Ox8U
(Note that this one was NOT about MT.GOX going bankrupt...)
Now you are seeing the opposite: Eg. https://www.barrons.com/articles/banks-fleeing-crypto-bitcoi...
I'm not replying here again fyi. I don't care about crypto anymore ( went out at 2018 before the crash), I do care about others losing money :).
If you think it will rise again, fine. Go for it.
As you say, borrowing was cheap. There was no reason for it to decline after 2018 till 2020...
Reminder: other speculative assets didn't decline then :)
As I said before, Covid, with boredom and free money. No one used Bitcoin as investment and not many would borrow money for buying crypto.
Still: no one cares about Bitcoin anymore except some select people that live in the past.
VTSAX-and-chill is gambling also. But the risks are so wildly different that Tether is closer to buying lottery tickets than index funds.
Everyone does what they want with their money but there seems to have been an explosion of “massive returns” content that I think is generally harmful.
(I’m neither saying that this post is or isn’t harmful.)
If your VTSAX ends up being worth nothing long-term, there is almost certainly no chance that your currency survived the same event.
Why do you think it’s similar to holding cash?
Basically, a bet on VTSAX is underpinned by faith in the dollar. If either one crashes the other is worthless.
It always sounds weird to me when someone uses the present continuous tense to refer to the rate of change of stock prices. Like, how are you taking the one-sided derivative of a fractal?
However, what it really means is that nobody can predict future performance, even with historical data. I think it's negativity bias that this phrase is used to apply to downside; it should also be used when considering upside. (The reason, I think, is many people prefer to miss out on upside rather than experience downside, ie we are risk-averse.)
Over some future time frame, the S&P will go up again. It doesn't feel like that will be soon, but as I always admit to myself: I am really bad at predicting the future.
Where it goes next is anybody's guess.
At such high interest rates, you need to close the deal soon otherwise you are bleeding your capital really fast. The interest compounding also means you are losing your money in a compounding fashion.
If the author started shorting Tether 5-6 years they’d never turn cashflow positive and they’d be nearing bankruptcy where they lose all their monies.
https://news.ycombinator.com/item?id=28796356
Hence the last line - "for the eventual pleasure of saying “I told you so”."
Tether effectively has a risk-free golden goose, it seems quite foolish to slaughter it in an attempt to gain slightly more alpha.
2. if they're not doing anything shady, how come they can't be more transparent than they are?
That's easy. I can assume US treasuries will be here in 3 month, or a year or 10 years, and almost everyone will agree with me.
Almost no one would agree with close to 100% certainty that Tether will be here in 10 years or a year or even 3 months.
Now, that does subject you to uncontrollable variation, but if you look at the chart, it's historically stayed at a very low level. Even the occasional spike you see is only for a day or two and has little impact on the annual average. [2]
Furthermore, the whole time, you're getting credited for interest accrued on your collateral. (1.18% on the USDC here -- so, all in all about a 2% annual carrying cost, not a bit issue if you think the crypto market are on borrowed time!)
"But what about the case where USDT borrowing surges and you have a persistent high rate?"
If that happens at all, it's probably because everyone else is dumping Tether, meaning its price is probably falling, and it's a great time to close the short anyway!
[1] https://app.aave.com/reserve-overview/?underlyingAsset=0xdac...
[2] People often miss that "omg high interest rate" for a few days translates into a very little expense in absolute terms. It was especially bad when banks were complaining about having to do one-off overnight loans on a very temporary basis for 4% rather than 2%, supposedly meriting Fed intervention!
That is assuming crypto rates are like USD bank rates.
Do you know any structural reason the rates can’t spike to a Megapercent (annualised) rate or higher? If you are being charged interest, and the rate spikes, you could lose your collateral quite quickly (and it seems likely trading would be stopped so you might not even be able to close out).
https://compound.finance/markets/USDT
It saturates at a pretty low level.
I have no idea what you mean by the expression "like USD bank rates" though. Fixed? (bank rates aren't that, necessarily)
Which is actually 10% if you include dividends. But it's about 6.56% if you adjust for inflation.
https://totalrealreturns.com/
There is an argument that deflationary currencies are bad because people will not want to spend them as they accrue value, but that value has to go somewhere; either stays in your pocket with deflationary currency or goes to some billionaire's fourth yacht's heated seats with inflationary.
The 1970s were bad, but we had a 40-year period of low, stable inflation, which is the goal. Now's not great, but it's not the Federal Reserve's fault; between a global plague, supply chain disruption, and a land war in Europe, inflation is up across the globe: https://tradingeconomics.com/country-list/inflation-rate
Compare that to the economic chaos that was much more common before the rise of strong central banks and I'd say "Federal Reserve baaaaad" is somewhat lacking in nuance.
Printing 13 trillion dollars for corona stimulus, yep.
Though I guess that's more the fault of the legislature than anyone else.
The FED can't be totally blamed, respective governments share a big part of the incompetency
Should that really be a surprise when we see the growing disparity in income between the average worker and the CEOs? The rich have been keeping a greater and greater percentage of corporate profits for themselves. And it now isn't being siphoned off by the government because the rich have also lobbied to have the top-income tax rates lowered and lowered.
I bet that 109 years after Bitcoin/ETH/FTX/Dogecoin/etc will be created they will fare far worse.
I remember when this blockchain was created. People were transferring Doge to each other for fun. That was the whole point, it was just goofing around and making jokes. And now you can buy it at ATMs in gas stations. What a world we live in.
I also would not store value long term in dollars anyway - I would care more about other things. Where cryptocurrencies are even worse when compared to dollars.
You don't seem to understand how fiat money is supposed to work, and how a stable economy is supposed to function.
Deflation is bad (where the value of a dollar increases relative to the average cost of products). Your economy can enter a deflationary spiral which is super bad and disruptive.
So ideally you would have a stable value relative to products and services. But how do you deal with progress and productivity increases? A farmer 100 years ago was plowing fields with a horse, and now can handle much larger farms with a tractor. We're producing a lot more of other resources and finished goods as well, and these are purchased by a much larger population. Well, you increase the money supply to match the economic activity.
Keeping inflation to exactly 0% is very difficult, and erring on the side of inflation isn't so bad, so that's what we try to do. The point isn't to have each dollar stored in a bank to automatically (magically) increase in relative value (to products and services) without any effort. If you want more money, you need to make more money.
Sure, inflation is cool because it shrinks our debt to nothing, but then what is our economy and social structure based on? Only lies. Even children can see now how this system is collapsing under the weight of its own absurdity and demoralization. I've had it to here with these banker-centric rationalizations of why it's a good thing that the average employee gets screwed harder and harder each year.
The last major deflationary event in the United States was the Great Recession and personally that seems a little out of touch to be calling that a time of prosperity for the layman.
They're also quite possibly inversely correlated (e.g. Tether collapsing could also tank Bitcoin).
BTC per Tether goes up, BTC per anything else is unchanged, without considering the loss due to yet another crypto blowup.
I wouldn't be so sure. Demand is denand, doesn't matter if it comes from $ or USDT. Exodus from tether will reduce supply for everybody that wants to buy other crypto even if they pay in hard currency.
Of course this could be offset by reduced interest in buying crypto from everyone else because tether is folding. Only time will tell hiw it plays out.
If I were to bet I think I'd bet on cryptos falling then. But I can't be sure.
I went looking last year and couldn’t find anyone allowing this feature. Binance had something close but only on their .com site not their American .us site
The legal way to do it would be with an old-fashioned paper contract between two known parties. But as web3isgoinggreat.com has made clear to me, the more effective way to do it is to use some crypto site for the deal. If you're lucky, the tools/sites/curriencies you've used will just have gone out of business. And even if not, apparently you can just say, "Oops, I used the money to do other things so I'm not giving anything back to you."
https://www.coingecko.com/en/categories/decentralized-option...
AKA counterparty risk.
In which case I am happy to extend my time horizon. We could go back 15 years, where all of this stuff was worthless. We could go back 20 years where the online currencies Beenz and Flooz had just collapsed into worthlessness. We could go back 150 years to the wildcat banking area, the last time we let chumps just make up magic money, which was such a disaster that it was foundational to the modern regulatory regime. Or how about we go back 300 years and look at the South Seas Bubble and Isaac Netwon's time reforming British currency so it was less of an exploitable clusterfuck.
You're right, extending my time horizon really does help put cryptocurrency in perspective.
It feels very similar to the thought stopping techniques that destructive cults use. Trump's word for this is "fake news".
After all, big money tried: spreading cheap FUD at the worst moment (FTX), betting heavy against... It didn't work out for them, but they tried and relative to their size, it didn't even cost them that much, I'm sure and it was worth the shot (as despicable as it looks).
Couldn't the same have been said of FTX right up until the moment its insolvency became public knowledge?
I'm curious what you consider safer ways to double ones money in crypto.
For the majority of folks to be convinced, Tether both has to exist for a long while, and provide a basic level of introspection into how the reserves are handled.
* 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).
Every time it dips under $0.99, there's a chance it goes straight to $0 and cannot be cashed out anywhere.
Since Tether is fully backed the chance is really small.
https://www.coindesk.com/markets/2021/03/30/tether-takes-ste...
"as noted later in the article the composition of Tether’s assets is not spelled out in the attestation"
Meaning they may be backed by loans or fraud coins or anything.
being able to pay out some portion of "deposits" is obviously not evidence of being "fully backed".
If you want evidence of being fully backed they have attestations on their transparency page that breaks down their assets.
Have people actually seen the receipts for this? I'm skeptical that this actually occurs.
Also, you can short crypto on CME. Is that rigged too?
I think your first point is fair, but I think you're overselling things here. Yyou can only short Bitcoin, not all crypto, but the real issue is that the Bitcoin futures curve is in backwardation, which implies a certain financing cost to go short.
The settlements for the various contracts can be found here[0]. Nearly all of the volume is concentrated in the front month contract (Jan 23 at the moment), so if you want to be able to trade any size at all, you'll have to do so by selling that contract.
However, the issue is that the future price is consistently lower than the spot price. So if you bought a Bitcoin today and then sold a future for the front month (i.e. so you locked in the price you could sell the Bitcoin at in the future), you would be guaranteed to lose money.
And you will effectively have to do exactly that every month: as your short contract approaches expiry, you'll need to roll it over for the next month's contract. As the front month gets closer to expiry, its price will trend to the Bitcoin spot price, meaning you'll have to buy it back at a higher price then you will get when you sell the next month contract.
I don't have access to the historical settlement prices for the CME contracts at the moment, so I can't estimate the exact roll cost you'd pay over the course of a year. If we guess that it's about $100 each roll, then you'd pay $1200 over the course of the year per bitcoin (as well as having to commit 50% of the price of bitcoin in margin).
The OP posted 185 USDC net as collateral and has a short position of 450 USDT, which he's paying about 13% on. In the CME case, the collateral requirements are higher (50% of the notional shorted) but the financing cost is lower (less than 10% of notional shorted).
[0] https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bi...
Otherwise someone would offer cheaper options and undercut all the existing market makers.
Is not true, you have been able to short in derivatives markets for ages and frequently get paid for it.
> I am 100% convinced that’s by design.
Nothing about crypto prevents to one entity from lending to another at a rate of their own choosing.
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.
In contrast, UST only had LUNA as collateral, and ended up minting more and more LUNA as UST fell off it's peg.
That's not to say that DAI doen't have it's own risks as they have a lot of potentially censorable USDC as collateral, there could be situations where they can't liquidate borrowers fast enough if a collateral falls in USD price too fast, and they run their own oracles which could fail or misbehave. Not to mention the DAO has a fair amount of governance drama on a regular basis. But those risks are quite distinct from what took luna/ust down.
DAI is not an algorithmic stable coin. (1) While DAI is based on smart contracts it is backed by a mixture of other cryptos and stable coins (not Tether but USDC, IRC). If you really want to keep money in the form of stable coins please use either DAI or USDC and not Tether.
(1) https://kriptomat.io/cryptocurrencies/dai/what-is-dai/
Why would Genesis be still alive after Tether's collapse ?
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 assure you, we can trivially look back to see the variance.
I mean, how could we calculate a sharpe without knowing the return and volatility, we always use historical for both, its one measure of how we track portfolio returns, which again, are backward looking.
Though sharpe isn't used as much as it was 15-20 years go due to it penalizing volatility in positive returns as much as it penalizes volatility in losses.
Crypto has nothing to do with this.
Are you certain if your facts here because something doesn’t seem right.
VAR makes abut more sense but still uses a backward looking variance. Sharpe never uses a forward lookingvariance as this makes no sense as you don’t know your returns ahead of time unless you are Madoff
And for VAR we either typically use historical VAR or Monte Carlo, again because you never know your returns ahead of time so trying to do any risk measure with estimates returns is useless
Estimated Sharpe for a trade would be what you think the return should be (e.g. fair market value - current price) divided by the estimated future variance. This is what you estimate for VAR and compare to your risk tolerance. The eventual accuracy of the estimates will determine whether it's a ho-hum trade or a black swan that wipes you out. Black swans are essentially situations in which variance estimates were completely wrong (as opposed to return estimates).
Variance is a function of a bunch of things (and correlated with every damn thing). Simply taking historical variance and assuming it will be the same in the future is the laziest possible solution. Black Swan events have woken people up to platykurtic Gaussians and the fact that many real life distributions aren't even Gaussian. This is why you use Monte Carlo, because it doesn't need to assume a kurtosis or even Gaussianity, but is more computationally intensive, but not terribly so, but also suffers from low sample number at the tails, so it's not that accurate in extreme situations either. An additional red flag is that, if you have to use MC, then you don't know the distribution underlying the process, and if you don't know that there might be other things you don't know.
Crypto is one of the newest markets, so we understand a lot less about its extreme conditions and the tails are very uncertain. Even with Monte Carlo I wouldn't trust crypto Sharpes one iota.
Sorry if you know all this stuff. Thought I should clarify where we probably actually agree but may be thinking of it differently.
You're basically betting that the crypto market will collapse ... but the exchange/broker/whoever you're dealing with will survive and have the necessary funds to cover your short.
It all seems rather contradictory to me --- you think it's all going to collapse ... but at the same time you're willing to bet that your little chosen piece of it will somehow survive just fine. And not shutdown withdrawals at the first sign of trouble (like others have done) so you can collect your payout.
This is almost like playing the lottery --- winning is pure dumb luck beyond your control.
By coincidence, my wife was watching The Big Short (2015) with our eldest two kids tonight, it really is worth watching [again] if you've not seen it [recently].
> ... but the exchange/broker/whoever you're dealing with will survive and have the necessary funds to cover your short
Michael Burry has pretty much exactly that conversation with Goldman in the film.