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Hi, author here. A liquidity crunch is not the same thing as a fall in Bitcoin's price. A liquidity crunch implies that the people who provide the dollars to th

Hi, author here. A liquidity crunch is not the same thing as a fall in Bitcoin's price. A liquidity crunch implies that the people who provide the dollars to this market (banks, I'm informed) cease doing so because they don't have confidence that the money they lend to provide USD liquidity to fiat on/offramps will be able to be repaid by their counterparties during whatever the maturity period is of the facility. As a result, companies like those on/offramps run out of dollars, and Bitcoin cannot be shifted through those platforms for any price. This happened to the London interbank lending market during the week of 15 September 2008, when LIBOR jumped to 8% and the banks simply stopped providing loans to each other. The reason? Because they weren't sure the assets their counterparties (other banks) were sitting on were worth anything (resi mortgages) and they didn't want to find themselves an unsecured creditor. Mortgages during the subprime crisis didn't fall in price so much as they were impossible to price. This made the credit risk of bank borrowers impossible to price. So funding headed for the doors. Change up the parties a bit and the banks --> offramps, mortgages ---> Bitcoin, and liquidity --> fiat, as in 2008. There is simply no way that, as Bitcoin goes parabolic, the on/offramps are prepared to handle a change in the weather which results in a huge influx of withdrawals unless their own bank balances rise significantly. My informed supposition is that most such entities should have high-cost liquidity facilities with commercial banks that can step in and address some of that withdrawal demand. As then, a liquidity shock (availability of dollars) could break the system without needing a precipitous drop in the market price of Bitcoin.

mrb 9y ago
I've already pointed out you don't seem to understand how Bitcoin exchanges operate: https://twitter.com/zorinaq/status/935016692270489600 https://twitter.com/zorinaq/status/935016692270489600 Banks don't provide liquidity to Bitcoin exchanges. Exchanges don't borrow from banks. Exchanges don't trade with their money, or their users' money. Exchange users deposit money to exchanges, and exchanges dumbly execute orders specified by their users. That's it. For example BTC/USD bids on an exchange's order book are 100% backed up by dollars that have already been deposited by users on this exchange's bank account.
- pjbyrne 9y ago
  No, they aren't, because the price of BTC is growing exponentially without necessarily having dollar deposits grow at the same time. Here's a worked example. In a closed system: Day 1: $1 buys 1000 Marmotcoin Day 2: $1000 buys 1 Marmotcoin Day 3: 1000 Marmotcoin attempts to sell for $1,000,000 That's what the initial phases of a liquidity shock will look like. I can almost guarantee you that retail operations all have bank liquidity facilities to deal with sudden upswings in withdrawal demand, otherwise they have to commit house money to cover it.
  - panarky 9y ago
    Your article assumes that to sell on Day 3, the exchange has to borrow $1,000,000 from a bank. That's now how an exchange works. For the price to be 1,000,000 USD for 1,000 BTC, there must exist buyers with 1,000,000 USD and sellers with 1,000 BTC with orders to trade at that price. There's no "house money" since exchanges aren't casinos where the players bet against the house. Buyers and sellers are transacting with each other, matching buy orders with sell orders. The exchange doesn't have to borrow the USD from a bank, the buyers bring the USD to the trade. There is no "liquidity shock" unless the exchange steals or loses the buyers' USD. And that's a different argument.
    - pjbyrne 9y ago
      You're still missing the point. If the exchange is providing a fiat on/offramp, then it will have to manage the possibility that the amount of USD deposits is massively exceeded by the amount of Bitcoin deposits which may one day call on the USD deposits to be redeemed. For example. If I bought $1000 for 1 BTC from Coinbase on January 1st 2017 and try to exit that position on Jan 1 2018, once I sell that $10,000 bitcoin to Coinbase I'll be withdrawing $9000 more than I put in. Coinbase has to get the $9000 from somewhere, whether that be from other deposits which are more recent than mine, or from its own trading operations. If you have a large number of people trying to withdraw a large number of dollars at the same time, your offramp could run out of dollars or, in the alternative, be required to (a) draw down a facility with a bank or (b) sell assets. In an environment where the asset price is falling rapidly it may not be able to avail itself of either option. As occurred in 2008, with dire consequences.
dahdum 9y ago
In what way does an exchange like Coinbase require liquidity through bank loans to operate? If you sell bitcoin for USD you're selling to another buyer who deposited USD. It's just shifting balances around.
modeless 9y ago
> the people who provide the dollars to this market (banks, I'm informed) You are misinformed. The people who provide the dollars to this market are the customers of the exchanges. It seems like you are not familiar with how a currency exchange works. A currency exchange does not buy or sell the currencies traded at the exchange. All it does is match buyers with sellers, like an auction house. Buyers must deposit all the dollars that they use to buy before buying, and sellers must deposit all the bitcoins they sell before selling. When someone withdraws dollars after selling, the exchange simply transfers to them the dollars that the buyer deposited earlier. It already has the dollars on hand and does not need to borrow them from a bank, ever. Now, not all places you can sell Bitcoin for dollars are currency exchanges. There are also brokers that do trade directly with their customers, rather than matching customers together to trade. In fact, Coinbase provides this service. However, they can simply obtain dollars by trading at currency exchanges themselves, and they adjust the price they offer to match the exchange price (plus a fee) so they can't just run out of money. Again, there is no need to borrow dollars from a bank. Furthermore, trading volumes at true currency exchanges absolutely dwarf the volume of any Bitcoin broker. All that said, nothing prevents a crash in the Bitcoin price. If too many people want to sell and not enough want to buy, the price will go down a lot. But this is true in any market, and it has nothing at all to do with bank lending. Not even a little bit.
- tradersam 9y ago
  > You are misinformed. The people who provide the dollars to this market are the customers of the exchanges. It seems like you are not familiar with how a currency exchange works. I fear you're misinformed. Besides localBitcoins, how does one get fiat to an exchange? That's right — a bank. Exchanges like Bitfinex only survive because of things like Tether, which requires other fiat accepting exchanges. If all exchanges were like Bitfinex, there would be a liquidity crunch, as the OP is saying.
  - modeless 9y ago
    No, that's not what OP is saying at all. Read his posts. He's under the impression that exchanges take out bank loans to pay dollars to their customers, which is false. When banks refuse to deal with an exchange like Bitfinex, it has nothing to do with liquidity concerns. It's because banks are required by law to verify who they are transferring money to (AML/KYC), and they don't believe Bitfinex abides by those laws (they are right). BTW, Bitfinex recently reopened bank deposits and withdrawals.
JohnnyConatus 9y ago
Not saying you're wrong, but this argument is irresolvable unless you can give evidence that either 1) Coinbase/similar are using bank facilities to provide liquidity, and in essence, being the market makers. Or 2) They're using market makers who might bow-out in a similar fashion.
decentralised 9y ago
You are misinformed and you make a terrible contribution to the crypto community by spreading your misunderstanding as truth. A little less ego and a little bit more self-doubt would do you good since you can't even tell the difference between volume and frequency Preston.

mrb 9y ago

I've already pointed out you don't seem to understand how Bitcoin exchanges operate: https://twitter.com/zorinaq/status/935016692270489600 https://twitter.com/zorinaq/status/935016692270489600 Banks don't provide liquidity to Bitcoin exchanges. Exchanges don't borrow from banks. Exchanges don't trade with their money, or their users' money. Exchange users deposit money to exchanges, and exchanges dumbly execute orders specified by their users. That's it. For example BTC/USD bids on an exchange's order book are 100% backed up by dollars that have already been deposited by users on this exchange's bank account.

pjbyrne 9y ago
No, they aren't, because the price of BTC is growing exponentially without necessarily having dollar deposits grow at the same time. Here's a worked example. In a closed system: Day 1: $1 buys 1000 Marmotcoin Day 2: $1000 buys 1 Marmotcoin Day 3: 1000 Marmotcoin attempts to sell for $1,000,000 That's what the initial phases of a liquidity shock will look like. I can almost guarantee you that retail operations all have bank liquidity facilities to deal with sudden upswings in withdrawal demand, otherwise they have to commit house money to cover it.
- panarky 9y ago
  Your article assumes that to sell on Day 3, the exchange has to borrow $1,000,000 from a bank. That's now how an exchange works. For the price to be 1,000,000 USD for 1,000 BTC, there must exist buyers with 1,000,000 USD and sellers with 1,000 BTC with orders to trade at that price. There's no "house money" since exchanges aren't casinos where the players bet against the house. Buyers and sellers are transacting with each other, matching buy orders with sell orders. The exchange doesn't have to borrow the USD from a bank, the buyers bring the USD to the trade. There is no "liquidity shock" unless the exchange steals or loses the buyers' USD. And that's a different argument.
  - pjbyrne 9y ago
    You're still missing the point. If the exchange is providing a fiat on/offramp, then it will have to manage the possibility that the amount of USD deposits is massively exceeded by the amount of Bitcoin deposits which may one day call on the USD deposits to be redeemed. For example. If I bought $1000 for 1 BTC from Coinbase on January 1st 2017 and try to exit that position on Jan 1 2018, once I sell that $10,000 bitcoin to Coinbase I'll be withdrawing $9000 more than I put in. Coinbase has to get the $9000 from somewhere, whether that be from other deposits which are more recent than mine, or from its own trading operations. If you have a large number of people trying to withdraw a large number of dollars at the same time, your offramp could run out of dollars or, in the alternative, be required to (a) draw down a facility with a bank or (b) sell assets. In an environment where the asset price is falling rapidly it may not be able to avail itself of either option. As occurred in 2008, with dire consequences.

dahdum 9y ago

In what way does an exchange like Coinbase require liquidity through bank loans to operate? If you sell bitcoin for USD you're selling to another buyer who deposited USD. It's just shifting balances around.

modeless 9y ago

> the people who provide the dollars to this market (banks, I'm informed) You are misinformed. The people who provide the dollars to this market are the customers of the exchanges. It seems like you are not familiar with how a currency exchange works. A currency exchange does not buy or sell the currencies traded at the exchange. All it does is match buyers with sellers, like an auction house. Buyers must deposit all the dollars that they use to buy before buying, and sellers must deposit all the bitcoins they sell before selling. When someone withdraws dollars after selling, the exchange simply transfers to them the dollars that the buyer deposited earlier. It already has the dollars on hand and does not need to borrow them from a bank, ever. Now, not all places you can sell Bitcoin for dollars are currency exchanges. There are also brokers that do trade directly with their customers, rather than matching customers together to trade. In fact, Coinbase provides this service. However, they can simply obtain dollars by trading at currency exchanges themselves, and they adjust the price they offer to match the exchange price (plus a fee) so they can't just run out of money. Again, there is no need to borrow dollars from a bank. Furthermore, trading volumes at true currency exchanges absolutely dwarf the volume of any Bitcoin broker. All that said, nothing prevents a crash in the Bitcoin price. If too many people want to sell and not enough want to buy, the price will go down a lot. But this is true in any market, and it has nothing at all to do with bank lending. Not even a little bit.

tradersam 9y ago
> You are misinformed. The people who provide the dollars to this market are the customers of the exchanges. It seems like you are not familiar with how a currency exchange works. I fear you're misinformed. Besides localBitcoins, how does one get fiat to an exchange? That's right — a bank. Exchanges like Bitfinex only survive because of things like Tether, which requires other fiat accepting exchanges. If all exchanges were like Bitfinex, there would be a liquidity crunch, as the OP is saying.
- modeless 9y ago
  No, that's not what OP is saying at all. Read his posts. He's under the impression that exchanges take out bank loans to pay dollars to their customers, which is false. When banks refuse to deal with an exchange like Bitfinex, it has nothing to do with liquidity concerns. It's because banks are required by law to verify who they are transferring money to (AML/KYC), and they don't believe Bitfinex abides by those laws (they are right). BTW, Bitfinex recently reopened bank deposits and withdrawals.

JohnnyConatus 9y ago

Not saying you're wrong, but this argument is irresolvable unless you can give evidence that either 1) Coinbase/similar are using bank facilities to provide liquidity, and in essence, being the market makers. Or 2) They're using market makers who might bow-out in a similar fashion.

decentralised 9y ago

You are misinformed and you make a terrible contribution to the crypto community by spreading your misunderstanding as truth. A little less ego and a little bit more self-doubt would do you good since you can't even tell the difference between volume and frequency Preston.