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While Tether may indeed be a fractional reserve, that doesn't seem like an existential threat to bitcoin. At any given time, a small scale bitcoin holder (<100

While Tether may indeed be a fractional reserve, that doesn't seem like an existential threat to bitcoin. At any given time, a small scale bitcoin holder (<1000BTC) can liquidate their entire position on Coinbase and withdraw USD to their bank account within a few days. A large holder would have to be more careful, but the market is big enough to liquidate 10,000 BTC over a week or two with minimal price impact. Given this, we can see from revealed preferences that most small and large bitcoin holders are not liquidating their positions for USD. Whether or not Tether is a fractional reserve doesn't really change this. That said, if Tether is revealed to be a fractional reserve, it would almost certainly be a huge short term shock to the system for bitcoin. Liquidity between exchanges would be shot, and the news would scare many investors away from the market. I wouldn't be surprised to see an 80% short term drawdown in that scenario, similar to when Mt Gox crashed. But again, this doesn't really change the long term dynamics I described above, since holder's ability to liquidate BTC for USD was never an issue.

arcticbull 6y ago
Re: fractional reserve. Fractional reserve banking without a backstop is dreadful and was a major contributor to the Great Depression. Luckily, we learned from that and created the FDIC. It's not at all the same thing and you cannot consider fractional reserve banking to be equivalent to fractional reserve banking with a backstop. The mechanics are different too, where a bank loans money it doesn't have and leaves itself with a negative balance until the loan is repaid (which btw, also has to be backed very carefully). They're just printing money to buy BTC and pump it. Last, they also don't owe you any money or other assets if you try and withdraw. They can say no, and tell you to stuff it. Read their T&Cs on their website. > That said, if Tether is revealed to be a fractional reserve... What do you mean? Their lawyer admitted it in court two years ago. [1] [1] https://www.coindesk.com/tether-lawyer-confirms-stablecoin-74-percent-backed-by-cash-and-equivalents https://www.coindesk.com/tether-lawyer-confirms-stablecoin-7...
- bb88 6y ago
  So here's the scheme (or scam depending on your point of view): 1. Tether exchanges BTC for USDT 2. Tether prevents people from exchanging USDT for USD 3. Tether immediately sells their newly gained BTC for USD 4. Ideally Tether would back USDT with a 1:1 in assets in USD. Point #4 is under debate. But since #2 exists it's unclear that even if #4 is true, Tether would stop a run on USDT. What it really looks like is that Tether figured out a way to extract capital out of the crypto market by buying assets and replacing them with worthless IOU's. Meanwhile the founders have walked out the back door with suitcases of cash.
wpietri 6y ago
> While Tether may indeed be a fractional reserve, that doesn't seem like an existential threat to bitcoin. Depends on how much Tether's driven the current bubble. A 90% fall from peak is perfectly plausible; that's where it was 2 years ago. And it could go much further. Will Bitcoin vanish? No, but it after a whole new set of people have their fingers burned, it could become effectively irrelevant. It's important to remember that the supply of new cryptocurrencies is basically infinite. Bitcoin has a brand recognition advantage over the others, but if its brand becomes "a giant vehicle for fraud that people lost absurd amounts of money in", there are plenty of other ways for speculators and marks to gamble.
- ur-whale 6y ago
  >Bitcoin has a brand recognition advantage over the others It's a little more than brand recognition: there's also a network effect involved (à la Facebook / WhatsApp) that makes it hard for the other cryptos to compete even though they may have better tech. There's also the hashing power, which - if you leave the tree-hugging arguments aside for a second - secures the network integrity quite effectively and is hard to match by contenders.
  - wpietri 6y ago
    It'll be interesting to see how much network effect is left after a significant brand hit. One of the purposes of exchanges is to cross-connect networks. Quitting Facebook is hard, because you need to get all your friends to move. But if you're just a speculator seeking volatility and liquidity, switching is pretty easy. The hashing power will decline drastically in a crash, as many existing miners will become uneconomical. If that happens, I'll be very interested to see where that mining power goes. Another currency? A 51% attack on the way out the door?

arcticbull 6y ago

Re: fractional reserve. Fractional reserve banking without a backstop is dreadful and was a major contributor to the Great Depression. Luckily, we learned from that and created the FDIC. It's not at all the same thing and you cannot consider fractional reserve banking to be equivalent to fractional reserve banking with a backstop. The mechanics are different too, where a bank loans money it doesn't have and leaves itself with a negative balance until the loan is repaid (which btw, also has to be backed very carefully). They're just printing money to buy BTC and pump it. Last, they also don't owe you any money or other assets if you try and withdraw. They can say no, and tell you to stuff it. Read their T&Cs on their website. > That said, if Tether is revealed to be a fractional reserve... What do you mean? Their lawyer admitted it in court two years ago. [1] [1] https://www.coindesk.com/tether-lawyer-confirms-stablecoin-74-percent-backed-by-cash-and-equivalents https://www.coindesk.com/tether-lawyer-confirms-stablecoin-7...

bb88 6y ago
So here's the scheme (or scam depending on your point of view): 1. Tether exchanges BTC for USDT 2. Tether prevents people from exchanging USDT for USD 3. Tether immediately sells their newly gained BTC for USD 4. Ideally Tether would back USDT with a 1:1 in assets in USD. Point #4 is under debate. But since #2 exists it's unclear that even if #4 is true, Tether would stop a run on USDT. What it really looks like is that Tether figured out a way to extract capital out of the crypto market by buying assets and replacing them with worthless IOU's. Meanwhile the founders have walked out the back door with suitcases of cash.

wpietri 6y ago

> While Tether may indeed be a fractional reserve, that doesn't seem like an existential threat to bitcoin. Depends on how much Tether's driven the current bubble. A 90% fall from peak is perfectly plausible; that's where it was 2 years ago. And it could go much further. Will Bitcoin vanish? No, but it after a whole new set of people have their fingers burned, it could become effectively irrelevant. It's important to remember that the supply of new cryptocurrencies is basically infinite. Bitcoin has a brand recognition advantage over the others, but if its brand becomes "a giant vehicle for fraud that people lost absurd amounts of money in", there are plenty of other ways for speculators and marks to gamble.

ur-whale 6y ago
>Bitcoin has a brand recognition advantage over the others It's a little more than brand recognition: there's also a network effect involved (à la Facebook / WhatsApp) that makes it hard for the other cryptos to compete even though they may have better tech. There's also the hashing power, which - if you leave the tree-hugging arguments aside for a second - secures the network integrity quite effectively and is hard to match by contenders.
- wpietri 6y ago
  It'll be interesting to see how much network effect is left after a significant brand hit. One of the purposes of exchanges is to cross-connect networks. Quitting Facebook is hard, because you need to get all your friends to move. But if you're just a speculator seeking volatility and liquidity, switching is pretty easy. The hashing power will decline drastically in a crash, as many existing miners will become uneconomical. If that happens, I'll be very interested to see where that mining power goes. Another currency? A 51% attack on the way out the door?