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Honest question. How's Tether imploding different from e.g. a public company suddenly shutting down and its stock price going to zero? I imagine the two scenari

by lhorie 5y ago

Honest question. How's Tether imploding different from e.g. a public company suddenly shutting down and its stock price going to zero? I imagine the two scenarios being similar in the sense that anyone holding tether would eat a big loss, but aside from the event obviously affecting investor sentiment, wouldn't it just be more or less business as usual for other coins? As in, couldn't BTC/ETH/whatever people just use other stablecoins instead? I feel like the risk of full-on panic selling seems more and more unlikely as time goes by and more institutional investors get into crypto. And even if everyone did take out their money at the same time, isn't most of the value actually backed by the dollars of whoever was the biggest fool?

Havoc 5y ago
>I feel like the risk of full-on panic selling seems more and more unlikely as time goes by and more institutional investors get into crypto. Agreed. Tether is special though because it's very big and (imo) very sketchy. So it's more of a "too big to fail - banks" company goes down than some random company. Thankfully other stablecoins are gaining ground
Marazan 5y ago
Because the majority of crypto trades are done in Tether.
diab0lic 5y ago
A large company going bust doesn't imply that demand for other public companies was somehow fabricated. The more apt comparison here would be something along the lines of the recent run up in TSLA being the result of purchasing from the infinite margin bug from Robinhood a while back. It would turn out the demand wasn't real, only there because it was free. The implications for Bitcoin and other crypto also purchased with Tether, or with Bitcoin are a lot bigger than you'd imagine.
lubujackson 5y ago
Tether imploding isn't at all like a public company closing shop, because public companies are Real Things and have public data about sales, revenue, employees, business relationships, etc. And even the ones that implode go through bankruptcy court where their assets are doled out to debtors and shareholders. Tether imploding would be more like a bank run, where you can see YOUR MONEY as a number on the screen then when you go to cash out, you simply can no longer access your money. Or maybe you can withdraw $100 a day, but no more. If and when that happens (or threatens to happen), everyone freaks out and tries to get their money at once - which is exactly why the banking system in the U.S. is backed by the federal government so this doesn't happen. The higher risk is that a good swath of crypto investment is done on leverage, which can increase with the more money you have. So with $100MM and a bit of lying you can go invest 10x your money in crypto and get some fat returns - lets say you go all-in and put $1B in Tether and get an 8% return on your money - thanks to leverage you are actually making 80% return on your $100M (sample #s, but you get the idea). This works great until things blow up, because you don't just lose your $100M, the BANKS that gave you leverage ("margin") lose $900M too, so one idiot taking this gamble can have a massive impact on the banking system as a whole. This isn't just theory either, something akin to this happened about a month ago: https://www.thestandard.com.hk/breaking-news/section/2/168807/Nomura,-Credit-Suisse-take-US$9b-hit-from-Bill-Hwang%27s-Archegos-fund-meltdown https://www.thestandard.com.hk/breaking-news/section/2/16880... And that wasn't even fallout from a Ponzi scheme, but simply from: bad risk management + leverage + minimal oversight + lying. The real stupidity is that these banks have continued to provide margin loans at very low rates with loose oversight, which should remind you of "race-to-the-bottom" mortgage market that blew up housing around 15 years ago. Except now we are talking about hedge funds and billionaires and a billions of dollars being thrown into shitcoins and NFTs. So when this implodes there won't be any collateral at all to rely on.
- mrlaserOO 5y ago
  Ummm how exactly would banks give you 900m for 100m in collateral?! Can you make an example?
  - dan-robertson 5y ago
    It’s not banks but I think the GP is trying to describe a margin loan. Basically you give (say) an exchange $100, ask them to buy $1000 worth of stuff using your $100 as margin, and if the stuff you bought looks like it is going to be worth less than $900 (ie if they would make a loss by selling all your stuff) they will call you and ask for more collateral or, if you are too slow, sell all your stuff for eg $925, leaving you with a less of $75.
- JackFr 5y ago
  To paraphrase: - when a company goes bust you still have shares your share -- no one wants to pay for them with dollars. - when tether implodes you still have your tether, but you can't turn it into dollars because there aren't any dollars to convert it too.
  - fastball 5y ago
    Wasn't that GC's point though? The run-on-a-bank analogy only applies if you are holding Tether when it happens. If you are rightfully paranoid about Tether and therefore don't hold any, what is the damage for you?
    - cortesoft 5y ago
      Isn’t this like saying a run on the banks won’t damage you if you keep your money in a mattress? Even if you don’t keep any money in a bank, banks collapsing would still hurt you. The stock market crashing hurts more than just people who own stock.
      - fastball 5y ago
        Right, but a run on a bank does not necessitate collateral damage. As an example, let's say Capital One has been fractional banking (as they all do) but for some reason people get paranoid about it and there is a run on the bank. Everyone tries to withdraw money Capital One doesn't have. As long as the govt doesn't step in and socialize losses on the back of the taxpayer, you're left with a bunch of people who had "deposits" at Capital One that are now non-existent because Capital One doesn't have any money left. Those people are of course hurt, but the person who only banks with Chase would be hurt how?
dantiberian 5y ago
I just listened to a podcast about this and the guest Bennett Tomlin said these are things that may happen if Tether was shut down by the US government: https://anchor.fm/aviv-milner/episodes/The-Tether-Situation-with-Bennett-Tomlin-Part-2-e1230gp https://anchor.fm/aviv-milner/episodes/The-Tether-Situation-... at 30:57 * Price of BTC/USDT ETH/USDT explodes as people try to exchange Tether to another liquid asset * BTC and ETH start to drop on non-Tether exchanges as people sell and try to get out to fiat currency * Tether collateralises futures contracts, when BTC/USDT spikes, some strange behaviour may happen in derivatives based on Tether. * Tether allegedly is a meaningful percentage of the commercial paper market, if those assets are seized, it may affect that market. * Some S&P500 companies have a lot of Tesla on their books. As BTC/USD drops, that would impact their stock price, and potentially the index overall. * Some shadier crypto exchanges may go under or abscond with client funds in the confusion. A lot of this could happen in a matter of minutes. You could imagine a similar flight to safety happen if Tether was revealed to not have the reserves they claimed to and were unable to redeem client funds. Fun times!

by lhorie 5y ago

Havoc 5y ago

>I feel like the risk of full-on panic selling seems more and more unlikely as time goes by and more institutional investors get into crypto. Agreed. Tether is special though because it's very big and (imo) very sketchy. So it's more of a "too big to fail - banks" company goes down than some random company. Thankfully other stablecoins are gaining ground

Marazan 5y ago

Because the majority of crypto trades are done in Tether.

diab0lic 5y ago

A large company going bust doesn't imply that demand for other public companies was somehow fabricated. The more apt comparison here would be something along the lines of the recent run up in TSLA being the result of purchasing from the infinite margin bug from Robinhood a while back. It would turn out the demand wasn't real, only there because it was free. The implications for Bitcoin and other crypto also purchased with Tether, or with Bitcoin are a lot bigger than you'd imagine.

lubujackson 5y ago

Tether imploding isn't at all like a public company closing shop, because public companies are Real Things and have public data about sales, revenue, employees, business relationships, etc. And even the ones that implode go through bankruptcy court where their assets are doled out to debtors and shareholders. Tether imploding would be more like a bank run, where you can see YOUR MONEY as a number on the screen then when you go to cash out, you simply can no longer access your money. Or maybe you can withdraw $100 a day, but no more. If and when that happens (or threatens to happen), everyone freaks out and tries to get their money at once - which is exactly why the banking system in the U.S. is backed by the federal government so this doesn't happen. The higher risk is that a good swath of crypto investment is done on leverage, which can increase with the more money you have. So with $100MM and a bit of lying you can go invest 10x your money in crypto and get some fat returns - lets say you go all-in and put $1B in Tether and get an 8% return on your money - thanks to leverage you are actually making 80% return on your $100M (sample #s, but you get the idea). This works great until things blow up, because you don't just lose your $100M, the BANKS that gave you leverage ("margin") lose $900M too, so one idiot taking this gamble can have a massive impact on the banking system as a whole. This isn't just theory either, something akin to this happened about a month ago: https://www.thestandard.com.hk/breaking-news/section/2/168807/Nomura,-Credit-Suisse-take-US$9b-hit-from-Bill-Hwang%27s-Archegos-fund-meltdown https://www.thestandard.com.hk/breaking-news/section/2/16880... And that wasn't even fallout from a Ponzi scheme, but simply from: bad risk management + leverage + minimal oversight + lying. The real stupidity is that these banks have continued to provide margin loans at very low rates with loose oversight, which should remind you of "race-to-the-bottom" mortgage market that blew up housing around 15 years ago. Except now we are talking about hedge funds and billionaires and a billions of dollars being thrown into shitcoins and NFTs. So when this implodes there won't be any collateral at all to rely on.

mrlaserOO 5y ago
Ummm how exactly would banks give you 900m for 100m in collateral?! Can you make an example?
- dan-robertson 5y ago
  It’s not banks but I think the GP is trying to describe a margin loan. Basically you give (say) an exchange $100, ask them to buy $1000 worth of stuff using your $100 as margin, and if the stuff you bought looks like it is going to be worth less than $900 (ie if they would make a loss by selling all your stuff) they will call you and ask for more collateral or, if you are too slow, sell all your stuff for eg $925, leaving you with a less of $75.
JackFr 5y ago
To paraphrase: - when a company goes bust you still have shares your share -- no one wants to pay for them with dollars. - when tether implodes you still have your tether, but you can't turn it into dollars because there aren't any dollars to convert it too.
- fastball 5y ago
  Wasn't that GC's point though? The run-on-a-bank analogy only applies if you are holding Tether when it happens. If you are rightfully paranoid about Tether and therefore don't hold any, what is the damage for you?
  - cortesoft 5y ago
    Isn’t this like saying a run on the banks won’t damage you if you keep your money in a mattress? Even if you don’t keep any money in a bank, banks collapsing would still hurt you. The stock market crashing hurts more than just people who own stock.
    - fastball 5y ago
      Right, but a run on a bank does not necessitate collateral damage. As an example, let's say Capital One has been fractional banking (as they all do) but for some reason people get paranoid about it and there is a run on the bank. Everyone tries to withdraw money Capital One doesn't have. As long as the govt doesn't step in and socialize losses on the back of the taxpayer, you're left with a bunch of people who had "deposits" at Capital One that are now non-existent because Capital One doesn't have any money left. Those people are of course hurt, but the person who only banks with Chase would be hurt how?

dantiberian 5y ago

I just listened to a podcast about this and the guest Bennett Tomlin said these are things that may happen if Tether was shut down by the US government: https://anchor.fm/aviv-milner/episodes/The-Tether-Situation-with-Bennett-Tomlin-Part-2-e1230gp https://anchor.fm/aviv-milner/episodes/The-Tether-Situation-... at 30:57 * Price of BTC/USDT ETH/USDT explodes as people try to exchange Tether to another liquid asset * BTC and ETH start to drop on non-Tether exchanges as people sell and try to get out to fiat currency * Tether collateralises futures contracts, when BTC/USDT spikes, some strange behaviour may happen in derivatives based on Tether. * Tether allegedly is a meaningful percentage of the commercial paper market, if those assets are seized, it may affect that market. * Some S&P500 companies have a lot of Tesla on their books. As BTC/USD drops, that would impact their stock price, and potentially the index overall. * Some shadier crypto exchanges may go under or abscond with client funds in the confusion. A lot of this could happen in a matter of minutes. You could imagine a similar flight to safety happen if Tether was revealed to not have the reserves they claimed to and were unable to redeem client funds. Fun times!