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The reality doesn't matter, what does is what people agree on. As long as people are willing to exchange them for $1 it can continue indefinitely. The incentive

The reality doesn't matter, what does is what people agree on. As long as people are willing to exchange them for $1 it can continue indefinitely. The incentive is clear: why would people invested in crypto actively nuke their investment? As long as their investment grow, reality and rationality really doesn't matter. I think it's a good lesson because that behavior is not unique to crypto.

gruez 5y ago
>The incentive is clear: why would people invested in crypto actively nuke their investment? That doesn't really make any sense. Holders of USDT are people who sold their crypto, ie. people who aren't invested. Moreover, it's unclear how switching to a more reputable stablecoin would nuke their investment. At best it's a prisoners dilemma and I'm skeptical that everyone chose the "cooperate" option rather than the "defect" option.
- tarsinge 5y ago
  If they are holders of USDT they have not sold their crypto. The risk is on the USDT/USD pair, and the game will continue while people (like you said) think they have exited to USD by holding USDT.
  - ethbr0 5y ago
    USDT isn't actually crypto, right? It's just an asset that a lot of crypto exchanges use, because it's more convenient to do so than usual (regulated) financial alternatives. Tether will probably just evaporate in the face of alternative stablecoin competition, before volume decreases to a point that a sudden devaluation kills it off.
    - x4e 5y ago
      It is an ERC-20 token on the Ethereum blockchain, so yes it is a cryptocurrency. There is good stablecoin competition in USDC, or, my favourite, DAI. Unfortunately I think exchanges like Binance are somewhat in kahoots with USDT which is why they will not move off it.
      - ethbr0 5y ago
        Thanks for the correction! :) Re: kahoots, it feels like the answer to "What's the easiest way to generate returns?" has one obvious answer: increase leverage. And what prevents leverage? Regulation. So wouldn't it be great if you could create an unregulated instrument via which you could balloon the amount of funds you had to play with?
  - gruez 5y ago
    >If they are holders of USDT they have not sold their crypto Technically USDT is a cryptocurrency but I can't think of a real reason why someone who cashed out of BTC would keep it in USDT rather than cashing out for real USD (the FDIC insured and in a licensed bank kind). If you're only cashing out for a short period of time and are planning to buy back, then you're not really "out", and I doubt that all the tether that's out there is coming from people who wants out for only a week or two.
    - TigeriusKirk 5y ago
      You might want to keep it on-chain, which a stablecoin would allow you to do. I can't think of a good reason to keep it in USDT that sits on a centralized exchange, but maybe someone has one.
    - graeme 5y ago
      Because the ecosystem has been offerint 8-20% interest to hold USDT and put it in a savings account or defi contract. It was seeing these rates that made me believe the market was a ponzi. Somehow the system has created a strong incentive to hold USDT rather than USD in the form of divergent interest rates. And 12% is crazy high: Madoff claimed returns of 10%. There could be a benign explanation but my bet would be that various market actors are propping up the system short run with unsustainable interest payoffs to stave off withdrawal attempts to maintain the Tether peg. Huge house of cards.
      - gruez 5y ago
        > Because the ecosystem has been offerint 8-20% interest to hold USDT and put it in a savings account or defi contract. 1. do the defi contracts not accept other stablecoins? Does USDT have a disproportionately higher interest rate than more reputable stablecoins? 2. This situation (large amount of USD being parked in USDT, people warning that it's a fraud) has existed since the last run-up (2017-2018), before defi got popular. So while there might be people parking their money in USDT to earn absurdly high interest rates, I don't think that's the whole story. It'll also be interesting to see how much USDT is locked in defi contracts vs that's issued.
bobthepanda 5y ago
As with all classic Ponzi schemes it will collapse when some external event causes a bunch of people to demand convertibility at once, and they can't meet their overvalued rate. This is, after all, how Bernie Madoff got caught, how bank runs generally start, and how most currency crises occur.
- jkepler 5y ago
  If you look at the classic definition of a ponzi scheme, bitcoin doesn't fit, though central bank fiat currencies do. See macro economist Lyn Alden's excellent article for the full explanation: https://www.lynalden.com/bitcoin-ponzi-scheme/ https://www.lynalden.com/bitcoin-ponzi-scheme/
  - mbroncano 5y ago
    I see a key difference: we choose to participate in a Ponzi scheme, whereas the central bank fiat system is one we are forced to participate in, just by means of being born in a particular country. There’s no choice involved, being backed by the full force and legal monopoly of the state. That’s a key difference many tend to gloss over when pursuing this characterization.
    - deleted 5y ago
      [deleted]
  - raziel2701 5y ago
    The details may be different but the active ingredient is fraud.
- gruez 5y ago
  > As with all classic Ponzi schemes it will collapse when some external event causes a bunch of people to demand convertibility at once, and they can't meet their overvalued rate. But why is everyone keeping their USD in USDT? For ponzis it makes sense because you're promised a rate of return, but for USDT you're essentially losing money every day due to inflation.

gruez 5y ago

>The incentive is clear: why would people invested in crypto actively nuke their investment? That doesn't really make any sense. Holders of USDT are people who sold their crypto, ie. people who aren't invested. Moreover, it's unclear how switching to a more reputable stablecoin would nuke their investment. At best it's a prisoners dilemma and I'm skeptical that everyone chose the "cooperate" option rather than the "defect" option.

tarsinge 5y ago
If they are holders of USDT they have not sold their crypto. The risk is on the USDT/USD pair, and the game will continue while people (like you said) think they have exited to USD by holding USDT.
- ethbr0 5y ago
  USDT isn't actually crypto, right? It's just an asset that a lot of crypto exchanges use, because it's more convenient to do so than usual (regulated) financial alternatives. Tether will probably just evaporate in the face of alternative stablecoin competition, before volume decreases to a point that a sudden devaluation kills it off.
  - x4e 5y ago
    It is an ERC-20 token on the Ethereum blockchain, so yes it is a cryptocurrency. There is good stablecoin competition in USDC, or, my favourite, DAI. Unfortunately I think exchanges like Binance are somewhat in kahoots with USDT which is why they will not move off it.
    - ethbr0 5y ago
      Thanks for the correction! :) Re: kahoots, it feels like the answer to "What's the easiest way to generate returns?" has one obvious answer: increase leverage. And what prevents leverage? Regulation. So wouldn't it be great if you could create an unregulated instrument via which you could balloon the amount of funds you had to play with?
- gruez 5y ago
  >If they are holders of USDT they have not sold their crypto Technically USDT is a cryptocurrency but I can't think of a real reason why someone who cashed out of BTC would keep it in USDT rather than cashing out for real USD (the FDIC insured and in a licensed bank kind). If you're only cashing out for a short period of time and are planning to buy back, then you're not really "out", and I doubt that all the tether that's out there is coming from people who wants out for only a week or two.
  - TigeriusKirk 5y ago
    You might want to keep it on-chain, which a stablecoin would allow you to do. I can't think of a good reason to keep it in USDT that sits on a centralized exchange, but maybe someone has one.
  - graeme 5y ago
    Because the ecosystem has been offerint 8-20% interest to hold USDT and put it in a savings account or defi contract. It was seeing these rates that made me believe the market was a ponzi. Somehow the system has created a strong incentive to hold USDT rather than USD in the form of divergent interest rates. And 12% is crazy high: Madoff claimed returns of 10%. There could be a benign explanation but my bet would be that various market actors are propping up the system short run with unsustainable interest payoffs to stave off withdrawal attempts to maintain the Tether peg. Huge house of cards.
    - gruez 5y ago
      > Because the ecosystem has been offerint 8-20% interest to hold USDT and put it in a savings account or defi contract. 1. do the defi contracts not accept other stablecoins? Does USDT have a disproportionately higher interest rate than more reputable stablecoins? 2. This situation (large amount of USD being parked in USDT, people warning that it's a fraud) has existed since the last run-up (2017-2018), before defi got popular. So while there might be people parking their money in USDT to earn absurdly high interest rates, I don't think that's the whole story. It'll also be interesting to see how much USDT is locked in defi contracts vs that's issued.

bobthepanda 5y ago

As with all classic Ponzi schemes it will collapse when some external event causes a bunch of people to demand convertibility at once, and they can't meet their overvalued rate. This is, after all, how Bernie Madoff got caught, how bank runs generally start, and how most currency crises occur.

jkepler 5y ago
If you look at the classic definition of a ponzi scheme, bitcoin doesn't fit, though central bank fiat currencies do. See macro economist Lyn Alden's excellent article for the full explanation: https://www.lynalden.com/bitcoin-ponzi-scheme/ https://www.lynalden.com/bitcoin-ponzi-scheme/
- mbroncano 5y ago
  I see a key difference: we choose to participate in a Ponzi scheme, whereas the central bank fiat system is one we are forced to participate in, just by means of being born in a particular country. There’s no choice involved, being backed by the full force and legal monopoly of the state. That’s a key difference many tend to gloss over when pursuing this characterization.
  - deleted 5y ago
    [deleted]
- raziel2701 5y ago
  The details may be different but the active ingredient is fraud.
gruez 5y ago
> As with all classic Ponzi schemes it will collapse when some external event causes a bunch of people to demand convertibility at once, and they can't meet their overvalued rate. But why is everyone keeping their USD in USDT? For ponzis it makes sense because you're promised a rate of return, but for USDT you're essentially losing money every day due to inflation.