3 ms·

As always, Matt Levine is shockingly informative: https://www.bloomberg.com/opinion/articles/2021-10-07/matt-levine-s-money-stuff-looking-for-tether-s-money ht

by _ah 5y ago

As always, Matt Levine is shockingly informative: https://www.bloomberg.com/opinion/articles/2021-10-07/matt-levine-s-money-stuff-looking-for-tether-s-money https://www.bloomberg.com/opinion/articles/2021-10-07/matt-l... Key quote: 1. You get a bunch of Bitcoins. 2. You slice them into junior and senior claims. 3. You sell the junior claims to people who want levered Bitcoin: people who want margin loans against their Bitcoins, etc., who want to gamble on Bitcoin without putting up too much cash. 4. You sell the senior claims as stablecoins: “Even if Bitcoin drops by 50%,” you say, “these coins will still be worth $1, because they are backed by $2 worth of Bitcoin.”

JumpCrisscross 5y ago
Tranching is a thing. It's fine. It works, if you don't pretend AAA-rated securities, which have--and historically had--a very low risk of losses, are both safe and liquid. If tranching were all Tether were doing, it would just be fraud. You can't sell a senior tranche on a pool of assets as a fully-backed security and call it a day. But whatever, Tether did that and more, nobody cared, we're on the next tier of the Narcissist's Prayer [1]. The new problem is we have circumstantial evidence that at least some of Tether's assets are Chinese developers' commercial paper. That's a risky asset. Even before Evergrande and Sinic defaulted, it was a speculative asset. (Now it's a distressed one.) If that's what we know they're in, how bad is the rest of their balance sheet? Tether claims to be over-collateralising their crypto-backed loans by 30%. An LTV of 77% will start losing money in a 25% crash. Bitcoin...does that a lot? For an asset they understand, they've set their risk limits woefully low. If that's what we know they're doing, how thin is the rest of their capital? We're going to see a run on Tether. Not might. Statistically, the assets Tether holds will sometimes go down. Sometimes a lot. Most of the time, that will be fine. Some times, however, Tether will get a redemption at the same time. (Assets going down and investors redeeming things are correlated.) Most of the time, that will work out. Some times, however, Tether will need time to avoid their own selling driving down the asset's price. Most of the time, that will be fine. Some of the time, however, the person making the redemption request won't have that time. They'll blow up, and they'll blame Tether. This will prompt additional redemptions, which will force the aforementioned fire sale until, in all likelihood, Tether kills its domain and steals the money. (The last part is a novelty really only afforded by their setup.) [1] https://news.ycombinator.com/item?id=28880280 https://news.ycombinator.com/item?id=28880280 [2] https://www.bloomberg.com/news/articles/2021-10-07/can-you-trust-stablecoin-tether-5-takeaways-from-bw-s-cover-story https://www.bloomberg.com/news/articles/2021-10-07/can-you-t...
- miohtama 5y ago
  Likely in the case of a bank run, Tether cannot redeem even a cent because their organisation is unable to serve any customer outside few selected one (no staff, no processed). However the damage to retail US investors should be quite well contained, as I do not feel they have significant Tether holdings. It is mostly (shady?) professional traders (Alameda, Celsius) and offshore (China) that use Tether. Tether is 50% of crypto trading. Tether stopping would case quite interesting escape into either Bitcoin or some other liquid widely available pair (ETH). Prices would shoot up until real dollar offramps can pick it up. Long term USDC, USDP snd other more robust stablecoins can pick up the slack. Tether is not too big råto,fail, though is massive.
  - JumpCrisscross 5y ago
    > the damage to retail US investors should be quite well contained, as I do not feel they have significant Tether holdings This is my understanding. The U.S. regulatory apparatus appears to have deterred Tether from getting too involved here. China, too, seems to have taken the hint.
    - miohtama 5y ago
      Also in the US you can use real ACH dollars, not Italian plastic surgery dollars.
  - tobltobs 5y ago
    The "Tether crash" == "Bitcoin surge" story is just BS. Just stop believing this crap and think about a better exit strategy for your crypto wealth.
- gitfan86 5y ago
  But they can print more tether, buy bitcoin with that tether, and give you bitcoin as redemptions. This could go on for a very long time.
  - hackingforfun 5y ago
dustingetz 5y ago
https://archive.md/cQVJl https://archive.md/cQVJl
deleted 5y ago
[deleted]

by _ah 5y ago

JumpCrisscross 5y ago

Tranching is a thing. It's fine. It works, if you don't pretend AAA-rated securities, which have--and historically had--a very low risk of losses, are both safe and liquid. If tranching were all Tether were doing, it would just be fraud. You can't sell a senior tranche on a pool of assets as a fully-backed security and call it a day. But whatever, Tether did that and more, nobody cared, we're on the next tier of the Narcissist's Prayer [1]. The new problem is we have circumstantial evidence that at least some of Tether's assets are Chinese developers' commercial paper. That's a risky asset. Even before Evergrande and Sinic defaulted, it was a speculative asset. (Now it's a distressed one.) If that's what we know they're in, how bad is the rest of their balance sheet? Tether claims to be over-collateralising their crypto-backed loans by 30%. An LTV of 77% will start losing money in a 25% crash. Bitcoin...does that a lot? For an asset they understand, they've set their risk limits woefully low. If that's what we know they're doing, how thin is the rest of their capital? We're going to see a run on Tether. Not might. Statistically, the assets Tether holds will sometimes go down. Sometimes a lot. Most of the time, that will be fine. Some times, however, Tether will get a redemption at the same time. (Assets going down and investors redeeming things are correlated.) Most of the time, that will work out. Some times, however, Tether will need time to avoid their own selling driving down the asset's price. Most of the time, that will be fine. Some of the time, however, the person making the redemption request won't have that time. They'll blow up, and they'll blame Tether. This will prompt additional redemptions, which will force the aforementioned fire sale until, in all likelihood, Tether kills its domain and steals the money. (The last part is a novelty really only afforded by their setup.) [1] https://news.ycombinator.com/item?id=28880280 https://news.ycombinator.com/item?id=28880280 [2] https://www.bloomberg.com/news/articles/2021-10-07/can-you-trust-stablecoin-tether-5-takeaways-from-bw-s-cover-story https://www.bloomberg.com/news/articles/2021-10-07/can-you-t...

miohtama 5y ago
Likely in the case of a bank run, Tether cannot redeem even a cent because their organisation is unable to serve any customer outside few selected one (no staff, no processed). However the damage to retail US investors should be quite well contained, as I do not feel they have significant Tether holdings. It is mostly (shady?) professional traders (Alameda, Celsius) and offshore (China) that use Tether. Tether is 50% of crypto trading. Tether stopping would case quite interesting escape into either Bitcoin or some other liquid widely available pair (ETH). Prices would shoot up until real dollar offramps can pick it up. Long term USDC, USDP snd other more robust stablecoins can pick up the slack. Tether is not too big råto,fail, though is massive.
- JumpCrisscross 5y ago
  > the damage to retail US investors should be quite well contained, as I do not feel they have significant Tether holdings This is my understanding. The U.S. regulatory apparatus appears to have deterred Tether from getting too involved here. China, too, seems to have taken the hint.
  - miohtama 5y ago
    Also in the US you can use real ACH dollars, not Italian plastic surgery dollars.
- tobltobs 5y ago
  The "Tether crash" == "Bitcoin surge" story is just BS. Just stop believing this crap and think about a better exit strategy for your crypto wealth.
gitfan86 5y ago
But they can print more tether, buy bitcoin with that tether, and give you bitcoin as redemptions. This could go on for a very long time.
- hackingforfun 5y ago

dustingetz 5y ago

https://archive.md/cQVJl https://archive.md/cQVJl

deleted 5y ago

[deleted]