7 ms·

I’ve been shorting a few bitcoin-related public companies on the theory that in a run on Tether they will have to liquidate large bitcoin holdings and bring dow

by paulgb 5y ago

I’ve been shorting a few bitcoin-related public companies on the theory that in a run on Tether they will have to liquidate large bitcoin holdings and bring down the rest of the market. It’s not as direct, but I’m less worried about counterparty risk. I wrote up my thesis here: https://paulbutler.org/2021/betting-against-bitcoin/ https://paulbutler.org/2021/betting-against-bitcoin/

hossbeast 5y ago
Very interesting read, and it's refreshing to read some contrary opinions on the topic.
- vkou 5y ago
  The only contrary opinion would be the obvious one - that their correlation to tether's fortunes are not 1:1, and that shorting them gives you a bounded upside, and an unlimited, completely uncorrelated downside. If the Fed prints another trillion dollars tomorrow, their stock price could double, wiping out your short...
tuesdayrain 5y ago
>I’ve been shorting a few bitcoin-related public companies on the theory that in a run on Tether they will have to liquidate large bitcoin holdings I doubt a run on tether would even cause a 50% drop in BTC price. Hope your account doesn't blow up when Bitcoin inevitably reaches 1 million per coin ;)
- panarky 5y ago
  Either markets work or they don't. Sure, in the short term, unregulated markets can be manipulated. But Tether's been around more than seven years, more than enough time for the "smart money" to profit by obliterating them. You can sell Tether on Coinbase for U.S. Dollar deposits to your bank account. The fact that Tether maintains its 1:1 peg to the dollar is a signal that maybe all the smart guys who have been confidently predicting its imminent and inevitable failure for the last seven years might be missing something.
  - paulgb 5y ago
    > But Tether's been around more than seven years, more than enough time for the "smart money" to profit by obliterating them. How would the smart money profit from obliterating them? If you’re referring to a Soros/GBP style trade, how would one borrow enough USDT to pull it off?
    - panarky 5y ago
      Somebody holds large chunks of the $70.5 billion in USDT. Presumably, people who hold hundreds of millions of the stuff are well aware of every accusation made against Tether. If they wanted to, they could trade their USDT for actual US fiat on a 1:1 basis if they thought USD was worth more than USDT. The really smart money with large crypto stashes could borrow USDT with crypto as collateral, and trade the USDT for greenbacks.
      - paulgb 5y ago
        A lot of folks in the “tether will fail spectacularly” camp also believe that its failure poses a systemic risk to other crypto, both because tether holds positions that they would have to quickly liquidate in a run, and because USDT makes up a large component of the daily trading volume for many coins. So I suspect there’s not much overlap between people who believe they could break tether and people sitting on a large crypto stash to use as collateral.
      - seanhunter 5y ago
        > The really smart money with large crypto stashes could borrow USDT with crypto as collateral, and trade the USDT for greenbacks. Have you looked into the mechanics of this trade? The crypto loans I'm aware of are all significantly overcollateralized. You would have to pledge say 1m BTC to get 0.8m BTC worth of USDT which you could then sell for dollars. If you succeeded USDT tanks, everyone who holds USDT would be rushing for the exit, wiping out the crypto you pledged as collateral also. So you succeed in losing 20% of your money on the initial USDT trade and almost all of the value of the crypto assets you pledged for the loan as well. These markets are nowhere near as flexible and liquid as regular fx - I would be amazed if you ended up making money overall on this kind of strategy and the execution risk is significant.
- pjc50 5y ago
  50% price fluctuations are normal in bitcoin. 31273 on 26 Aug, 65701 on 20 Oct.
  - tata71 5y ago
    What if Tether had rugpulled on 27 Aug?
csstanton 5y ago
Insightful article. Any particular Bitcoin mining companies you’re bearish on?
- paulgb 5y ago
  Thanks. I mostly bet against the two largest, RIOT and MARA. The smaller ones can be very volatile and thinly traded.
kirse 5y ago
Interesting thoughts, I like the miner analysis, esp. since a lot of these companies have moved from OTC to NQ listed recently. I keep a watchlist just to observe how they react to BTC pricing, and pondering some of your thesis it's got me revisiting the thought that miners might be a great target for a "short the VIX" style strategy. There's also the new "BITO" ETF which is most certainly being used by some big brain quants to build some asset basket that nets them a near zero-risk long-term win. Wish I had more financial brainpower to put to it.
dmichulke 5y ago
Have you considered longing a BTCUSDT perpetual and shorting an equivalent BTCUSDC contract or e.g. borrow and sell BTC if you dislike the other stablecoins? The big risk in your play is that the crowd in a panic will select another stable coin for going on the sideline IF AND ONLY IF such a coin is available. If not they will buy the most stable non-stablecoin which is ... drumroll ... bitcoin. Of course, long-term effects might be different.
- gunshai 5y ago
  How do you do this add a US citizen. Dydx maybe?
fitzn 5y ago
Really interesting article. Thanks for sharing. I was going to ask which tickers you short so I could continue learning, but I see it's RIOT and MARA. Just curious: is it intentional not to mention them in the article?
- paulgb 5y ago
  Thanks. Yes, I wanted the underlying message of the article to be “you’re not stupid for avoiding bitcoin” rather than “yolo into this short with me” :). I did create a synthetic tracking portfolio to keep myself accountable to the bet over time, though: https://twitter.com/paulgb/status/1453111218374389763 https://twitter.com/paulgb/status/1453111218374389763
  - fitzn 5y ago
    Love it, and appreciate your perspective.
challenger-derp 5y ago
Halving risks & information assymetry risks are pretty solid arguments for future headwinds faced by btc miners. Investopedia states that by August 2021, only 2.3M BTC out of the 21M cap remain to be mined (https://www.investopedia.com/tech/what-happens-bitcoin-after-21-million-mined/ https://www.investopedia.com/tech/what-happens-bitcoin-after...). However, what is preventing a fork of bitcoin from addressing this?
- 22c 5y ago
  You can fork BTC to do whatever you want, but it doesn't come with liquidity. In other words, a fork doesn't come with the same amount of inertia.
  - challenger-derp 5y ago
    Suppose BTC is met with a severe logjam as predicted by the author, won't a solution that does not involve mass liquidation (for e.g. a fork) be in demand and eagerly welcomed by existing BTC users?
    - 22c 5y ago
      Adoption of a fork by it's nature essentially requires there be a "liquidation event". If every single BTC user is on board then that's an "easy" game to play, you simply pick a date and coordinate with everyone that the old BTC becomes completely worthless and the new BTC is worth exactly as much as the old BTC. That, of course, would not happen. Even if there were such an event you'd still see people trying to beat the clock and mass liquidate the old BTC while there's still demand, or people immediately liquidating their positions in "new BTC" because they think it's not going to eclipse "old BTC". We have a good real world example of these very things happening with things like BCH and Ethereum Classic still trading quite regularly. Both were the result of some users deciding to move to a fork and some deciding to stay. In traditional markets you could make some parallels with a stock split or demerger.
SZJX 5y ago
Interesting idea. On the topic of shorting Tether itself, maybe I'm missing something obvious, but exchanges like Kraken actually offer margin trading on pairs such as USDT/USD and USDT/EUR. https://support.kraken.com/hc/en-us/articles/227876608-Margi https://support.kraken.com/hc/en-us/articles/227876608-Margi... If somebody (probably a non-US-person who is allowed to do margin trading there) is convinced that Tether will tank, why can't they just go on such exchanges and initiate a short? Is the fear that the exchange itself will become insolvent after the crash, and you won't be able to withdraw your fiat out of it in the end? I'd be curious to hear thoughts on this.

by paulgb 5y ago

hossbeast 5y ago

Very interesting read, and it's refreshing to read some contrary opinions on the topic.

vkou 5y ago
The only contrary opinion would be the obvious one - that their correlation to tether's fortunes are not 1:1, and that shorting them gives you a bounded upside, and an unlimited, completely uncorrelated downside. If the Fed prints another trillion dollars tomorrow, their stock price could double, wiping out your short...

tuesdayrain 5y ago

>I’ve been shorting a few bitcoin-related public companies on the theory that in a run on Tether they will have to liquidate large bitcoin holdings I doubt a run on tether would even cause a 50% drop in BTC price. Hope your account doesn't blow up when Bitcoin inevitably reaches 1 million per coin ;)

panarky 5y ago
Either markets work or they don't. Sure, in the short term, unregulated markets can be manipulated. But Tether's been around more than seven years, more than enough time for the "smart money" to profit by obliterating them. You can sell Tether on Coinbase for U.S. Dollar deposits to your bank account. The fact that Tether maintains its 1:1 peg to the dollar is a signal that maybe all the smart guys who have been confidently predicting its imminent and inevitable failure for the last seven years might be missing something.
- paulgb 5y ago
  > But Tether's been around more than seven years, more than enough time for the "smart money" to profit by obliterating them. How would the smart money profit from obliterating them? If you’re referring to a Soros/GBP style trade, how would one borrow enough USDT to pull it off?
  - panarky 5y ago
    Somebody holds large chunks of the $70.5 billion in USDT. Presumably, people who hold hundreds of millions of the stuff are well aware of every accusation made against Tether. If they wanted to, they could trade their USDT for actual US fiat on a 1:1 basis if they thought USD was worth more than USDT. The really smart money with large crypto stashes could borrow USDT with crypto as collateral, and trade the USDT for greenbacks.
    - paulgb 5y ago
      A lot of folks in the “tether will fail spectacularly” camp also believe that its failure poses a systemic risk to other crypto, both because tether holds positions that they would have to quickly liquidate in a run, and because USDT makes up a large component of the daily trading volume for many coins. So I suspect there’s not much overlap between people who believe they could break tether and people sitting on a large crypto stash to use as collateral.
    - seanhunter 5y ago
      > The really smart money with large crypto stashes could borrow USDT with crypto as collateral, and trade the USDT for greenbacks. Have you looked into the mechanics of this trade? The crypto loans I'm aware of are all significantly overcollateralized. You would have to pledge say 1m BTC to get 0.8m BTC worth of USDT which you could then sell for dollars. If you succeeded USDT tanks, everyone who holds USDT would be rushing for the exit, wiping out the crypto you pledged as collateral also. So you succeed in losing 20% of your money on the initial USDT trade and almost all of the value of the crypto assets you pledged for the loan as well. These markets are nowhere near as flexible and liquid as regular fx - I would be amazed if you ended up making money overall on this kind of strategy and the execution risk is significant.
pjc50 5y ago
50% price fluctuations are normal in bitcoin. 31273 on 26 Aug, 65701 on 20 Oct.
- tata71 5y ago
  What if Tether had rugpulled on 27 Aug?

csstanton 5y ago

Insightful article. Any particular Bitcoin mining companies you’re bearish on?

paulgb 5y ago
Thanks. I mostly bet against the two largest, RIOT and MARA. The smaller ones can be very volatile and thinly traded.

kirse 5y ago

Interesting thoughts, I like the miner analysis, esp. since a lot of these companies have moved from OTC to NQ listed recently. I keep a watchlist just to observe how they react to BTC pricing, and pondering some of your thesis it's got me revisiting the thought that miners might be a great target for a "short the VIX" style strategy. There's also the new "BITO" ETF which is most certainly being used by some big brain quants to build some asset basket that nets them a near zero-risk long-term win. Wish I had more financial brainpower to put to it.

dmichulke 5y ago

Have you considered longing a BTCUSDT perpetual and shorting an equivalent BTCUSDC contract or e.g. borrow and sell BTC if you dislike the other stablecoins? The big risk in your play is that the crowd in a panic will select another stable coin for going on the sideline IF AND ONLY IF such a coin is available. If not they will buy the most stable non-stablecoin which is ... drumroll ... bitcoin. Of course, long-term effects might be different.

gunshai 5y ago
How do you do this add a US citizen. Dydx maybe?

fitzn 5y ago

Really interesting article. Thanks for sharing. I was going to ask which tickers you short so I could continue learning, but I see it's RIOT and MARA. Just curious: is it intentional not to mention them in the article?

paulgb 5y ago
Thanks. Yes, I wanted the underlying message of the article to be “you’re not stupid for avoiding bitcoin” rather than “yolo into this short with me” :). I did create a synthetic tracking portfolio to keep myself accountable to the bet over time, though: https://twitter.com/paulgb/status/1453111218374389763 https://twitter.com/paulgb/status/1453111218374389763
- fitzn 5y ago
  Love it, and appreciate your perspective.

challenger-derp 5y ago

Halving risks & information assymetry risks are pretty solid arguments for future headwinds faced by btc miners. Investopedia states that by August 2021, only 2.3M BTC out of the 21M cap remain to be mined (https://www.investopedia.com/tech/what-happens-bitcoin-after-21-million-mined/ https://www.investopedia.com/tech/what-happens-bitcoin-after...). However, what is preventing a fork of bitcoin from addressing this?

22c 5y ago
You can fork BTC to do whatever you want, but it doesn't come with liquidity. In other words, a fork doesn't come with the same amount of inertia.
- challenger-derp 5y ago
  Suppose BTC is met with a severe logjam as predicted by the author, won't a solution that does not involve mass liquidation (for e.g. a fork) be in demand and eagerly welcomed by existing BTC users?
  - 22c 5y ago
    Adoption of a fork by it's nature essentially requires there be a "liquidation event". If every single BTC user is on board then that's an "easy" game to play, you simply pick a date and coordinate with everyone that the old BTC becomes completely worthless and the new BTC is worth exactly as much as the old BTC. That, of course, would not happen. Even if there were such an event you'd still see people trying to beat the clock and mass liquidate the old BTC while there's still demand, or people immediately liquidating their positions in "new BTC" because they think it's not going to eclipse "old BTC". We have a good real world example of these very things happening with things like BCH and Ethereum Classic still trading quite regularly. Both were the result of some users deciding to move to a fork and some deciding to stay. In traditional markets you could make some parallels with a stock split or demerger.

SZJX 5y ago

Interesting idea. On the topic of shorting Tether itself, maybe I'm missing something obvious, but exchanges like Kraken actually offer margin trading on pairs such as USDT/USD and USDT/EUR. https://support.kraken.com/hc/en-us/articles/227876608-Margi https://support.kraken.com/hc/en-us/articles/227876608-Margi... If somebody (probably a non-US-person who is allowed to do margin trading there) is convinced that Tether will tank, why can't they just go on such exchanges and initiate a short? Is the fear that the exchange itself will become insolvent after the crash, and you won't be able to withdraw your fiat out of it in the end? I'd be curious to hear thoughts on this.