4 ms·

Well, the downside is capped at "you lose all the money you invested". I think. Did I miss something?

by cwp 5y ago

hermitdev 5y ago
In general, yeah, you're capped at everything you invested basically ceasing to exist. Unless you bought on margin. Then, you can end up owing money, even if the asset is worthless. Not crypto related, but one of the things that made the financial collapse of 2008 so much worse were the number of institutions that were over leveraged at the time and couldn't make the margin calls when assets started tanking. The fund I worked for at the time was leveraged as high as 40:1 at one point around that period. We exited the crisis leveraged closer to 10:1. The problem with firms being overleveraged is when the margin call comes, it starts a snowball effect. To make the margin call, you have to liquidate assets, most likely at a loss, which further drives asset prices in the market down, increasing margin requirements in a vicious feedback loop. It's not uncommon for a firm hit with a big margin call like this to end up having to sell everything for pennies on the dollar. I won't name names, but I worked a few high profile blowups during my tenure in finance, one of which was the very high profile bankruptcy of one of the banks that was allowed to fail in the US another was a boutique hedge fund that doubled down on a bad energy bet. Neither was pretty. But, in both cases, the root cause was the same: failure to properly understand the risk of the investments they were making either in part or in whole. Data quality in the risk system at the large bank was especially atrocious, BTW.
- landemva 5y ago
  Another thing that made 2008 worse was bank regulators napping for a few years. Those ratings on mortgage debt stunk and nobody cared.
- cwp 5y ago
  Heh, yeah. I think that falls under "lose everything you invested". If you invested more than you have, well, you lose more than you have. ¯\_(ツ)_/¯
sbierwagen 5y ago
That is a much worse risk than basically any other investment! If you buy gold, the price will fluctuate, but it won't be lost. If you bought the Dow at the peak in 1929 and held it all the way to the bottom then you lost 89% of your money, but it didn't actually go to zero. When Ponzi schemes evaporate, the money disappears. You can sign on to whatever class action lawsuit comes out of it, but the lawyers are going to eat most of the proceeds. It's more options trading than "investing", and Robinhood's profits demonstrate that most people lose money on options. Blockfi's yields remind me of money market funds in 2008. They looked like bank accounts, and paid out mostly sane yields, but the fine print said "not a bank account, may evaporate". Well, when it threatened to evaporate, everyone freaked out: https://www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp https://www.investopedia.com/articles/economics/09/money-mar... When the NFT staking people are advertising yields of 132%, https://twitter.com/Route2FI/status/1492940519965605890 https://twitter.com/Route2FI/status/1492940519965605890 that's a huge blinking red sign that says SCAM SCAM SCAM, but 9.25% isn't as big of a warning as it should be. The moral hazard of every market bubble is sophisticated actors chasing yield on the way up, then claiming you were swindled, bamboozled, and had no idea what you were getting into, and urgently need a bailout when the bubble pops.
- thebean11 5y ago
  It's unlikely that every single borrower would default just like it's unlikely every stock in an index fund would go to zero. I wouldn't really compare it to options trading, junk bonds are a much better comparison. Lower potential return but also much less likely you would lose money than with options. Obviously the devil is in the details, it's not clear if/how these loans are secured.
  - CPLX 5y ago
    There’s no reason at all to think that a complete and total default is unlikely. It’s far from certain but it’s certainly plausible that the value of nearly all cryptocurrency’s will collapse to nothing at all.
    - 5y ago

Well, the downside is capped at "you lose all the money you invested". I think. Did I miss something?

by cwp 5y ago

Well, the downside is capped at "you lose all the money you invested". I think. Did I miss something?

In general, yeah, you're capped at everything you invested basically ceasing to exist. Unless you bought on margin. Then, you can end up owing money, even if the asset is worthless. Not crypto related, but one of the things that made the financial collapse of 2008 so much worse were the number of institutions that were over leveraged at the time and couldn't make the margin calls when assets started tanking. The fund I worked for at the time was leveraged as high as 40:1 at one point around that period. We exited the crisis leveraged closer to 10:1. The problem with firms being overleveraged is when the margin call comes, it starts a snowball effect. To make the margin call, you have to liquidate assets, most likely at a loss, which further drives asset prices in the market down, increasing margin requirements in a vicious feedback loop. It's not uncommon for a firm hit with a big margin call like this to end up having to sell everything for pennies on the dollar. I won't name names, but I worked a few high profile blowups during my tenure in finance, one of which was the very high profile bankruptcy of one of the banks that was allowed to fail in the US another was a boutique hedge fund that doubled down on a bad energy bet. Neither was pretty. But, in both cases, the root cause was the same: failure to properly understand the risk of the investments they were making either in part or in whole. Data quality in the risk system at the large bank was especially atrocious, BTW.

landemva 5y ago
Another thing that made 2008 worse was bank regulators napping for a few years. Those ratings on mortgage debt stunk and nobody cared.
cwp 5y ago
Heh, yeah. I think that falls under "lose everything you invested". If you invested more than you have, well, you lose more than you have. ¯\_(ツ)_/¯

sbierwagen 5y ago

That is a much worse risk than basically any other investment! If you buy gold, the price will fluctuate, but it won't be lost. If you bought the Dow at the peak in 1929 and held it all the way to the bottom then you lost 89% of your money, but it didn't actually go to zero. When Ponzi schemes evaporate, the money disappears. You can sign on to whatever class action lawsuit comes out of it, but the lawyers are going to eat most of the proceeds. It's more options trading than "investing", and Robinhood's profits demonstrate that most people lose money on options. Blockfi's yields remind me of money market funds in 2008. They looked like bank accounts, and paid out mostly sane yields, but the fine print said "not a bank account, may evaporate". Well, when it threatened to evaporate, everyone freaked out: https://www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp https://www.investopedia.com/articles/economics/09/money-mar... When the NFT staking people are advertising yields of 132%, https://twitter.com/Route2FI/status/1492940519965605890 https://twitter.com/Route2FI/status/1492940519965605890 that's a huge blinking red sign that says SCAM SCAM SCAM, but 9.25% isn't as big of a warning as it should be. The moral hazard of every market bubble is sophisticated actors chasing yield on the way up, then claiming you were swindled, bamboozled, and had no idea what you were getting into, and urgently need a bailout when the bubble pops.

thebean11 5y ago
It's unlikely that every single borrower would default just like it's unlikely every stock in an index fund would go to zero. I wouldn't really compare it to options trading, junk bonds are a much better comparison. Lower potential return but also much less likely you would lose money than with options. Obviously the devil is in the details, it's not clear if/how these loans are secured.
- CPLX 5y ago
  There’s no reason at all to think that a complete and total default is unlikely. It’s far from certain but it’s certainly plausible that the value of nearly all cryptocurrency’s will collapse to nothing at all.
  - 5y ago