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The most important point in this article is that whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties

by axg11 4y ago

The most important point in this article is that whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine. Nobody should be under the illusion that Tether is decentralized or anything other than a bet on Bitfinex.

tlb 4y ago
You have to predict what those well-capitalized parties will do during a market panic. Decision making seems to change quickly when half the money has just disappeared, to focus on salvaging as much as possible.
- Salgat 4y ago
  Exactly. It's not whether Bitfinex is able to prop it up, it's whether Bitfinex thinks Tether can be propped up without too much expense. At a certain point it no longer becomes worth propping up, and that number is very far from the current $74B market cap it's currently at.
kirse 4y ago
As long as there are well-capitalized parties that want to prop up Tether That's been my personal conclusion as well but it led me to the next question of what # is the breaking point for these well-capitalized parties? I tried looking at the size of other well-known collapses like Enron, LTCM, Lehman Bros, etc. LB reportedly had $700B in assets and liabilities before the underlying asset devaluation precipitated their cave in. Tether survived the recent de-peg due to trading shops like Alameda absorbing the free 1-5% with their cash flow, which I believe is also responsible for the recent 11% drawdown in Market Cap (I assume due to redemptions). That said I'm not really experienced enough to know how these backroom overnight liquidity issues get resolved. My hunch is given the true global reach of the crypto market Tether could easily get to $nnnB or $nT before we experience a black swan event that results in a liquidity crisis. Assuming they survive these short-term recessionary pressures, my long-term prediction is we're just setting ourselves up for another roaring '20s again, with crypto eventually learning all the same fundamental financial lessons we did back then.
- dwater 4y ago
  I don't have the time, but I'd love to see someone rewrite "Reminiscences of a Stock Operator" as "Reminiscences of a Crypto Operator". I don't think you'd have to change any of the scams, only the context. Partner with a good illustrator and it would make a lovely coffee table book. https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Operator https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Opera...
- deleted 4y ago
  [deleted]
- overtonwhy 4y ago
  The majority of this scam is happening on unlicensed unregulated off shore exchanges. They don't keep client funds segregated either. When the bubble pops they all go down. The bag holders won't even realize it until the website domains stop resolving. It's musical chairs and the music stopped playing earlier this year when the audits of Tether's reserves came out. Now people that were listening are getting as much out as possible before the seats are all gone.
parkingrift 4y ago
It matters deeply. Neither Bitfinex nor any other exchanges are required to rescue Tether. Additionally, these other exchanges may not have the collateral to rescue Tether in a simultaneous market and crypto downturn. This is a ticking bomb.
jandrese 4y ago
As an outsider this reads like someone in 2006 saying that these risky looking mortgage based products are fine because they'll be propped up by Fannie Mae and Freddie Mac.
- dboreham 4y ago
  And they were pretty much correct. So probably not the same as that.
  - ceejayoz 4y ago
    We had an international financial crisis over it. That seems less than fine.
  - jandrese 4y ago
    They certainly weren't correct for the people who bought those Mortgage Backed Securities. Unless you were a huge institutional investor with the inside track you got skinned alive. Even the big boys got burned pretty badly. Lehman Brothers was the fourth largest investment bank at the start of 2008.
JumpCrisscross 4y ago
> whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine This is true for every pile of toxic crap that's ever been financially engineered. The problem is the entangled financial health of the backer (in this case, Bitfinex and other crypto exchanges) with the backee (Tether). If creditors to the system (in this case, lenders to and customers of the exchanges together with holders of Tether) don't have transparency into the health of the nodes, a small crisis of confidence can prompt a run. (How do you know the parties are "well capitalized"?) Critically, this can occur even if the original impetus was survivable. The opacity causes people to doubt the system's survivability, which avalanches into a run that no system can survive. Perversely, everyone knows this pattern, which increases the chances of small perturbations careening out of control. Add in that a crisis in any part of this system creates a systemic risk and the outcome becomes, as it's been across history, inevitable. Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.
- zionic 4y ago
  >This is true for every pile of toxic crap that's ever been financially engineered. I have a radical idea that I'm fairly sure would get me killed if I ever stood a chance of implementing it: A complete ban on all non-productive financial schemes. We have an entire parasite class that grown unfathomably wealthy while providing no real value to the rest of society. The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this. They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
  - JumpCrisscross 4y ago
    > complete ban on all non-productive financial schemes I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante. > "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more Great example. In 1958, the Congress banned "the trading of futures contracts on onions" [1]. By the 2000s, increased price volatility--which had to be borne solely by farmers and distributors--prompted "the son of a farmer who initially lobbied for the ban to advocate a return to onion futures trading" [2]. There is a middle ground between banning and a free for all. In the former, useful financial products and innovation is suppressed. Finance is about allocating real resources in our economy. Bad finance is bad. But on the other end, everyone steals everything, and investor self-interest gives way to the animal spirits we saw leading up to the Panic of 1907, the Great Depression, the S&L crisis, the Financial Crisis and whatever we'll call crypto. [1] https://en.wikipedia.org/wiki/Onion_Futures_Act#cite_note-fortune-18 https://en.wikipedia.org/wiki/Onion_Futures_Act#cite_note-fo... [2] https://archive.fortune.com/2008/06/27/news/economy/The_onion_conundrum_Birger.fortune/index.htm https://archive.fortune.com/2008/06/27/news/economy/The_onio...
lacker 4y ago
It's such a weird "bet", though. Pay $1, get back $1 if you win, get back $0 if you lose.
- PKop 4y ago
  If you just sit in Tether sure, but the ecosystem of stablecoins gives you access to DeFi yield opportunities with much better "passive" interest than bank deposits or treasuries, so the bet is a little more sophisticated than dollar for dollar.
  - muttantt 4y ago
    The "DeFi yield opportunities" of today were the HYIP ponzis of years past.
  - nradov 4y ago
    Actually the DeFi yield opportunities are not any better than Treasuries on a risk-adjusted basis. You might not be familiar with the actual risk level, including counterparty risk. Some of the cryptocurrency grifters have intentionally obscured that issue.
    - PKop 4y ago
      Treasuries pay negative real yields, so I'm not sure there's any opportunity there. More of a guaranteed loss.
      - blitzar 4y ago
        Luna had a real negative yield as well
  - runarberg 4y ago
    I’m confused. Banks and credit unions pay interest on savings because they can loan or invest that money with higher yields then the interest they pay to the customer/member. How exactly do cryptocurrencies finance their DeFi yields to their investors? The only way I can think of is with the money of future investors, but that is a pretty blatant Ponzi scheme.
nradov 4y ago
As long as there are well-capitalized parties that want to prop up the UK Pound, it will be fine. Whoops. https://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp https://www.investopedia.com/ask/answers/08/george-soros-ban...
astoor 4y ago
So Tether has become something like an international reserve cryptocurrency, which gives them an "exorbitant privilege"[0], meaning they can do pretty much whatever they want safe in the knowledge that everyone else will do everything they can to prevent them from failing because everyone else would have too much to lose if they did fail. That has kept it going for a long time, and might (or might not) keep it going for a lot longer, but ultimately a replacement reserve cryptocurrency will come. [0] https://en.wikipedia.org/wiki/Exorbitant_privilege https://en.wikipedia.org/wiki/Exorbitant_privilege
- lkrubner 4y ago
  The "exorbitant privilege" usually belongs to a government with a vast military, and/or substantial colonial possessions -- something that allows force to be used in an emergency. There is a reason why the US dollar, but not the Swiss franc, is an international reserve currency.
  - nradov 4y ago
    The UK Pound is still considered an international reserve currency by virtue of being incorporated into IMF special drawing rights, even though the UK no longer really has a vast military or substantial colonial possessions.
    - jeffdn 4y ago
      They still have the ability to put nuclear warheads anywhere on the globe, by virtue of their ballistic missile submarines and the nuclear warheads those ballistic missiles carry. The Trident D5 missiles have a range of more than 7,500 miles, and the submarines move. That, in and of itself, is worth a lot -- potentially even more than having a large military.
      - dr_dshiv 4y ago
        I saw a trident missile launch once in 2017. Didn’t know it at the time. Everyone should know about those missiles—they are the reason we don’t have “real” war. They are so unbelievably powerful it blows my mind.
tootie 4y ago
Backed by the full faith and credit of Bitfinex
dpierce9 4y ago
“that want to prop up Tether” AND are able to do so. Crypto risks are highly correlated. The ability to bail out Tether is not a given.
anotheracctfo 4y ago
Yeah that's the whole point behind fractional banking. The government regulates how much money you need to hold to satisfy demand. Oh wait, I'm just getting word that Tether isn't a bank. I wonder what ratio you can have if you aren't a bank? Weird to think about because I thought that it was very illegal to have an unregulated bank. Oh well, I'm sure nothing bad ever happened before bank regulation.
DebtDeflation 4y ago
>whether Tether is fully collateralized ultimately doesn't matter There's a nuance here. If Tether IS full collateralized, then it does not matter since a run on Tether is by definition impossible. If Tether IS NOT fully collateralized then it may or may not matter depending on the size of the run and the ability of Bitfinex etc. to contribute capital.
- lottin 4y ago
  Full collateralisation isn't enough to rule out a run on USDT, since the value of the collateral can vary depending on market conditions. We can be certain that one USDT will always be redeemable for one USD, as long as USDT is fully backed with USD, but we already know from the attestations this is not the case.
  - DebtDeflation 4y ago
    Right, I'm assuming collateralization by bank accounts, money market accounts, and short term Treasuries. Not commercial paper issued by Binance and Bitfinex.
chinathrow 4y ago
They want to prop up Tether until they don't want any longer. Nothing lasts forever, especially in cryptoland.
giaour 4y ago
> As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine. Doesn't that make Tether a fiat currency?
bendtheblock 4y ago
For anything to work efficiently in crypto it always needs to be centralised e.g. OpenSea, Coinbase. Both of which hilariously are backed by a16z. As Scott G says... "meet the new boss... it's your old boss" More examples: Metamask, Moralis, Blockchain.com, Kraken, Binance
Dangeranger 4y ago
> As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine. This reads like the honest description of a Ponzi scheme. As long as the originating parties, or newbie rubes, continue to prop up this sham it will not collapse.

by axg11 4y ago

tlb 4y ago

You have to predict what those well-capitalized parties will do during a market panic. Decision making seems to change quickly when half the money has just disappeared, to focus on salvaging as much as possible.

Salgat 4y ago
Exactly. It's not whether Bitfinex is able to prop it up, it's whether Bitfinex thinks Tether can be propped up without too much expense. At a certain point it no longer becomes worth propping up, and that number is very far from the current $74B market cap it's currently at.

kirse 4y ago

As long as there are well-capitalized parties that want to prop up Tether That's been my personal conclusion as well but it led me to the next question of what # is the breaking point for these well-capitalized parties? I tried looking at the size of other well-known collapses like Enron, LTCM, Lehman Bros, etc. LB reportedly had $700B in assets and liabilities before the underlying asset devaluation precipitated their cave in. Tether survived the recent de-peg due to trading shops like Alameda absorbing the free 1-5% with their cash flow, which I believe is also responsible for the recent 11% drawdown in Market Cap (I assume due to redemptions). That said I'm not really experienced enough to know how these backroom overnight liquidity issues get resolved. My hunch is given the true global reach of the crypto market Tether could easily get to $nnnB or $nT before we experience a black swan event that results in a liquidity crisis. Assuming they survive these short-term recessionary pressures, my long-term prediction is we're just setting ourselves up for another roaring '20s again, with crypto eventually learning all the same fundamental financial lessons we did back then.

dwater 4y ago
I don't have the time, but I'd love to see someone rewrite "Reminiscences of a Stock Operator" as "Reminiscences of a Crypto Operator". I don't think you'd have to change any of the scams, only the context. Partner with a good illustrator and it would make a lovely coffee table book. https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Operator https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Opera...
deleted 4y ago
[deleted]
overtonwhy 4y ago
The majority of this scam is happening on unlicensed unregulated off shore exchanges. They don't keep client funds segregated either. When the bubble pops they all go down. The bag holders won't even realize it until the website domains stop resolving. It's musical chairs and the music stopped playing earlier this year when the audits of Tether's reserves came out. Now people that were listening are getting as much out as possible before the seats are all gone.

parkingrift 4y ago

It matters deeply. Neither Bitfinex nor any other exchanges are required to rescue Tether. Additionally, these other exchanges may not have the collateral to rescue Tether in a simultaneous market and crypto downturn. This is a ticking bomb.

jandrese 4y ago

As an outsider this reads like someone in 2006 saying that these risky looking mortgage based products are fine because they'll be propped up by Fannie Mae and Freddie Mac.

dboreham 4y ago
And they were pretty much correct. So probably not the same as that.
- ceejayoz 4y ago
  We had an international financial crisis over it. That seems less than fine.
- jandrese 4y ago
  They certainly weren't correct for the people who bought those Mortgage Backed Securities. Unless you were a huge institutional investor with the inside track you got skinned alive. Even the big boys got burned pretty badly. Lehman Brothers was the fourth largest investment bank at the start of 2008.

JumpCrisscross 4y ago

> whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine This is true for every pile of toxic crap that's ever been financially engineered. The problem is the entangled financial health of the backer (in this case, Bitfinex and other crypto exchanges) with the backee (Tether). If creditors to the system (in this case, lenders to and customers of the exchanges together with holders of Tether) don't have transparency into the health of the nodes, a small crisis of confidence can prompt a run. (How do you know the parties are "well capitalized"?) Critically, this can occur even if the original impetus was survivable. The opacity causes people to doubt the system's survivability, which avalanches into a run that no system can survive. Perversely, everyone knows this pattern, which increases the chances of small perturbations careening out of control. Add in that a crisis in any part of this system creates a systemic risk and the outcome becomes, as it's been across history, inevitable. Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.

zionic 4y ago
>This is true for every pile of toxic crap that's ever been financially engineered. I have a radical idea that I'm fairly sure would get me killed if I ever stood a chance of implementing it: A complete ban on all non-productive financial schemes. We have an entire parasite class that grown unfathomably wealthy while providing no real value to the rest of society. The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this. They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
- JumpCrisscross 4y ago
  > complete ban on all non-productive financial schemes I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante. > "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more Great example. In 1958, the Congress banned "the trading of futures contracts on onions" [1]. By the 2000s, increased price volatility--which had to be borne solely by farmers and distributors--prompted "the son of a farmer who initially lobbied for the ban to advocate a return to onion futures trading" [2]. There is a middle ground between banning and a free for all. In the former, useful financial products and innovation is suppressed. Finance is about allocating real resources in our economy. Bad finance is bad. But on the other end, everyone steals everything, and investor self-interest gives way to the animal spirits we saw leading up to the Panic of 1907, the Great Depression, the S&L crisis, the Financial Crisis and whatever we'll call crypto. [1] https://en.wikipedia.org/wiki/Onion_Futures_Act#cite_note-fortune-18 https://en.wikipedia.org/wiki/Onion_Futures_Act#cite_note-fo... [2] https://archive.fortune.com/2008/06/27/news/economy/The_onion_conundrum_Birger.fortune/index.htm https://archive.fortune.com/2008/06/27/news/economy/The_onio...

lacker 4y ago

It's such a weird "bet", though. Pay $1, get back $1 if you win, get back $0 if you lose.

PKop 4y ago
If you just sit in Tether sure, but the ecosystem of stablecoins gives you access to DeFi yield opportunities with much better "passive" interest than bank deposits or treasuries, so the bet is a little more sophisticated than dollar for dollar.
- muttantt 4y ago
  The "DeFi yield opportunities" of today were the HYIP ponzis of years past.
- nradov 4y ago
  Actually the DeFi yield opportunities are not any better than Treasuries on a risk-adjusted basis. You might not be familiar with the actual risk level, including counterparty risk. Some of the cryptocurrency grifters have intentionally obscured that issue.
  - PKop 4y ago
    Treasuries pay negative real yields, so I'm not sure there's any opportunity there. More of a guaranteed loss.
    - blitzar 4y ago
      Luna had a real negative yield as well
- runarberg 4y ago
  I’m confused. Banks and credit unions pay interest on savings because they can loan or invest that money with higher yields then the interest they pay to the customer/member. How exactly do cryptocurrencies finance their DeFi yields to their investors? The only way I can think of is with the money of future investors, but that is a pretty blatant Ponzi scheme.

nradov 4y ago

As long as there are well-capitalized parties that want to prop up the UK Pound, it will be fine. Whoops. https://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp https://www.investopedia.com/ask/answers/08/george-soros-ban...

astoor 4y ago

So Tether has become something like an international reserve cryptocurrency, which gives them an "exorbitant privilege"[0], meaning they can do pretty much whatever they want safe in the knowledge that everyone else will do everything they can to prevent them from failing because everyone else would have too much to lose if they did fail. That has kept it going for a long time, and might (or might not) keep it going for a lot longer, but ultimately a replacement reserve cryptocurrency will come. [0] https://en.wikipedia.org/wiki/Exorbitant_privilege https://en.wikipedia.org/wiki/Exorbitant_privilege

lkrubner 4y ago
The "exorbitant privilege" usually belongs to a government with a vast military, and/or substantial colonial possessions -- something that allows force to be used in an emergency. There is a reason why the US dollar, but not the Swiss franc, is an international reserve currency.
- nradov 4y ago
  The UK Pound is still considered an international reserve currency by virtue of being incorporated into IMF special drawing rights, even though the UK no longer really has a vast military or substantial colonial possessions.
  - jeffdn 4y ago
    They still have the ability to put nuclear warheads anywhere on the globe, by virtue of their ballistic missile submarines and the nuclear warheads those ballistic missiles carry. The Trident D5 missiles have a range of more than 7,500 miles, and the submarines move. That, in and of itself, is worth a lot -- potentially even more than having a large military.
    - dr_dshiv 4y ago
      I saw a trident missile launch once in 2017. Didn’t know it at the time. Everyone should know about those missiles—they are the reason we don’t have “real” war. They are so unbelievably powerful it blows my mind.

tootie 4y ago

Backed by the full faith and credit of Bitfinex

dpierce9 4y ago

“that want to prop up Tether” AND are able to do so. Crypto risks are highly correlated. The ability to bail out Tether is not a given.

anotheracctfo 4y ago

Yeah that's the whole point behind fractional banking. The government regulates how much money you need to hold to satisfy demand. Oh wait, I'm just getting word that Tether isn't a bank. I wonder what ratio you can have if you aren't a bank? Weird to think about because I thought that it was very illegal to have an unregulated bank. Oh well, I'm sure nothing bad ever happened before bank regulation.

DebtDeflation 4y ago

>whether Tether is fully collateralized ultimately doesn't matter There's a nuance here. If Tether IS full collateralized, then it does not matter since a run on Tether is by definition impossible. If Tether IS NOT fully collateralized then it may or may not matter depending on the size of the run and the ability of Bitfinex etc. to contribute capital.

lottin 4y ago
Full collateralisation isn't enough to rule out a run on USDT, since the value of the collateral can vary depending on market conditions. We can be certain that one USDT will always be redeemable for one USD, as long as USDT is fully backed with USD, but we already know from the attestations this is not the case.
- DebtDeflation 4y ago
  Right, I'm assuming collateralization by bank accounts, money market accounts, and short term Treasuries. Not commercial paper issued by Binance and Bitfinex.

chinathrow 4y ago

They want to prop up Tether until they don't want any longer. Nothing lasts forever, especially in cryptoland.

giaour 4y ago

> As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine. Doesn't that make Tether a fiat currency?

bendtheblock 4y ago

For anything to work efficiently in crypto it always needs to be centralised e.g. OpenSea, Coinbase. Both of which hilariously are backed by a16z. As Scott G says... "meet the new boss... it's your old boss" More examples: Metamask, Moralis, Blockchain.com, Kraken, Binance

Dangeranger 4y ago

> As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine. This reads like the honest description of a Ponzi scheme. As long as the originating parties, or newbie rubes, continue to prop up this sham it will not collapse.