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Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

137 points by uptown 4y ago

chollida1 4y ago
The crypto community continues to speed run the history of traditional finance. This weeks lesson is that in an up market its leverage that makes you money and in a down market its the unwinding of leverage that kills you. They are also learning that interconnectedness will hurt more in a downturn. You can be perfectly delta hedged( don't care which way the market moves) and its the counter party risk that will sink you. Now as these firms start to unwind they spill over to the next one. The collateral taht you lent to the failed firm is now gone and your once well hedge d and collateralized position is now in shambles because someone else can't pay you. TradFi normally solves this by having a firm have oversite on everyones positions and have everyone pay money into a pot to help bail out failed counterparties so they don't spill over to other firms. Crypto has tried to solve this by strict liquidation rules that tend to make things worse by turning firms into forced sellers when they may have been able to ride things out, thereby forcing markets down even more. To the point where its a profitable trading strategy to intentionally force the market down to liquidate leveraged longs. As more crypto firms fail, they'll end up selling their best collateral first(BTC and ETH) forcing down the price even more. $5,000 BTC and $200 ETH are in site if Tether starts to fail. Tehter has lent money to almost all these firms but doesn't mark down its positions from what it originally held them at. If tether holds we may get out of this with $10-15,000 BTC but if Binance/FTX walk away from Tether then we'll be down another 80% from here I bet. TL/DR its going to get alot uglier than it currently is due to the interconnected nature of the crypto markets. We'll find out that pretty much everyone was linked to everyone else as there are only so many ways to make money in crypto and everyone piled into them. Defi is about to find out how hard it is to make money when no one wants to stake.
- junofan 4y ago
  A nice narrative that falls apart when you remember LTCM, Archegos, etc. I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe.
  - rr888 4y ago
    LTCM was bailed out with government (Fed) coordination. Archegos was only survivable because it was in a huge bull market and the losses were just a few billions dollars which was possible to be absorbed by the big banks.
  - charles_kaw 4y ago
    > I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe. Because they don't. Because it's a wild west. TradFi has it's failures as well - but that's "whataboutism". DeFi is collapsing in real time and we'll probably see oversight and regulation around this in the near future.
    - logicchains 4y ago
      >DeFi is collapsing in real time and we'll probably see oversight and regulation around this in the near future. From the perspective of people who support the mission of DeFi and aren't just in it for the money, this is a feature, not a bug. We want these dodgy, extractive institutions to go under and not have to bail them out.
      - charles_kaw 4y ago
        Unfortunately, large defi institutions have been advertising to retail investors. Many of whom have not just had a haircut, but their whole head shaved. Government regulation of retail finance is a feature, not a bug.
        logicchains 4y ago
        >Government regulation of retail finance is a feature, not a bug. It's not a bug unless you believe adults should be treated like children and not be able to take the risks they desire or face the consequences of those risks. Anyone investing in DeFi should absolutely have known the risks; it doesn't justify giving the government even more power over people's finances.
- polynomial 4y ago
  Can you explain what you mean by crypto's forced liquidation rules? Not familiar with how that works at all.
  - toomuchtodo 4y ago
    When you get margin called in traditional/centralized finance, humans intervene and liquidation is not immediate (except Interactive Brokers, who are closer to how crypto manages margin, and will liquidate you without a margin call). Maybe you put up more collateral, maybe you borrow from a line of credit, there is a buffer. As an individual, you work with your broker. As a larger participant, you work with the clearinghouse (of meme stock fame). In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable. This is why traditional finance doesn’t take seriously the idea of immediate settlement, and why end of day settlement is as good as it’ll get.
    - gst 4y ago
      > In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable. Is auto-liquidation a bad thing? It leads to more volatility in the short-term, but it seems that there might be long-term benefits of ensuring that players with unresponsible business practices will be forced out of the market. "Traditional" crypto holders will be affected too (the value of their investment goes down while people are forced to sell), but this looks more like a temporary impact. As long as they don't trade on margin they won't be forced to sell and as long as they hold their own keys they are unaffected if exchanges are crashing. From a "price" perspective the current events might be bad for the crypto ecosystem, but from a "health" perspective I think that they could be positive, as only the responsible players with healthy business practices are going to survive.
      - UncleMeat 4y ago
- dcolkitt 4y ago
  > Crypto has tried to solve this by strict liquidation rules that tend to make things worse by turning firms into forced sellers This is literally how traditional finance works as well. If you have a leveraged position at a futures or options exchange, you absolutely will be liquidated as soon as your position gets close to being in the red. I 100% guarantee you that the CME or Goldman will not let you "ride things out". You don't have to take my word for this. Look up the history of what happened to the energy hedge fund Amaranth.
  - joosters 4y ago
    As per Matt Levine: ...The way the traditional system works is that if you have a margin loan, and the value of your collateral declines, your broker calls you up and says “hey we need more collateral,” and you either post more collateral and it’s fine, or you don’t post more collateral and your broker liquidates your position. Or sometimes you say something like “hang on I’ve got another call, I’ll call you back after lunch,” or “sorry I don’t have the money right now but I am a good customer and you know I’m good for it,” or “I don’t have the money right now but I’m pretty sure prices can only recover from here so why don’t you let it ride for a day or two,” or whatever, and you don’t post more collateral but your broker doesn’t liquidate your position because you’re a human and your broker is a human and everyone is embedded in a repeated social game with fuzzy rules
    - DebtDeflation 4y ago
      For every seller, there must be a buyer. With a defi "code is law" approach, if every contract automatically tries to execute a sell at the same time, the price will fall until there are enough matching buyers, and if there still aren't enough buyers when BTC hits $0.0000001 then the sell orders will just not execute. Smart contracts do not eliminate the problem of liquidity risk, they merely assume it away.
      - FabHK 4y ago
        Yes. It seems not appreciated by some that price need not move continuously, but it can jump, and it can also go to zero (or if it cannot: no buyer can be found at the smallest possible positive price).
- leishman 4y ago
  There are plenty of firms that run full reserve and are not subject to this contagion.
  - chollida1 4y ago
    Good to know, Who are these fully capitalized crypto firms?
    - hanklazard 4y ago
      Good question. Finding that out would take a lot of on-chain analysis. I have no love for these firms so I really don't care if they are solvent. For those that took major risks with leverage and mismatched their risk on duration, let them fail. Some in this thread seem to be saying that having humans involved in liquidations is preferable because it prevents contagion. To me, that sounds like letting someone get away with bad decision-making and safe-guarding them against the previously defined consequences. Sounds like the same kind of philosophy that makes some firms in traditional finance "too big to fail." This kind of thinking kicks the can down the road instead of addressing the problem and feeling the pain now. I say liquidate them. Maybe that's easy for me to say because my only exposure has been through defi protocols that I interact with directly and with risks that I've considered. These Cefi companies take retail money, use it to take risky positions in defi, then take a large cut of the profits. Works great until a market downturn and people start asking for the their Eth back and, whoops, we don't have access to it until 6M+ post-merge (Celcius). That's called piss-poor risk management and I don't want these kinds of actors in the market long-term. I feel bad for the retail that is getting screwed in all this but in the end, we need regulators / DOJ to come down very hard on these companies. If we clean house now, the space will be stronger in the future. Yes it will be painful in the short term.
- abiro 4y ago
  > Tehter has lent money to almost all these firms Do you have a source for this?
  - mccorrinall 4y ago
    https://assets.ctfassets.net/vyse88cgwfbl/1np5dpcwuHrWJ4AgUgI3Vn/e0dac722de3cea07766e05c52773748b/Tether_Assurance_Consolidated_Reserves_Report_2022-03-31__3_.pdf https://assets.ctfassets.net/vyse88cgwfbl/1np5dpcwuHrWJ4AgUg... The points you're looking for: > Secured Loans (none to affiliated entities) $3,149,732,368 > Other Investments (including digital tokens) $4,959,634,446
    - lizknope 4y ago
      Your link is to an attestation, not an audit, and it was performed by a company in the Cayman Islands that changed its name and is still under investigation by the United Kingdom government https://www.coindesk.com/markets/2022/01/26/tethers-new-accounting-firm-is-the-old-one-with-baggage/ https://www.coindesk.com/markets/2022/01/26/tethers-new-acco...
      - sgt101 4y ago
        Hopefully you can link to Tether's audit? ???
        lizknope 4y ago
        There is no audit. That's why they produced that bullshit attestation. Tether has been saying they would produce an audit since July 2021, that's a year ago! https://www.cnbc.com/2022/05/17/tether-usdt-redemptions-fuel-fears-about-stablecoins-backing.html https://www.cnbc.com/2022/05/17/tether-usdt-redemptions-fuel... This is long but fascinating. Tether is a scam, it just hasn't fallen apart yet. https://crypto-anonymous-2021.medium.com/the-bit-short-inside-cryptos-doomsday-machine-f8dcf78a64d3 https://crypto-anonymous-2021.medium.com/the-bit-short-insid...
- DebtDeflation 4y ago
  >$5,000 BTC and $200 ETH are in site if Tether starts to fail. IMO, pre-2017 prices for BTC (<$1000) returning is inevitable. If Tether fails, then pre-2014 prices (<$100) are more likely. BTC was at $5K a little over 2 years ago, anyone who thinks the bottom is at that level is deluding themselves.
  - code4life 4y ago
    You could be a millionaire if you are right.
    - DebtDeflation 4y ago
      You can be right and still go broke shorting something. "The market can stay irrational longer than you can stay solvent." And shorting crypto has additional challenges beyond shorting traditional securities.
  - chollida1 4y ago
    I'll take that bet. I say BTC doesn't breach $5,000 in the next 18 months. What do you want to bet?
- martinko 4y ago
  Would love to see a citation on this.
  - xeromal 4y ago
    I don't understand why everything needs a citation on every comment on the internet. Imagine you're at lunch with a coworker and they say this. We go, "Wow, that's pretty interesting. Hope it doesn't happen" and we continue to eat our soup. I enjoy reading stuff like this without the need for them to publish a study.
  - chollida1 4y ago
    Sure, on what specifically?
- ouid 4y ago
  What follows is loose speculation, but I do not think the equilibrium price of a single bitcoin after a crash is any more likely to be $100 than $1. This is due to the anatomy of a bubble. A belief in the long term value of cryptocurrency is very tightly correlated with ones current cryptocurrency position. The demand curve, then, for cryptocurrency, is extremely steep, and the "buy pressure" for cryptocurrency will not increase tremendously with falling prices, since the people who would generally be willing to buy at these reduced prices, have just lost their life savings. Likewise, even the poeple who think that crypto is valuable long term know that you can't pay your taxes in it. If people don't believe that it's worth anything, then it isn't. They all know that the price falling could indicate that right this second is the most your cryptocurrency will ever be worth. The more the price drops, the more likely this is to be the case, and the more likely I am to sell. If the sell pressure is greater than the buy presssure at some price, then it is very likely to be the case at every lower price, resulting in catastrophic collapse. This inversion event is more likely the longer the asset has remained in bubble status, since the optimism proportion of the inflated asset is strictly increasing with price.
  - bitxbitxbitcoin 4y ago
    Guess that’s the difference between a bubble and spike?
- vishnugupta 4y ago
  Take increasing risks in search for higher yield? Check Leveraged trading to ratchet up profits? Check Margin called when the risky bet doesn't pay off? Check Counter party risk? Check Contagion + domino effect? Check Fire sale of decent quality assets putting down pressure on its prices thus hurting the whole ecosystem? Check
  - drexlspivey 4y ago
    What's the counterparty risk?
    - vishnugupta 4y ago
      A bunch of crypto fintechs had lent to 3AC are in a spot of bother. https://www.ft.com/content/126d8b02-f06a-4fd9-a57b-9f4ceab3de71 https://www.ft.com/content/126d8b02-f06a-4fd9-a57b-9f4ceab3d...
      - arcticbull 4y ago
        And 3AC led bunch of crypto seed rounds. They then offered them 8-10% APR to hold their treasuries. Now, I believe they've been ghosted.
- AlexandrB 4y ago
  It's interesting to watch Tether's market cap decrease in this downturn - presumably as more and more Tether is redeemed by major holders. The question is: how much liquidity does Tether have to fund these redemptions? Is it 20B? 50B? Maybe it is fully-backed?
- TuringNYC 4y ago
  >> TradFi normally solves this by having a firm have oversite on everyones positions and have everyone pay money into a pot to help bail out failed counterparties so they don't spill over to other firms. I'm curious -- in traditional finance, there are often daily collateral settlements which force both parties to change collateral based on valuations shifts by way of the exchange. is there such a concept in crypto? Wouldnt this resolve a lot of the issues you're speaking about?
- arcticbull 4y ago
  > Defi is about to find out how hard it is to make money when no one wants to stake. I have often described DeFi as Decentralized 2008.
- ryan93 4y ago
  Congratulations you are the 1 millionth person on Hacker News to say "speed run the history of traditional finance"
  - chollida1 4y ago
    Umm, thanks?
  - abathur 4y ago
    Congratulations! You are the seventh person on HN to say the words "speed run" and "finance" in the same comment :o ) https://hn.algolia.com/?dateRange=all&page=0&prefix=true&query=%22speed%20run%22%20%22finance%22&sort=byDate&type=comment https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
- saurik 4y ago
  But this IS traditional finance, in a very key sense: the money loaned to 3AC was NOT done using defi. When I have collateral I loan out using actual-defi the liquidation rules are transparent and the holdings are transparent and if something starts crashing I get to cause the liquidation before all of my money just disappears into a black hole of people lying to me. That 3AC then took their traditionally-loaned money and did something dumb with it involving crypto is not an argument that defi is broken but that people shouldn't be using tradfi: what is stupid here was people trusting 3AC instead of using their own tooling (a problem that I fully admit is so endemic in the cryptocurrency industry that I have to CONSTANTLY complain to my own business partners that our using Coinbase Custody to hold any of our currency is flat out embarrassing).
- iqkznnft 4y ago
  > tend to make things worse by turning firms into forced sellers when they may have been able to ride things out What do you mean, may have been able to ride things out? They owe money they don't have... Oh, you mean, if you wait long enough crypto might come back up and they're solvent again? Right, after they lost more than they had on the first bet, you wanna let them bet again that it might come back up?
carrja99 4y ago
"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"
- 0xcde4c3db 4y ago
  In case the relevance isn't clear, this is a headline that was inserted into the Bitcoin origin block, presumably to prove that it hadn't been mined before that date. However, the specific headline chosen is often interpreted as an implicit jab at conventional finance by Satoshi Nakamoto.
  - optimalsolver 4y ago
    I wonder what Satoshi would think of Tether, or crypto-firms like Blockstream.
- aaaaaaaaaaab 4y ago
  Ironic, isn't it?
  - aaaaaaaaata 4y ago
    That selfish people are drawn to money markets?
- raverbashing 4y ago
  And now, we see the biggest irony in thinking this was bad It was not a bailout for banks, it was for their account holders.
tjbiddle 4y ago
Paywall: https://web.archive.org/web/20220617125537/https://www.wsj.com/articles/battered-crypto-hedge-fund-three-arrows-capital-considers-asset-sales-bailout-11655469932 https://web.archive.org/web/20220617125537/https://www.wsj.c...
seibelj 4y ago
The private sector will have to arrange any acquisition of distressed assets or they will fail and people will get hurt. Lenders will harden and be better equipped for the future. This IMO is a good thing - there is no one to save anyone and the market will deal with the consequences. I don't care about the impact on prices. Drive the weak players out and let the strong survive.
- ausbah 4y ago
  what firms are going to survive this, seems like everyone is being hit hard
  - seibelj 4y ago
    Plenty of firms and trading shops will survive. Not everyone was a total YOLO degen with billions of dollars.
  - smabie 4y ago
    Most trading firms will survive this atleast. Many are pretty prudent, especially the ones that are only managing their own money (prop shops).
  - aaaaaaaaata 4y ago
    FTX, KuCoin, Coinbase, more.
- woeirua 4y ago
  I think you'll change your tune on this when too many firms fail at once and this becomes a systemic issue.
midislack 4y ago
brink 4y ago
I remember when they invested in Axie Infinity when it was still sub $5. they must have made bank when it shot up to $150. The token is now back at $13.
kgwgk 4y ago
> TradFi normally solves this by having a firm have oversite > $5,000 BTC and $200 ETH are in site I think you meant to write oversight and sight.
- chollida1 4y ago
  Yikes, I did. Talk about coasting on autocomplete/correct:)
ouid 4y ago
>Firm’s founders say they still believe in the future of cryptocurrencies. How the fuck is this the subtitle? The firm's founders saying they believe this is evidence of nothing. A responsible journalist would not include it at all. It is journalistic malpractice to make it the subtitle.
- ipnon 4y ago
  A journalist's job is to report the facts. The fact is Davies said he still believes. Seems like good journalism to me!
  - ouid 4y ago
    PR is not facts.
smabie 4y ago
Haven't met a single person who liked or respected 3ac and the founders (Su Zhu and Kyle Davies). Not only was their investment strategy incredibly irresponsible, but their business conduct was consistently shady. Good riddance. PS: don't really think 3ac behavior is representative of crypto trading firms as a whole (Wintermute, Jump etc). A lot of them are highly professional and responsible operations who have weathered the storm just fine and in many cases, have generated nice pnl during this event.
shuntress 4y ago
Is this mostly caused by people coming to grips with the fact that "crypto" is entirely speculative with no actual value? "TradFi" at least has a real floor because "real" money (as in: currency that can be exchanged for goods and services) and "real" investments (as in: shares of companies that provide goods/services) do actually exist. Even if significant portions of the market are driven by speculation. Are we reaching the point where people trading crypto get bored and just... stop?
- clpm4j 4y ago
  As long as people have a way to potentially get rich with little to no 'real work', they won't stop.
  - shuntress 4y ago
    Sure. Speculation certainly will continue and real money will continue to change hands. But are we at least done pretending that crypto currency (at least, as it exists now) will ever have any practical purpose beyond being a fungible entity upon which gamblers speculate?
    - yata69420 4y ago
      > But are we at least done pretending that crypto currency (at least, as it exists now) will ever have any practical purpose beyond being a fungible entity upon which gamblers speculate? No, I don't think that's happened yet. I still know tons of people excited to build for "web3". I don't think we need "rich" websites with javascript, "smart" phones in everyone's pocket, or "social media" at all. But those all happened, and it seems to be a lot of the same vibe for "web3" builders right now.
      - shuntress 4y ago
        It's difficult to get a clear picture of what exactly people think "web3" is. My general experience is that people who are caught up in web3 hype seem to actually just want simpler self-hosted/distributed resource redundancy.

137 points by uptown 4y ago

The crypto community continues to speed run the history of traditional finance. This weeks lesson is that in an up market its leverage that makes you money and in a down market its the unwinding of leverage that kills you. They are also learning that interconnectedness will hurt more in a downturn. You can be perfectly delta hedged( don't care which way the market moves) and its the counter party risk that will sink you. Now as these firms start to unwind they spill over to the next one. The collateral taht you lent to the failed firm is now gone and your once well hedge d and collateralized position is now in shambles because someone else can't pay you. TradFi normally solves this by having a firm have oversite on everyones positions and have everyone pay money into a pot to help bail out failed counterparties so they don't spill over to other firms. Crypto has tried to solve this by strict liquidation rules that tend to make things worse by turning firms into forced sellers when they may have been able to ride things out, thereby forcing markets down even more. To the point where its a profitable trading strategy to intentionally force the market down to liquidate leveraged longs. As more crypto firms fail, they'll end up selling their best collateral first(BTC and ETH) forcing down the price even more. $5,000 BTC and $200 ETH are in site if Tether starts to fail. Tehter has lent money to almost all these firms but doesn't mark down its positions from what it originally held them at. If tether holds we may get out of this with $10-15,000 BTC but if Binance/FTX walk away from Tether then we'll be down another 80% from here I bet. TL/DR its going to get alot uglier than it currently is due to the interconnected nature of the crypto markets. We'll find out that pretty much everyone was linked to everyone else as there are only so many ways to make money in crypto and everyone piled into them. Defi is about to find out how hard it is to make money when no one wants to stake.

junofan 4y ago
A nice narrative that falls apart when you remember LTCM, Archegos, etc. I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe.
- rr888 4y ago
  LTCM was bailed out with government (Fed) coordination. Archegos was only survivable because it was in a huge bull market and the losses were just a few billions dollars which was possible to be absorbed by the big banks.
- charles_kaw 4y ago
  > I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe. Because they don't. Because it's a wild west. TradFi has it's failures as well - but that's "whataboutism". DeFi is collapsing in real time and we'll probably see oversight and regulation around this in the near future.
  - logicchains 4y ago
    >DeFi is collapsing in real time and we'll probably see oversight and regulation around this in the near future. From the perspective of people who support the mission of DeFi and aren't just in it for the money, this is a feature, not a bug. We want these dodgy, extractive institutions to go under and not have to bail them out.
    - charles_kaw 4y ago
      Unfortunately, large defi institutions have been advertising to retail investors. Many of whom have not just had a haircut, but their whole head shaved. Government regulation of retail finance is a feature, not a bug.
      - logicchains 4y ago
        >Government regulation of retail finance is a feature, not a bug. It's not a bug unless you believe adults should be treated like children and not be able to take the risks they desire or face the consequences of those risks. Anyone investing in DeFi should absolutely have known the risks; it doesn't justify giving the government even more power over people's finances.
polynomial 4y ago
Can you explain what you mean by crypto's forced liquidation rules? Not familiar with how that works at all.
- toomuchtodo 4y ago
  When you get margin called in traditional/centralized finance, humans intervene and liquidation is not immediate (except Interactive Brokers, who are closer to how crypto manages margin, and will liquidate you without a margin call). Maybe you put up more collateral, maybe you borrow from a line of credit, there is a buffer. As an individual, you work with your broker. As a larger participant, you work with the clearinghouse (of meme stock fame). In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable. This is why traditional finance doesn’t take seriously the idea of immediate settlement, and why end of day settlement is as good as it’ll get.
  - gst 4y ago
    > In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable. Is auto-liquidation a bad thing? It leads to more volatility in the short-term, but it seems that there might be long-term benefits of ensuring that players with unresponsible business practices will be forced out of the market. "Traditional" crypto holders will be affected too (the value of their investment goes down while people are forced to sell), but this looks more like a temporary impact. As long as they don't trade on margin they won't be forced to sell and as long as they hold their own keys they are unaffected if exchanges are crashing. From a "price" perspective the current events might be bad for the crypto ecosystem, but from a "health" perspective I think that they could be positive, as only the responsible players with healthy business practices are going to survive.
    - UncleMeat 4y ago
dcolkitt 4y ago
> Crypto has tried to solve this by strict liquidation rules that tend to make things worse by turning firms into forced sellers This is literally how traditional finance works as well. If you have a leveraged position at a futures or options exchange, you absolutely will be liquidated as soon as your position gets close to being in the red. I 100% guarantee you that the CME or Goldman will not let you "ride things out". You don't have to take my word for this. Look up the history of what happened to the energy hedge fund Amaranth.
- joosters 4y ago
  As per Matt Levine: ...The way the traditional system works is that if you have a margin loan, and the value of your collateral declines, your broker calls you up and says “hey we need more collateral,” and you either post more collateral and it’s fine, or you don’t post more collateral and your broker liquidates your position. Or sometimes you say something like “hang on I’ve got another call, I’ll call you back after lunch,” or “sorry I don’t have the money right now but I am a good customer and you know I’m good for it,” or “I don’t have the money right now but I’m pretty sure prices can only recover from here so why don’t you let it ride for a day or two,” or whatever, and you don’t post more collateral but your broker doesn’t liquidate your position because you’re a human and your broker is a human and everyone is embedded in a repeated social game with fuzzy rules
  - DebtDeflation 4y ago
    For every seller, there must be a buyer. With a defi "code is law" approach, if every contract automatically tries to execute a sell at the same time, the price will fall until there are enough matching buyers, and if there still aren't enough buyers when BTC hits $0.0000001 then the sell orders will just not execute. Smart contracts do not eliminate the problem of liquidity risk, they merely assume it away.
    - FabHK 4y ago
      Yes. It seems not appreciated by some that price need not move continuously, but it can jump, and it can also go to zero (or if it cannot: no buyer can be found at the smallest possible positive price).
leishman 4y ago
There are plenty of firms that run full reserve and are not subject to this contagion.
- chollida1 4y ago
  Good to know, Who are these fully capitalized crypto firms?
  - hanklazard 4y ago
    Good question. Finding that out would take a lot of on-chain analysis. I have no love for these firms so I really don't care if they are solvent. For those that took major risks with leverage and mismatched their risk on duration, let them fail. Some in this thread seem to be saying that having humans involved in liquidations is preferable because it prevents contagion. To me, that sounds like letting someone get away with bad decision-making and safe-guarding them against the previously defined consequences. Sounds like the same kind of philosophy that makes some firms in traditional finance "too big to fail." This kind of thinking kicks the can down the road instead of addressing the problem and feeling the pain now. I say liquidate them. Maybe that's easy for me to say because my only exposure has been through defi protocols that I interact with directly and with risks that I've considered. These Cefi companies take retail money, use it to take risky positions in defi, then take a large cut of the profits. Works great until a market downturn and people start asking for the their Eth back and, whoops, we don't have access to it until 6M+ post-merge (Celcius). That's called piss-poor risk management and I don't want these kinds of actors in the market long-term. I feel bad for the retail that is getting screwed in all this but in the end, we need regulators / DOJ to come down very hard on these companies. If we clean house now, the space will be stronger in the future. Yes it will be painful in the short term.
abiro 4y ago
> Tehter has lent money to almost all these firms Do you have a source for this?
- mccorrinall 4y ago
  https://assets.ctfassets.net/vyse88cgwfbl/1np5dpcwuHrWJ4AgUgI3Vn/e0dac722de3cea07766e05c52773748b/Tether_Assurance_Consolidated_Reserves_Report_2022-03-31__3_.pdf https://assets.ctfassets.net/vyse88cgwfbl/1np5dpcwuHrWJ4AgUg... The points you're looking for: > Secured Loans (none to affiliated entities) $3,149,732,368 > Other Investments (including digital tokens) $4,959,634,446
  - lizknope 4y ago
    Your link is to an attestation, not an audit, and it was performed by a company in the Cayman Islands that changed its name and is still under investigation by the United Kingdom government https://www.coindesk.com/markets/2022/01/26/tethers-new-accounting-firm-is-the-old-one-with-baggage/ https://www.coindesk.com/markets/2022/01/26/tethers-new-acco...
    - sgt101 4y ago
      Hopefully you can link to Tether's audit? ???
      - lizknope 4y ago
        There is no audit. That's why they produced that bullshit attestation. Tether has been saying they would produce an audit since July 2021, that's a year ago! https://www.cnbc.com/2022/05/17/tether-usdt-redemptions-fuel-fears-about-stablecoins-backing.html https://www.cnbc.com/2022/05/17/tether-usdt-redemptions-fuel... This is long but fascinating. Tether is a scam, it just hasn't fallen apart yet. https://crypto-anonymous-2021.medium.com/the-bit-short-inside-cryptos-doomsday-machine-f8dcf78a64d3 https://crypto-anonymous-2021.medium.com/the-bit-short-insid...
DebtDeflation 4y ago
>$5,000 BTC and $200 ETH are in site if Tether starts to fail. IMO, pre-2017 prices for BTC (<$1000) returning is inevitable. If Tether fails, then pre-2014 prices (<$100) are more likely. BTC was at $5K a little over 2 years ago, anyone who thinks the bottom is at that level is deluding themselves.
- code4life 4y ago
  You could be a millionaire if you are right.
  - DebtDeflation 4y ago
    You can be right and still go broke shorting something. "The market can stay irrational longer than you can stay solvent." And shorting crypto has additional challenges beyond shorting traditional securities.
- chollida1 4y ago
  I'll take that bet. I say BTC doesn't breach $5,000 in the next 18 months. What do you want to bet?
martinko 4y ago
Would love to see a citation on this.
- xeromal 4y ago
  I don't understand why everything needs a citation on every comment on the internet. Imagine you're at lunch with a coworker and they say this. We go, "Wow, that's pretty interesting. Hope it doesn't happen" and we continue to eat our soup. I enjoy reading stuff like this without the need for them to publish a study.
- chollida1 4y ago
  Sure, on what specifically?
ouid 4y ago
What follows is loose speculation, but I do not think the equilibrium price of a single bitcoin after a crash is any more likely to be $100 than $1. This is due to the anatomy of a bubble. A belief in the long term value of cryptocurrency is very tightly correlated with ones current cryptocurrency position. The demand curve, then, for cryptocurrency, is extremely steep, and the "buy pressure" for cryptocurrency will not increase tremendously with falling prices, since the people who would generally be willing to buy at these reduced prices, have just lost their life savings. Likewise, even the poeple who think that crypto is valuable long term know that you can't pay your taxes in it. If people don't believe that it's worth anything, then it isn't. They all know that the price falling could indicate that right this second is the most your cryptocurrency will ever be worth. The more the price drops, the more likely this is to be the case, and the more likely I am to sell. If the sell pressure is greater than the buy presssure at some price, then it is very likely to be the case at every lower price, resulting in catastrophic collapse. This inversion event is more likely the longer the asset has remained in bubble status, since the optimism proportion of the inflated asset is strictly increasing with price.
- bitxbitxbitcoin 4y ago
  Guess that’s the difference between a bubble and spike?
vishnugupta 4y ago
Take increasing risks in search for higher yield? Check Leveraged trading to ratchet up profits? Check Margin called when the risky bet doesn't pay off? Check Counter party risk? Check Contagion + domino effect? Check Fire sale of decent quality assets putting down pressure on its prices thus hurting the whole ecosystem? Check
- drexlspivey 4y ago
  What's the counterparty risk?
  - vishnugupta 4y ago
    A bunch of crypto fintechs had lent to 3AC are in a spot of bother. https://www.ft.com/content/126d8b02-f06a-4fd9-a57b-9f4ceab3de71 https://www.ft.com/content/126d8b02-f06a-4fd9-a57b-9f4ceab3d...
    - arcticbull 4y ago
      And 3AC led bunch of crypto seed rounds. They then offered them 8-10% APR to hold their treasuries. Now, I believe they've been ghosted.
AlexandrB 4y ago
It's interesting to watch Tether's market cap decrease in this downturn - presumably as more and more Tether is redeemed by major holders. The question is: how much liquidity does Tether have to fund these redemptions? Is it 20B? 50B? Maybe it is fully-backed?
TuringNYC 4y ago
>> TradFi normally solves this by having a firm have oversite on everyones positions and have everyone pay money into a pot to help bail out failed counterparties so they don't spill over to other firms. I'm curious -- in traditional finance, there are often daily collateral settlements which force both parties to change collateral based on valuations shifts by way of the exchange. is there such a concept in crypto? Wouldnt this resolve a lot of the issues you're speaking about?
arcticbull 4y ago
> Defi is about to find out how hard it is to make money when no one wants to stake. I have often described DeFi as Decentralized 2008.
ryan93 4y ago
Congratulations you are the 1 millionth person on Hacker News to say "speed run the history of traditional finance"
- chollida1 4y ago
  Umm, thanks?
- abathur 4y ago
  Congratulations! You are the seventh person on HN to say the words "speed run" and "finance" in the same comment :o ) https://hn.algolia.com/?dateRange=all&page=0&prefix=true&query=%22speed%20run%22%20%22finance%22&sort=byDate&type=comment https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
saurik 4y ago
But this IS traditional finance, in a very key sense: the money loaned to 3AC was NOT done using defi. When I have collateral I loan out using actual-defi the liquidation rules are transparent and the holdings are transparent and if something starts crashing I get to cause the liquidation before all of my money just disappears into a black hole of people lying to me. That 3AC then took their traditionally-loaned money and did something dumb with it involving crypto is not an argument that defi is broken but that people shouldn't be using tradfi: what is stupid here was people trusting 3AC instead of using their own tooling (a problem that I fully admit is so endemic in the cryptocurrency industry that I have to CONSTANTLY complain to my own business partners that our using Coinbase Custody to hold any of our currency is flat out embarrassing).
iqkznnft 4y ago
> tend to make things worse by turning firms into forced sellers when they may have been able to ride things out What do you mean, may have been able to ride things out? They owe money they don't have... Oh, you mean, if you wait long enough crypto might come back up and they're solvent again? Right, after they lost more than they had on the first bet, you wanna let them bet again that it might come back up?

carrja99 4y ago

"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"

0xcde4c3db 4y ago
In case the relevance isn't clear, this is a headline that was inserted into the Bitcoin origin block, presumably to prove that it hadn't been mined before that date. However, the specific headline chosen is often interpreted as an implicit jab at conventional finance by Satoshi Nakamoto.
- optimalsolver 4y ago
  I wonder what Satoshi would think of Tether, or crypto-firms like Blockstream.
aaaaaaaaaaab 4y ago
Ironic, isn't it?
- aaaaaaaaata 4y ago
  That selfish people are drawn to money markets?
raverbashing 4y ago
And now, we see the biggest irony in thinking this was bad It was not a bailout for banks, it was for their account holders.

tjbiddle 4y ago

Paywall: https://web.archive.org/web/20220617125537/https://www.wsj.com/articles/battered-crypto-hedge-fund-three-arrows-capital-considers-asset-sales-bailout-11655469932 https://web.archive.org/web/20220617125537/https://www.wsj.c...

seibelj 4y ago

The private sector will have to arrange any acquisition of distressed assets or they will fail and people will get hurt. Lenders will harden and be better equipped for the future. This IMO is a good thing - there is no one to save anyone and the market will deal with the consequences. I don't care about the impact on prices. Drive the weak players out and let the strong survive.

ausbah 4y ago
what firms are going to survive this, seems like everyone is being hit hard
- seibelj 4y ago
  Plenty of firms and trading shops will survive. Not everyone was a total YOLO degen with billions of dollars.
- smabie 4y ago
  Most trading firms will survive this atleast. Many are pretty prudent, especially the ones that are only managing their own money (prop shops).
- aaaaaaaaata 4y ago
  FTX, KuCoin, Coinbase, more.
woeirua 4y ago
I think you'll change your tune on this when too many firms fail at once and this becomes a systemic issue.

midislack 4y ago

brink 4y ago

I remember when they invested in Axie Infinity when it was still sub $5. they must have made bank when it shot up to $150. The token is now back at $13.

kgwgk 4y ago

> TradFi normally solves this by having a firm have oversite > $5,000 BTC and $200 ETH are in site I think you meant to write oversight and sight.

chollida1 4y ago
Yikes, I did. Talk about coasting on autocomplete/correct:)

ouid 4y ago

>Firm’s founders say they still believe in the future of cryptocurrencies. How the fuck is this the subtitle? The firm's founders saying they believe this is evidence of nothing. A responsible journalist would not include it at all. It is journalistic malpractice to make it the subtitle.

ipnon 4y ago
A journalist's job is to report the facts. The fact is Davies said he still believes. Seems like good journalism to me!
- ouid 4y ago
  PR is not facts.

smabie 4y ago

Haven't met a single person who liked or respected 3ac and the founders (Su Zhu and Kyle Davies). Not only was their investment strategy incredibly irresponsible, but their business conduct was consistently shady. Good riddance. PS: don't really think 3ac behavior is representative of crypto trading firms as a whole (Wintermute, Jump etc). A lot of them are highly professional and responsible operations who have weathered the storm just fine and in many cases, have generated nice pnl during this event.

shuntress 4y ago

Is this mostly caused by people coming to grips with the fact that "crypto" is entirely speculative with no actual value? "TradFi" at least has a real floor because "real" money (as in: currency that can be exchanged for goods and services) and "real" investments (as in: shares of companies that provide goods/services) do actually exist. Even if significant portions of the market are driven by speculation. Are we reaching the point where people trading crypto get bored and just... stop?

clpm4j 4y ago
As long as people have a way to potentially get rich with little to no 'real work', they won't stop.
- shuntress 4y ago
  Sure. Speculation certainly will continue and real money will continue to change hands. But are we at least done pretending that crypto currency (at least, as it exists now) will ever have any practical purpose beyond being a fungible entity upon which gamblers speculate?
  - yata69420 4y ago
    > But are we at least done pretending that crypto currency (at least, as it exists now) will ever have any practical purpose beyond being a fungible entity upon which gamblers speculate? No, I don't think that's happened yet. I still know tons of people excited to build for "web3". I don't think we need "rich" websites with javascript, "smart" phones in everyone's pocket, or "social media" at all. But those all happened, and it seems to be a lot of the same vibe for "web3" builders right now.
    - shuntress 4y ago
      It's difficult to get a clear picture of what exactly people think "web3" is. My general experience is that people who are caught up in web3 hype seem to actually just want simpler self-hosted/distributed resource redundancy.