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Counterparty risk. Lets say you borrowed 1BTC from FTX exchange so that you can short BTC. Congrats, you're correct! You're technically worth a lot more US-dol

Counterparty risk. Lets say you borrowed 1BTC from FTX exchange so that you can short BTC. Congrats, you're correct! You're technically worth a lot more US-dollars now. You go to FTX, and it stopped existing today. So you don't get your money. In fact, it turns out that you never had borrowed 1BTC in the first place, because FTX where you handled this whole concept has stopped existing entirely. ------- You can only do things like "short" something if the bank you're shorting with still exists by the end of it all. You can't win this at all. You _MUST_ have trust with somebody to do any kind of financial trade (be it a long, or short, or any other such complex trade). If that trust is broken, everything collapses.

notimetorelax 4y ago
Honest question, why do you need FTX to exist to short? E.g. if you borrow 1 BTC from someone and then sell it for dollars, later when you need to return this BTC you need to buy it on the mark. The difference in price is either your gain or loss.
- dibt 4y ago
  You need whichever exchange you entered the position on to exist, and ensure payout when the position is closed/expired. FTX is irrelevant. If the exchange is doing it's job properly, it would ensure there's a long position for every short position. It's the trader/market maker on the other side that pays you. The premium is what attracts your counter party to the trade. In the case of FTX, there wasn't a problem with the counter party, it was a problem with the exchange playing with the customer deposits that should have been left untouched.
  - vkou 4y ago
    > In the case of FTX, there wasn't a problem with the counter party, it was a problem with the exchange playing with the customer deposits that should have been left untouched. I have two questions, because unlike with the other crypto drama, I'm late to this party. 1. Is that actually what happened? 2. If the answer to #1 is yes, why does this still keep happening? We're in 2022, how many times has this played out, already?
    - dibt 4y ago
      >1. Is that actually what happened? Yes, this is our best guess based on all current facts. https://www.bloomberg.com/opinion/articles/2022-11-09/bankman-fried-s-ftx-had-a-death-spiral-before-binance-deal https://www.bloomberg.com/opinion/articles/2022-11-09/bankma... "The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’s a huge hole in the balance sheet." >2. If the answer to #1 is yes, why does this still keep happening? We're in 2022, how many times has this played out, already? This is a common occurrence during bear markets. The non-US crypto exchanges are (self|minimally|un)regulated. FTX is the biggest blow-up, and surprised many experienced people. As Warren Buffet says: “It's only when the tide goes out that you learn who's been swimming naked.” It's also rumored that FTX/Alameda were hit hard by the LUNA/Terra collapse early this year. They may have tried to cover it by manipulating the tokens they control, and trading with customer deposits. It's not unique to crypto. LME (London Metals Exchange) had an issue this year with someone short nickel that didn't want to payout. Also, Archegos capital ran up much more leverage than they should, which resulted in loses at several prime brokers. This was due to the brokers not margin calling them sooner. Credit Suisse had to close their broker services unit afterwards.
  - thaumasiotes 4y ago
    > You need whichever exchange you entered the position on to exist, and ensure payout when the position is closed/expired. FTX is irrelevant. You need that if you're long, unless you have ownership [almost always true...] in which case you can just close out your long position on some other exchange. You don't need it if you're short, because you get your payout immediately when you go short; closing out a short position is always a loss for you. (You profit when the loss from closing the short is smaller than the gain you got when you took the position. If you never need to close it at all, that's the best-case scenario for your short position.)
    - dibt 4y ago
      >You don't need it if you're short, because you get your payout immediately when you go short I don't know of any exchange that would let you withdraw premium before the short position was closed/expired. If you thought that happened once before, it's only because you are using margin collateralized with other assets on that exchange.
- scotty79 4y ago
  Nobody will borrow you a Bitcoin because with price that could go up by few hundred percent you might not have money to buy it back to give it back. It would need to be guaranteed by the third party that can force you to pay back by liquidating some of your other assets.
- dragontamer 4y ago
  > E.g. if you borrow 1 BTC from someone and then sell it for dollars Why does that guy trust you to return the BTC later? You don't need an exchange per se. But both people need to trust each other. In the stock market, cleaning houses serve as the central role of trust (and brokerages pass your money/stock to these cleaning houses). ----- It goes like this: if you don't return the stock, the clearinghouse will return the stock. If the other guy doesn't return the money, the clearinghouse makes it whole again. Since the clearinghouse is well trusted, everyone is happy with the trust issue. Otherwise, you have no reason to trust random people on the internet with your $15,000+ bets.
low_tech_love 4y ago
Well, if you borrowed just before it went down…
thaumasiotes 4y ago
> Lets say you borrowed 1BTC from FTX exchange so that you can short BTC. Congrats, you're correct! You're technically worth a lot more US-dollars now. > You go to FTX, and it stopped existing today. So you don't get your money. What? That's not how shorting works. If you borrow 1BTC from FTX so that you can short BTC, you then actually perform the short by selling the 1BTC to some other party. Now you have two things: (1) cash; and (2) an obligation denominated in bitcoin. That is what it means to be short. As soon as FTX stops existing, that's great for you, because it means you don't need to give them their 1BTC back. You got your money a long time ago.
- dragontamer 4y ago
  That's probably not what happens in practice. 1. You never got the BTC to begin with. Its on FTX's platform, with a little database entry that says "User Bob has -1 BTC on margin on the books". 2. The cash never leaves FTX platform either. Because FTX needs to "margin call" (aka: grab your assets somehow) if the market moves against the short position. 3. So really, you're trusting that FTX is going to give you the money back eventually when you zero out all your position entirely. 4. Also remember: exchanges regularly grab the assets. So its not really FTX's bitcoin either. They probably took it from Alice to lend to you. 5. If you wanna say "Well, why doesn't Bob go to Alice directly for this transaction??", its because Alice doesn't trust Bob, and Bob has no trust of Alice, so the entire scheme would never work.

notimetorelax 4y ago

Honest question, why do you need FTX to exist to short? E.g. if you borrow 1 BTC from someone and then sell it for dollars, later when you need to return this BTC you need to buy it on the mark. The difference in price is either your gain or loss.

dibt 4y ago
You need whichever exchange you entered the position on to exist, and ensure payout when the position is closed/expired. FTX is irrelevant. If the exchange is doing it's job properly, it would ensure there's a long position for every short position. It's the trader/market maker on the other side that pays you. The premium is what attracts your counter party to the trade. In the case of FTX, there wasn't a problem with the counter party, it was a problem with the exchange playing with the customer deposits that should have been left untouched.
- vkou 4y ago
  > In the case of FTX, there wasn't a problem with the counter party, it was a problem with the exchange playing with the customer deposits that should have been left untouched. I have two questions, because unlike with the other crypto drama, I'm late to this party. 1. Is that actually what happened? 2. If the answer to #1 is yes, why does this still keep happening? We're in 2022, how many times has this played out, already?
  - dibt 4y ago
    >1. Is that actually what happened? Yes, this is our best guess based on all current facts. https://www.bloomberg.com/opinion/articles/2022-11-09/bankman-fried-s-ftx-had-a-death-spiral-before-binance-deal https://www.bloomberg.com/opinion/articles/2022-11-09/bankma... "The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’s a huge hole in the balance sheet." >2. If the answer to #1 is yes, why does this still keep happening? We're in 2022, how many times has this played out, already? This is a common occurrence during bear markets. The non-US crypto exchanges are (self|minimally|un)regulated. FTX is the biggest blow-up, and surprised many experienced people. As Warren Buffet says: “It's only when the tide goes out that you learn who's been swimming naked.” It's also rumored that FTX/Alameda were hit hard by the LUNA/Terra collapse early this year. They may have tried to cover it by manipulating the tokens they control, and trading with customer deposits. It's not unique to crypto. LME (London Metals Exchange) had an issue this year with someone short nickel that didn't want to payout. Also, Archegos capital ran up much more leverage than they should, which resulted in loses at several prime brokers. This was due to the brokers not margin calling them sooner. Credit Suisse had to close their broker services unit afterwards.
- thaumasiotes 4y ago
  > You need whichever exchange you entered the position on to exist, and ensure payout when the position is closed/expired. FTX is irrelevant. You need that if you're long, unless you have ownership [almost always true...] in which case you can just close out your long position on some other exchange. You don't need it if you're short, because you get your payout immediately when you go short; closing out a short position is always a loss for you. (You profit when the loss from closing the short is smaller than the gain you got when you took the position. If you never need to close it at all, that's the best-case scenario for your short position.)
  - dibt 4y ago
    >You don't need it if you're short, because you get your payout immediately when you go short I don't know of any exchange that would let you withdraw premium before the short position was closed/expired. If you thought that happened once before, it's only because you are using margin collateralized with other assets on that exchange.
scotty79 4y ago
Nobody will borrow you a Bitcoin because with price that could go up by few hundred percent you might not have money to buy it back to give it back. It would need to be guaranteed by the third party that can force you to pay back by liquidating some of your other assets.
dragontamer 4y ago
> E.g. if you borrow 1 BTC from someone and then sell it for dollars Why does that guy trust you to return the BTC later? You don't need an exchange per se. But both people need to trust each other. In the stock market, cleaning houses serve as the central role of trust (and brokerages pass your money/stock to these cleaning houses). ----- It goes like this: if you don't return the stock, the clearinghouse will return the stock. If the other guy doesn't return the money, the clearinghouse makes it whole again. Since the clearinghouse is well trusted, everyone is happy with the trust issue. Otherwise, you have no reason to trust random people on the internet with your $15,000+ bets.

low_tech_love 4y ago

Well, if you borrowed just before it went down…

thaumasiotes 4y ago

> Lets say you borrowed 1BTC from FTX exchange so that you can short BTC. Congrats, you're correct! You're technically worth a lot more US-dollars now. > You go to FTX, and it stopped existing today. So you don't get your money. What? That's not how shorting works. If you borrow 1BTC from FTX so that you can short BTC, you then actually perform the short by selling the 1BTC to some other party. Now you have two things: (1) cash; and (2) an obligation denominated in bitcoin. That is what it means to be short. As soon as FTX stops existing, that's great for you, because it means you don't need to give them their 1BTC back. You got your money a long time ago.

dragontamer 4y ago
That's probably not what happens in practice. 1. You never got the BTC to begin with. Its on FTX's platform, with a little database entry that says "User Bob has -1 BTC on margin on the books". 2. The cash never leaves FTX platform either. Because FTX needs to "margin call" (aka: grab your assets somehow) if the market moves against the short position. 3. So really, you're trusting that FTX is going to give you the money back eventually when you zero out all your position entirely. 4. Also remember: exchanges regularly grab the assets. So its not really FTX's bitcoin either. They probably took it from Alice to lend to you. 5. If you wanna say "Well, why doesn't Bob go to Alice directly for this transaction??", its because Alice doesn't trust Bob, and Bob has no trust of Alice, so the entire scheme would never work.