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That’s a common problem when dealing with illiquid assets and not a characteristic of just crypto. For example a VC firm buys 10% shares of a company valued $1B

That’s a common problem when dealing with illiquid assets and not a characteristic of just crypto. For example a VC firm buys 10% shares of a company valued $1B at their latest round. Then the market tanks but no one really knows what these shares are worth because they are not trading anywhere so you don’t have a price to mark them. As a result you mark them in your books with the latest round price at $100m even though they might be worth much much less.

cykros 4y ago
It boggles my mind that lenders aren't all wise to this nonsense, and severely mark down these assets, if not completely refuse to allow them as collateral. I suppose that at least many banks got very hard up over the last 10 years of next to zero interest (next to on one side or other of it depending on where in the world they operate), so they were probably more willing than usual to lend money for the chance at getting a return on it. Curious to see which banks are getting hit hardest for exposure to FTX loans -- that hasn't been something I've been hearing much about yet.
Chyzwar 4y ago
Company have valuation would be based on recorded revenue, profit or at least growth rate. When buying a stake in a company, there is a whole legal framework and due diligence. Crypto token just have the bunch of wash trades to support theirs valuation and no transparency.
codyb 4y ago
Although, according to Matt Levine who writes Money Matters, that can sometimes be a feature instead of a bug whereby private firms are better able to ride bad market conditions than public firms are. In some cases you could see it being positive not having your stock price drop everytime the Fed announces a new rate increase or jump everytime they don't (or etc etc with other events) if your primary goal is to continue at a steady pace to achieve some goal.
- am3101 4y ago
  Small note: it’s Cliff Asness from AQR who came up with the illiquidity “premium,” though Levine does report it a lot. This matters a bit bc AQR is a large hedge fund that trades in liquids and therefore is marked frequently… there’s a bit of self-serving bias here (although may still be true).
jmull 4y ago
> …and not a characteristic of just crypto That’s a rather fine and unimportant distinction. It is characteristic of crypto, just not only crypto. And, in the case of crypto, the asset never represents anything but itself.
- worik 4y ago
  Oh yes. > in the case of crypto, the asset never represents anything but itself. This is the foul taste of all crypto "assets". They are not assets because they have no intrinsic value for anything. The nearest real economy analogy is the art market, which is hopelessly inflated, utterly riddled with fraud, and with very little intrinsic value. But you can hang a painting on a wall and look at it. Even if it is a fake it still looks good on the wall. Crypto has none of that. All it has is the scam, the fake, the hope of a bigger fool. Shame on us for letting this happen. It gives a bad name to geeks in general and cryptography specifically.
  - astrange 4y ago
    The art market has value because the illiquid-but-existing market lets you do tax evasion through fractional gifts. Crypto doesn't have the same properties, but if a crypto token isn't a security then you can get some other tax benefits via wash sales.
- JamesianP 4y ago
  Well I mean there are asset-backed cryptocurrencies too, also ones backed by fiat currency.
jimbokun 4y ago
Classic illiquid asset problem. Don't know the "real" price because it's infrequently (or never) traded.
- cbtacy 4y ago
  But are we really talking about "assets" here?
  - lazide 4y ago
    Good luck finding a solid definition of that term that excludes them without excluding a whole class of other, more traditionally recognized stuff. Tokens, etc. are easiest to think of as securities (aka stock) generally, albeit securities in a more abstract thing than a company.
    - dudeinhawaii 4y ago
      It feels like you're stretching here. If I cut squares of paper and call them Ponzi Coins and then mark them in my books as 100 Million in assets, well, I'm stretching that definition. I've also created more "assets" than the average crypto coin. Maybe it's as simple as adding a word, fake. The coins are fake assets. Otherwise, the words lose all meaning in the context of finance (assets and liabilities).
      - lazide 4y ago
        Except many are tradable on a market, just like securities and other assets. Also; stock in private companies is often not tradeable at all, but no accountant is going to call those fake. There are multiple ways of plausibly pricing assets. None are generally accepted that would let someone just make up a ridiculous valuation and stand up to any scrutiny, but people can always do what they want until the auditors show up anyway.
        cykros 4y ago
        At the very least, a bank can look at stock in a private company, and before accepting it as collateral, demand to see cash flow and income statements, and perform its own valuations based on revenue, earnings (if they exist), debt to equity ratios, and things of that nature. With a token, pretty sure the analysis on that level becomes "so you just made these up?" Now, whether or not this is how banks act in practice is another question. It is, perhaps, how they should act if they're being conservative, but it is likely that others will swoop in and often enough grab that interest for themselves. And in the rate environment we've been in until very recently, those are likely the banks that have managed to survive in many cases.
IfOnlyYouKnew 4y ago
No. You can’t just make up the book value of your assets. You need some sort of justification, and these are, for public companies, strictly regulated.
mediaman 4y ago
This is different. In the case of the VC who bought shares in the startup, they at least have the price they paid for the shares. In the case of crypto companies who create their own tokens and then use them as collateral, they never actually paid anything for the tokens they own. There's not even a cost basis. It's entirely made up. Not only is what the crypto companies doing much worse, but it is rare for VCs to leverage their investments in companies. It's not like their fund is levering up 2:1 and buying companies, like a PE fund does, because in the case of VCs their investments are usually not producing cash flow. But in the case of some of these crypto companies, they were levering up using collateral of tokens they made up that they never paid anything for. It's much, much worse than anything recently seen in finance. CDOs were bad in 2008, but at least the mortgages were a secured claim on a physical asset that someone actually paid something for.

cykros 4y ago

It boggles my mind that lenders aren't all wise to this nonsense, and severely mark down these assets, if not completely refuse to allow them as collateral. I suppose that at least many banks got very hard up over the last 10 years of next to zero interest (next to on one side or other of it depending on where in the world they operate), so they were probably more willing than usual to lend money for the chance at getting a return on it. Curious to see which banks are getting hit hardest for exposure to FTX loans -- that hasn't been something I've been hearing much about yet.

Chyzwar 4y ago

Company have valuation would be based on recorded revenue, profit or at least growth rate. When buying a stake in a company, there is a whole legal framework and due diligence. Crypto token just have the bunch of wash trades to support theirs valuation and no transparency.

codyb 4y ago

Although, according to Matt Levine who writes Money Matters, that can sometimes be a feature instead of a bug whereby private firms are better able to ride bad market conditions than public firms are. In some cases you could see it being positive not having your stock price drop everytime the Fed announces a new rate increase or jump everytime they don't (or etc etc with other events) if your primary goal is to continue at a steady pace to achieve some goal.

am3101 4y ago
Small note: it’s Cliff Asness from AQR who came up with the illiquidity “premium,” though Levine does report it a lot. This matters a bit bc AQR is a large hedge fund that trades in liquids and therefore is marked frequently… there’s a bit of self-serving bias here (although may still be true).

jmull 4y ago

> …and not a characteristic of just crypto That’s a rather fine and unimportant distinction. It is characteristic of crypto, just not only crypto. And, in the case of crypto, the asset never represents anything but itself.

worik 4y ago
Oh yes. > in the case of crypto, the asset never represents anything but itself. This is the foul taste of all crypto "assets". They are not assets because they have no intrinsic value for anything. The nearest real economy analogy is the art market, which is hopelessly inflated, utterly riddled with fraud, and with very little intrinsic value. But you can hang a painting on a wall and look at it. Even if it is a fake it still looks good on the wall. Crypto has none of that. All it has is the scam, the fake, the hope of a bigger fool. Shame on us for letting this happen. It gives a bad name to geeks in general and cryptography specifically.
- astrange 4y ago
  The art market has value because the illiquid-but-existing market lets you do tax evasion through fractional gifts. Crypto doesn't have the same properties, but if a crypto token isn't a security then you can get some other tax benefits via wash sales.
JamesianP 4y ago
Well I mean there are asset-backed cryptocurrencies too, also ones backed by fiat currency.

jimbokun 4y ago

Classic illiquid asset problem. Don't know the "real" price because it's infrequently (or never) traded.

cbtacy 4y ago
But are we really talking about "assets" here?
- lazide 4y ago
  Good luck finding a solid definition of that term that excludes them without excluding a whole class of other, more traditionally recognized stuff. Tokens, etc. are easiest to think of as securities (aka stock) generally, albeit securities in a more abstract thing than a company.
  - dudeinhawaii 4y ago
    It feels like you're stretching here. If I cut squares of paper and call them Ponzi Coins and then mark them in my books as 100 Million in assets, well, I'm stretching that definition. I've also created more "assets" than the average crypto coin. Maybe it's as simple as adding a word, fake. The coins are fake assets. Otherwise, the words lose all meaning in the context of finance (assets and liabilities).
    - lazide 4y ago
      Except many are tradable on a market, just like securities and other assets. Also; stock in private companies is often not tradeable at all, but no accountant is going to call those fake. There are multiple ways of plausibly pricing assets. None are generally accepted that would let someone just make up a ridiculous valuation and stand up to any scrutiny, but people can always do what they want until the auditors show up anyway.
      - cykros 4y ago
        At the very least, a bank can look at stock in a private company, and before accepting it as collateral, demand to see cash flow and income statements, and perform its own valuations based on revenue, earnings (if they exist), debt to equity ratios, and things of that nature. With a token, pretty sure the analysis on that level becomes "so you just made these up?" Now, whether or not this is how banks act in practice is another question. It is, perhaps, how they should act if they're being conservative, but it is likely that others will swoop in and often enough grab that interest for themselves. And in the rate environment we've been in until very recently, those are likely the banks that have managed to survive in many cases.

IfOnlyYouKnew 4y ago

No. You can’t just make up the book value of your assets. You need some sort of justification, and these are, for public companies, strictly regulated.

mediaman 4y ago

This is different. In the case of the VC who bought shares in the startup, they at least have the price they paid for the shares. In the case of crypto companies who create their own tokens and then use them as collateral, they never actually paid anything for the tokens they own. There's not even a cost basis. It's entirely made up. Not only is what the crypto companies doing much worse, but it is rare for VCs to leverage their investments in companies. It's not like their fund is levering up 2:1 and buying companies, like a PE fund does, because in the case of VCs their investments are usually not producing cash flow. But in the case of some of these crypto companies, they were levering up using collateral of tokens they made up that they never paid anything for. It's much, much worse than anything recently seen in finance. CDOs were bad in 2008, but at least the mortgages were a secured claim on a physical asset that someone actually paid something for.