22 ms·

Shorting Tether

244 points by yoelo 4y ago

deleted 4y ago
[deleted]
getToTheChopin 4y ago
It's a clever trade, and I appreciate that the author pointed out the main drawback: > What does that mean? Essentially that we’re exposed to the risk of something going wrong with Aave itself and not being able to get our money back. (Aave’s own explanation of its risks is here.) In order to withdraw our money from Aave, Aave actually needs to have the money we want to withdraw. When we deposited USDC collateral on Aave, Aave lends out that USDC to other users who deposit their own collateral on Aave. At the time of this writing, about 53% of Aave’s USDC is lent out. Author states that they only have "a couple hundred dollars" risked on this trade. Seems that they're just looking to win Internet points by being able to say that they shorted Tether.
- actionablefiber 4y ago
  Funny how the only entities that let you short Tether are the ones that will go bust and won't be able to pay you back if you're right.
  - rhaway84773 4y ago
    What this post does more than anything (and I think that is the goal) is illustrates that for all the crypto bluster, it’s currently a terrible financial system that has all sorts of massive risks that are not just hypothetical but have already been realized.
  - scotty79 4y ago
    Isn't it nice that one of the main dangers to your stable coin doesn't exist because shorting it is not profitable enough for the risk?
    - toss1 4y ago
      You want to imply that the short is unprofitable because the asset is so good that it'll never decline in value. That is the exact opposite of the reality (and misses the entire point of the article). The point is that shorting tether is likely to be enormously profitable, but you won't be able to collect your profits This is because no well capitalized and stable broker or exchange will touch Tether, and the only counterparties who might lend you the Tether to short are extremely likely to go bankrupt when Tether does collapse. So, you'll put your millions of dollars at risk on deposit, pay your interest, and end up with a $100 million or whatever profit, owed to you by a now-bankrupt exchange, so your profit will never arrive at your bank account, and your best case is suing the husk of a bankrupt exchange whose shady owners absconded to a non-extradition country. The trade is bad because only disreputable and insufficiently capitalized counter-parties will touch it, not because Tether is great in any way.
      - scotty79 4y ago
        > You want to imply that the short is unprofitable because the asset is so good that it'll never decline in value. Absolutely not. I think tether is garbage that benefits almost noone except its creators. I'm just amused by the fact that stability of a bad thing is increased because betting against it is worse than for it. > The point is that shorting tether is likely to be enormously profitable, but you won't be able to collect your profits. Hence not profitable at all. :-) Betting for it is risky, betting against it is risky. Maybe that's a huge part of its stability? Like stability on the edge of the knife held over lava pit. Nobody benefits from going to either side despite equilibrium being uncomfortable?
        grey-area 4y ago
        No it’s stable because they’re lying about what it is backed by. It’s easy to make a scam look superficially stable if you are not called on it or make it impossible to call you on your promises.
        scotty79 4y ago
  - sebzim4500 4y ago
    Exchanges typically back client USDT/USDC assets partially with USD and partially with fixed interest products. If USDT goes to zero some of the big exchanges will make billions. These are your counterparties when you short USDT vs USD.
  - dmurray 4y ago
    This isn't really true and the guy saying "If someone showed me a way to do it with Goldman Sachs as a counterparty, I’m in" is also misstating things, perhaps intentionally. I'll take the long side of the Tether bet for 30% a year (I'll buy one-year Tether forwards at 70c). I'm not as creditworthy as Goldman, but for small amounts, it's pretty close. I could collateralize the trade with my house, and in any case I don't have the kind of correlated portfolio that means if Tether goes bust, I can't pay you. But enough about me - some trader at Goldman will absolutely do the same deal! Maybe they can even do it for 72c. There is a market-clearing price for this trade if done between two creditworthy parties. I don't know what that price is because there isn't a big public market for it, but if you shop the trade around, you'll find a price. The people bemoaning they can't short Tether mean they can't short it at what looks like it should be the right price, say, paying 5% a year to borrow it. But that's not the right price! That's the price that already includes you taking a lot of wrong-way counterparty risk. Against Goldman, the price is 20% or 30% or something, and you can do the trade, but you don't want to. So the fair price of one-year Tether forwards is 75c or whatever, but the spot price is clearly $1.00. How do you reconcile this in financial markets terms, that the prices don't converge? Same reason other commodity futures might have backwardation - holding Tether provides some value to its owners. Like having steel today allows you to build a skyscraper and start collecting rent, so spot steel trades higher than future steel if the construction business is good. In Tether's case, that value is the freedom to participate in other crypto trades, or perhaps to escape even riskier assets in China, or something else.
    - Nowado 4y ago
      There's also a scale issue. If a product is not standardized, that Goldman trader isn't going to work with 'a couple hundred dollars' mentioned in the piece.
  - drexlspivey 4y ago
    When you are shorting something you receive money and you are the one that needs to pay back not them.
    - actionablefiber 4y ago
      It is not that simple. In many cases the money you receive from short selling is the collateral for your short position. You need to return the borrowed asset to get your collateral back.
- yborg 4y ago
  The author's Internet point is that they think Tether is bust and why big money is not shorting it (you can't find a counterparty to make a big trade with that is any less dodgy than Tether itself). They then describe a mechanism for making the trade in which the counterparty is a DeFi protocol that is, of course, just as dodgy as Tether itself. The whole ecosystem currently remains a giant confidence game, as Matt Levine described well in a recent article. This doesn't mean there isn't a lot of money to be made - casinos make a lot of money at an activity with no direct economic value - but right now you are best served only putting in money you can easily lose.
  - Aperocky 4y ago
    Big money is not shorting it because there's no way to short it at scale. There are no broker that will survive to close the short, and you need a broker to short.
    - OJFord 4y ago
      That's the same thing GP is saying - nobody reliable, not 'in the game', wants to take the other side of the trade. (Presumably there is a price at which they do, but also at which nobody's remained interested.)
      - Aperocky 4y ago
        want vs reality. In fact, I would want to bet against USDT with a reasonable proportion of my savings, but there are no safe way to ensure such a contract will be honored in the case that it actually went to 0.
    - dghlsakjg 4y ago
      USDT is super interesting since it doesn't behave like a normal market priced asset. You know it won't ever go up in value, and you know that if it goes down, it goes down to 0 VERY QUICKLY, with maybe a chance of a claim against unverified assets that might pay out after years of litigation.
- SilasX 4y ago
  Yeah I was going to say these are ridiculously small numbers to try the bet with -- each of those transactions mentioned was around $3 worth of ETH, which adds up fast. I wouldn't try something like this for less than $5k.
britneybitch 4y ago
Even if your premise is right, your timing has to be right too. The SP500 has doubled since 2014 which lines up with the traditional 7% per year. Meanwhile they're paying 12% per year to short, so their approach is a compounded 22% worse[1] than VTSAX-and-chill (before even considering capital risk). This is still gambling, just not in the usual direction. [1]: 1.07/(1-0.12) = 1.22
- aardvarkr 4y ago
  I agree with your premise but the s&p isn’t going up by 7% right now and the author is just taking a calculated risk. That’s his business. If he thinks Tether is going to collapse then he’ll make a massive return on his investment. He’s essentially gambling $46/yr to get a $450 payout if Tether collapses.
  - scotty79 4y ago
    > massive return Just around 100%. That's not massive for crypto gambling. You could just buy BTC and have 600% in less than 3 years if only BTC won't break out of its 12 year trend. And that's a very conservative gamble.
    - eli 4y ago
      Not if you believe BTC is wildly overvalued. I personally don’t think it sets a new record high, ever, and is mostly down from here
      - swyx 4y ago
        look i'm as skeptical as the next HN'er but the evidence of past history is against you and "ever" is a very long time... BTC doesn't have to win mass adoption for it to set new highs, it just has to be the "store of value" (i know, i know) for enough people and for the next QE cycle to start in 3 years to get going again
        4y ago
mouse_ 4y ago
Money printers bad. Including the Federal Reserve (since its inception 109 years ago, the US Dollar has lost 96% of its value.) There is an argument that deflationary currencies are bad because people will not want to spend them as they accrue value, but that value has to go somewhere; either stays in your pocket with deflationary currency or goes to some billionaire's fourth yacht's heated seats with inflationary.
- wpietri 4y ago
  The Federal Reserve has done a pretty good job on inflation in recent decades: https://www.macrotrends.net/countries/USA/united-states/inflation-rate-cpi https://www.macrotrends.net/countries/USA/united-states/infl... The 1970s were bad, but we had a 40-year period of low, stable inflation, which is the goal. Now's not great, but it's not the Federal Reserve's fault; between a global plague, supply chain disruption, and a land war in Europe, inflation is up across the globe: https://tradingeconomics.com/country-list/inflation-rate https://tradingeconomics.com/country-list/inflation-rate Compare that to the economic chaos that was much more common before the rise of strong central banks and I'd say "Federal Reserve baaaaad" is somewhat lacking in nuance.
  - bottlepalm 4y ago
    Global plague nope, supply chain disruption nope, a land war in Europe nope. Printing 13 trillion dollars for corona stimulus, yep. Though I guess that's more the fault of the legislature than anyone else.
    - mouse_ 4y ago
      +1
    - WinstonSmith84 4y ago
      Yeah ... But I think he must have been sarcastic with "The Federal Reserve has done a pretty good job on inflation". The FED can't be totally blamed, respective governments share a big part of the incompetency
jboogie77 4y ago
https://twitter.com/oppositeinvict2/status/1536510984654929921?s=46&t=rhQ1D6juAEaQ8ThDNnbZxQ https://twitter.com/oppositeinvict2/status/15365109846549299...
hoschicz 4y ago
Note that interest rates on USDT went down now and now it costs around only 3 % APR to short it. I've been short for a year now and will be fairly rich if Tether burns to the ground.
- retube 4y ago
  How are you managing the counterparty risk?
- scotty79 4y ago
  How's that profitable when compared to buying bicoin year after the crash and hodling for 3 years?
  - albntomat0 4y ago
    The probability of Tether collapsing and Bitcoin going to/beyond its previous peak are definitely different. They're also quite possibly inversely correlated (e.g. Tether collapsing could also tank Bitcoin).
    - scotty79 4y ago
      I'm not that sure. At least not in the short term. When people exit tether they'll mostly exit into other cryptos and this will generate demand vastly exceeding the supply.
      - albntomat0 4y ago
        In that scenario, I agree that the price of other cryptos in Tether will go up, if Tether seems like it's actively collapsing. However, that'd be due to Tether's perceived value being significantly less than 1 normal US dollar, or 1 of another US dollar stablecoin. BTC per Tether goes up, BTC per anything else is unchanged, without considering the loss due to yet another crypto blowup.
        scotty79 4y ago
cgb223 4y ago
Has anyone found a reliable platform in the US to legally short / take out PUTs on a crypto currency in the US? I went looking last year and couldn’t find anyone allowing this feature. Binance had something close but only on their .com site not their American .us site
- throwaway1777 4y ago
  Until regulators approve such things they won’t be offered legitimately after all the saber rattling from the sec.
- marcrosoft 4y ago
  IBKR has futures trading for bitcoin. You can go both directions with futures.
- wpietri 4y ago
  You could do it the old fashioned way. You find somebody who thinks the value of their crypto will go up. You pay them to borrow their crypto for, say, a year. You then sell the crypto for dollars and in a year you hope you can buy it back for less than you made. The legal way to do it would be with an old-fashioned paper contract between two known parties. But as web3isgoinggreat.com has made clear to me, the more effective way to do it is to use some crypto site for the deal. If you're lucky, the tools/sites/curriencies you've used will just have gone out of business. And even if not, apparently you can just say, "Oops, I used the money to do other things so I'm not giving anything back to you."
  - foobarian 4y ago
    Wasn't ETH created just for this purpose by accomplishing these deals via smart contracts?
    - c7b 4y ago
      Yes, and they exist, that's also what the article's author ended up using.
- 4y ago
WinstonSmith84 4y ago
More like "Shorting Tether for Fun and Slow Bleeding"... 8 years of FUD and still here, it doesn't take 8 years to do a safe 2x in crypto, not even in trad-fi.
- wpietri 4y ago
  Yes, if there's anything I've learned from the crypto markets lately it's that a few years of (apparent but vigorously unaudited) success is proof that it is very safe and won't come apart precipitously.
  - WinstonSmith84 4y ago
    not sure whether this was sarcastic, but if it really is, then you shall just extend your time horizon. Those who bought bitcoin at the worst moment of 2014 are still now at a comfortable ~20x (and roughly ~2x on the spx)
    - reducesuffering 4y ago
      How does that help whether to buy or sell in 2023? You could say the exact same paragraph last year, but someone would’ve bought and lost 2/3 now. That means it could happen again.
      - wpietri 4y ago
        Hey now. The Bitcoin price is heavily dependent on financially naive people putting dollars in. If you're just going to run around countering hype with facts and reasonableness, how are they going to get the bubble to reinflate?
    - wpietri 4y ago
      Oh wait, is the game we're playing Pick an Arbitrary Time Period That Lets Me Be Right? How fun, let me try. In which case I am happy to extend my time horizon. We could go back 15 years, where all of this stuff was worthless. We could go back 20 years where the online currencies Beenz and Flooz had just collapsed into worthlessness. We could go back 150 years to the wildcat banking area, the last time we let chumps just make up magic money, which was such a disaster that it was foundational to the modern regulatory regime. Or how about we go back 300 years and look at the South Seas Bubble and Isaac Netwon's time reforming British currency so it was less of an exploitable clusterfuck. You're right, extending my time horizon really does help put cryptocurrency in perspective.
vgatherps 4y ago
An potential failure case for defi is that some contract: * Is looking at USDT pairs as well as USD pairs for a price oracle and doesn't handle USDT pairs going to infinity well (i.e. BTC/USDT skyrockets) when tether goes to zero * Effectively hardcodes the value of Tether to $1 (can happen by accidentally treating a X/USDT pair as an X/USD pair) I suspect that the major lending protocols (AAVE, Compound) have enough attention and effort to not make such a basic mistake but there's a whole wide world of less competent protocols out there. This can happen to centralised venues as well of course but as far as OP is concerned those are too risky for the tether trade (an assessment I agree with).
- tornato7 4y ago
  This indeed happened to a few protocols that had the value of UST hard-coded at $1. The big players mostly use Chainlink though, which uses a diversity of price sources and doesn't make that type of assumption.
adrianchifor 4y ago
You know who already made tens of millions in profits and will continue to because of stories like this? Market makers that redeem billions of USDT for cash with Tether/Bitfinex every time it goes under $0.99. Borrow USDT on leverage, cash out at $1 to US bank, mint USDC with Circle, swap to USDT, repay USDT loan and bank the difference, rinse and repeat until it's back to $1.
- Aperocky 4y ago
  It's not a risk free proposition, it's probably a losing proposition in the long term. Every time it dips under $0.99, there's a chance it goes straight to $0 and cannot be cashed out anywhere.
  - charcircuit 4y ago
    >there's a chance it goes straight to $0 Since Tether is fully backed the chance is really small.
    - bagels 4y ago
      They merely claim it is fully backed.
      - charcircuit 4y ago
        No, they also have third party attestations that it is fully backed.
        bagels 4y ago
        Apparently those attestations are relatively recent in their history, but also not very convincing: https://www.coindesk.com/markets/2021/03/30/tether-takes-step-toward-transparency-with-first-accounting-firm-report-card/ https://www.coindesk.com/markets/2021/03/30/tether-takes-ste... "as noted later in the article the composition of Tether’s assets is not spelled out in the attestation" Meaning they may be backed by loans or fraud coins or anything.
lvl102 4y ago
It’s been more than a decade and it’s still not that cheap to short crypto. I am 100% convinced that’s by design. If you think equity is rigged, crypto is a complete circus. I rather not deal with it even if money can be made. It’s going to slam you at some point.
- djtango 4y ago
  On OddLots they interviewed someone who shorted Luna and borrow fees were insanely high in part due to the fact that it would yield 20%.
- 323 4y ago
  Nobody is stopping you from creating an "unrigged" way of shorting crypto. If what you say is true, you will have huge demand. Also, you can short crypto on CME. Is that rigged too?
  - s28l 4y ago
    > Also, you can short crypto on CME. Is that rigged too? I think your first point is fair, but I think you're overselling things here. Yyou can only short Bitcoin, not all crypto, but the real issue is that the Bitcoin futures curve is in backwardation, which implies a certain financing cost to go short. The settlements for the various contracts can be found here[0]. Nearly all of the volume is concentrated in the front month contract (Jan 23 at the moment), so if you want to be able to trade any size at all, you'll have to do so by selling that contract. However, the issue is that the future price is consistently lower than the spot price. So if you bought a Bitcoin today and then sold a future for the front month (i.e. so you locked in the price you could sell the Bitcoin at in the future), you would be guaranteed to lose money. And you will effectively have to do exactly that every month: as your short contract approaches expiry, you'll need to roll it over for the next month's contract. As the front month gets closer to expiry, its price will trend to the Bitcoin spot price, meaning you'll have to buy it back at a higher price then you will get when you sell the next month contract. I don't have access to the historical settlement prices for the CME contracts at the moment, so I can't estimate the exact roll cost you'd pay over the course of a year. If we guess that it's about $100 each roll, then you'd pay $1200 over the course of the year per bitcoin (as well as having to commit 50% of the price of bitcoin in margin). The OP posted 185 USDC net as collateral and has a short position of 450 USDT, which he's paying about 13% on. In the CME case, the collateral requirements are higher (50% of the notional shorted) but the financing cost is lower (less than 10% of notional shorted). [0] https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.settlements.html https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bi...
ptero 4y ago
I admit that I only skimmed the article, but the first thing that jumps at me is counterparty risk; the same risk the author is trying to avoid in his rejected "just short Tether" option. The proposal seems to put a bunch of crypto exchanges in the transaction path which, thinks me, can bring trouble* should the Tether collapse the way FTX did. More generally, while Tether may be a house of cards that will eventually collapse, placing a bet on it has actual costs. And "the market can stay irrational longer than you can stay solvent" is an adage worth remembering. My 2c. *either directly, by failing to deliver the winnings should the trade go the authors way; or indirectly, via clawbacks when govvies and lawyers go after those who made profits to (minimally) compensate those who was left holding the bag.
- dktp 4y ago
  Act III describes this risk and Act IV addresses how they dealt with it
  - ptero 4y ago
    I think Act IV describes shifting it to a different defi counterparty, which might carry lower counterparty risk. Or not.
ansible 4y ago
Man, I'd love to short Tether too. But that would mean giving actual USD to some other exchange, and I'm yet to be convinced that there are any exchanges who aren't running some kind of fraud scheme as well.
- tornato7 4y ago
  You can short tether purely with ETH collateral on-chain, and then you're not exposed to any exchange risk. Of course you are then exposed to ETH price risk.
  - polygamous_bat 4y ago
    It's like sawing off a tree branch you are sitting on: if Tether falls Ethereum prices will be severely impacted as well.
rthomas6 4y ago
I still like DAI. Nobody seems to have heard of it or remember it exists, but it's a stablecoin that doesn't rely on "trust me bro". It's soft pegged to the dollar through its algorithm. While the crypto world seems to have been almost entirely replaced people interested in and having a basic understanding of the technological side of it with people who want to get rich quick while understanding nothing, DAI has remained successfully pegged to the dollar. Not perfect but also not likely to take a permanent dump.
- greenthrow 4y ago
  Algorithmic stablecoins are not a good idea. See: Luna/Terra.
  - m00dy 4y ago
    Algorithmic stable coins are the future, they just need a reliable utility.
    - polygamous_bat 4y ago
      Are you saying... they're a solution looking for a problem?
  - yokem55 4y ago
    The main difference between MakerDAO/DAI and Luna/UST is that Maker doesn't accept their native token as collateral. You have to use collaterals external to the protocol which won't inflate in response to where DAI is relative to a $1 peg. In contrast, UST only had LUNA as collateral, and ended up minting more and more LUNA as UST fell off it's peg. That's not to say that DAI doen't have it's own risks as they have a lot of potentially censorable USDC as collateral, there could be situations where they can't liquidate borrowers fast enough if a collateral falls in USD price too fast, and they run their own oracles which could fail or misbehave. Not to mention the DAO has a fair amount of governance drama on a regular basis. But those risks are quite distinct from what took luna/ust down.
  - G3rn0ti 4y ago
deleted 4y ago
[deleted]
low_tech_love 4y ago
”Tether’s large enough by now, and significant enough to the crypto ecosystem, that crypto’s major players will likely do just about anything they can to stop it from failing.” Where have I heard that before…
m00dy 4y ago
> If USDT collapses to a price of, say, $0.01 USD / USDT, you can buy up 100M USDT for $1M USD, and hand back that Tether to Genesis to satisfy your loan. Why would Genesis be still alive after Tether's collapse ?
- HomeDeLaPot 4y ago
  The article goes on to raise that exact point. Did you stop reading halfway through?
- jtsiskin 4y ago
  …keep reading :)
deadlast2 4y ago
Keep away. Obviously crooks involved in the tether from the beginning. These crooks are big financial institutions and you might get sucked in to a short squeeze.
- Invictus0 4y ago
  A short squeeze on a stablecoin? lol
- tornato7 4y ago
  Shorting stablecoins is pretty uniquely risk off because the price of Tether will not go much higher than $1.
gitfan86 4y ago
During the '07 housing crisis people bought "Synthetic CDOs" which where actually bets on a particular set of mortgages defaulting. For example, they bet that a group of mortgages where the borrower had no proof of income and a mortgage with a very high interest rate in a location where prices were falling would fail. It seems like a reasonable bet, but they didn't take into account that the people taking these bets had no limit to how many times they could take the bet. Eventually they had enough money to just payoff the mortgages and win the bet. I would be very concerned here that the same type of risk could happen
- qeternity 4y ago
  You're confusing a synthetic collateralized debt obligation (CDO squared) with a credit default swap (CDS).
  - gitfan86 4y ago
    Good, the last thing I want is to be an expert in the details of the obfuscation and misdirection of the scammers on Wall St. during '07
    - baobabKoodaa 4y ago
      Why are you responding with snark and sarcasm to someone who pointed out a factual error in your post? Don't do that.
      - gitfan86 4y ago
        I'm not being sarcastic, I think it is a huge waste of time to try to understand the details of a system that is specifically designed to be obtuse and confusing when if you zoom out you can understand the system just fine at higher levels.
        baobabKoodaa 4y ago
        That's tangential to the point. You accidentally posted misinformation to the internet and somebody corrected you. Don't go off on a raging tangent, just say "thanks" or something.
GlitchMr 4y ago
The problem with shorting cryptocurrency is that you are assuming that market is fair, when this is absolutely not the case - the market is heavily manipulated.
jqpabc123 4y ago
Tether is the support mechanism underlying the entire crypto market. You're basically betting that the crypto market will collapse ... but the exchange/broker/whoever you're dealing with will survive and have the necessary funds to cover your short. It all seems rather contradictory to me --- you think it's all going to collapse ... but at the same time you're willing to bet that your little chosen piece of it will somehow survive just fine. And not shutdown withdrawals at the first sign of trouble (like others have done) so you can collect your payout. This is almost like playing the lottery --- winning is pure dumb luck beyond your control.
- logifail 4y ago
  > You're basically betting that the crypto market will collapse By coincidence, my wife was watching The Big Short (2015) with our eldest two kids tonight, it really is worth watching [again] if you've not seen it [recently]. > ... but the exchange/broker/whoever you're dealing with will survive and have the necessary funds to cover your short Michael Burry has pretty much exactly that conversation with Goldman in the film.
queuebert 4y ago
The problem is no one can calculate a Sharpe ratio for crypto. The variance is not well understood.
- chollida1 4y ago
  Sharpe ratio uses a backward looking variance as it tells you how you traded wrt to the volatility. I assure you, we can trivially look back to see the variance. I mean, how could we calculate a sharpe without knowing the return and volatility, we always use historical for both, its one measure of how we track portfolio returns, which again, are backward looking. Though sharpe isn't used as much as it was 15-20 years go due to it penalizing volatility in positive returns as much as it penalizes volatility in losses.
  - queuebert 4y ago
    That is a backward/ex-post Sharpe ratio. Bankroll management requires knowing the forward Sharpe ratio for VAR. You can't know VAR without knowing the forward expected variance. This is why black swan events wipe out traders who think they know their risk but really don't.
    - chollida1 4y ago
      Hmm I worked in a bank and ran these calcs and we never use forward variances as you can’t know it for any instrument and you can’t know your return as well. Crypto has nothing to do with this. Are you certain if your facts here because something doesn’t seem right. VAR makes abut more sense but still uses a backward looking variance. Sharpe never uses a forward lookingvariance as this makes no sense as you don’t know your returns ahead of time unless you are Madoff And for VAR we either typically use historical VAR or Monte Carlo, again because you never know your returns ahead of time so trying to do any risk measure with estimates returns is useless
      - queuebert 4y ago
        This is why banks fail. Just kidding.... :-P Estimated Sharpe for a trade would be what you think the return should be (e.g. fair market value - current price) divided by the estimated future variance. This is what you estimate for VAR and compare to your risk tolerance. The eventual accuracy of the estimates will determine whether it's a ho-hum trade or a black swan that wipes you out. Black swans are essentially situations in which variance estimates were completely wrong (as opposed to return estimates). Variance is a function of a bunch of things (and correlated with every damn thing). Simply taking historical variance and assuming it will be the same in the future is the laziest possible solution. Black Swan events have woken people up to platykurtic Gaussians and the fact that many real life distributions aren't even Gaussian. This is why you use Monte Carlo, because it doesn't need to assume a kurtosis or even Gaussianity, but is more computationally intensive, but not terribly so, but also suffers from low sample number at the tails, so it's not that accurate in extreme situations either. An additional red flag is that, if you have to use MC, then you don't know the distribution underlying the process, and if you don't know that there might be other things you don't know. Crypto is one of the newest markets, so we understand a lot less about its extreme conditions and the tails are very uncertain. Even with Monte Carlo I wouldn't trust crypto Sharpes one iota. Sorry if you know all this stuff. Thought I should clarify where we probably actually agree but may be thinking of it differently.
jeffreyrogers 4y ago
For it be worth doing for a hedge fund they'd need to be able to put on a sizable trade. Let's say $1mm but probably a lot more. Is there enough liquidity to do this? I have no idea.
paulusthe 4y ago
You don't have to short tether specifically. If tether goes under, everything will go under. Just short whatever large ish coin which has cheapish carrying costs.
- itake 4y ago
  The difference though is tether can only go down and when it does it goes to zero. If you short a large ish coin you’re exposed to value increases and the unlikely hood of the count going to zero
charcircuit 4y ago
Tether is 100.38% backed by assets. This means they can always trade Tether for USD. About 80% of their assets are liquid meaning that Tether's supply can shrink by up to 80% and they can still pay out within a couple of days.
arisAlexis 4y ago
Please refrain from doing what OP is proposing for your pocket’s sake
deleted 4y ago
[deleted]
acjohnson55 4y ago
I had this same idea a few months ago: https://mobile.twitter.com/AlanJay1/status/1418786319199780865 https://mobile.twitter.com/AlanJay1/status/14187863191997808... I'd bet on USDT failing in 3 years. But I'd want to understand how the close-out works under the assumption that the non-stablecoin collateral in Aave crashes and the liquidation process isn't able to preserve the value of the pool. I haven't studied that in depth. My guess is there's non-negligble risk of not being able to get that return on the last leg of the trade, even if the hypothesis is right.
- c7b 4y ago
  I guess most people who looked at crypto had that idea, and most people who thought about for more than a short moment probably came to similar conclusions as the OP (if you do it, do it through DeFi, and ideally only with what's probably play money for them). One thing they didn't mention that someone who just wants to play around should keep in mind is that you might incur tax reporting obligations. On the technical point: USDT isn't used as collateral in the protocol, apparently, so the main risk is that other assets in the collateral pool like Ether drop so sharply that the liquidation mechanism can't keep up / that the price oracles get messed up. That's a known unknown, there are also unknown unknown, eg bugs/unexpected behavior in the protocol. There's also the question whether/how you'd be able to convert your crypto holdings back into fiat dollars at that point (most centralized exchanges might be in trouble, with USDC you need to create a business account with Circle, but still seems like a feasible off-ramp).
jupp0r 4y ago
There's also the risk of collateral damage to BTC and other crypto assets. That sweet money you are making is coming from somewhere.
darawk 4y ago
All the people mindlessly saying "counterparty risk" clearly didn't read the article. He has thought about this carefully. His counterparty in this case is Aave, a DeFi smart contract. Smart contracts famously get hacked frequently, of course, but Aave has been around a long time, and it's probably reasonable to be somewhat confident in its security, at this point. The second thing you have to worry about is Aave's liquidation mechanism: under the market conditions implied by a Tether collapse, will Aave's liquidation mechanisms function efficiently and effectively? The answer to that question would depend on exactly how the collapse unfolded (i.e. how quickly it was certain, the degree of insolvency, how much the market moved how fast, etc). However, it is important to note that the only thing at risk here for him is the profit from his short plus the collateral factor haircut, not the entire principal. The trade he did was to deposit $x usdc on Aave, borrow $y usdt, and then sell that usdt back to usdc. That means he physically has CF * principal USDC in his possession, and no matter what happens, Aave can't take that away from him. Now, he looped this twice, so it's actually CF^2 * USDC that he has, but that's still not that big a risk. Finally, he has to worry about the solvency of USDC. However, USDC is regulated in the US and has fairly real audits. Almost nobody seriously thinks USDC is insolvent. I think there is very little to worry about here. Personally, I think Tether is pretty obviously at least mostly solvent, and I think shorting it is a dumb trade that will lose him money. But he's going to lose money paying the interest, not losing his principal. People have been predicting a Tether collapse for literally years now, and despite all the market stress and volatility which should have clearly exposed their supposed fraud, they're still standing, and the peg trades with solid liquidity at $1 today. My own theory of what's actually going on here is that Tether is intentionally obtuse, because it allows them to make seignorage profits against their own users. If you issue a stablecoin and you know you are solvent, then you can hint to the market that maybe you're not, and buy (your own) assets that you know are worth $1 at a discount, making a tidy profit in the process. I think this is their real strategy, always has been, and they've gotten very rich doing it. It's possible they've been under-collateralized at various times, and maybe are even slightly so now, but I seriously doubt they are currently insolvent to the degree people like this think.
- hiq 4y ago
  > My own theory of what's actually going on here is that Tether is intentionally obtuse, because it allows them to make seignorage profits against their own users. From https://www.bloomberg.com/news/articles/2022-12-14/hedge-funds-drawn-to-crypto-s-big-short-tether-after-ftx-reveals-cracks https://www.bloomberg.com/news/articles/2022-12-14/hedge-fun...: > Tether concealed the loss of more than $850 million of reserves to a Panamanian entity called Crypto Capital Corp. as recently as 2018, the New York Attorney General found. In a separate case, the Commodity Futures Trading Commission found Tether didn’t have enough fiat reserves to back circulating tokens more than two-thirds of the time, in a period between 2016 and 2018. so it's more than just being obtuse. I don't think they're playing with the trust of their own stablecoin to get cheap USDT, it'd be better for them to be more trustworthy and have more USD to invest in safe investments with low interests, but they're probably losing some market share to more trustworthy (US-based) stablecoins because of how shady they look.
nickpinkston 4y ago
Note that the current Tether investigation just moved to the SDNY DOJ office that handles the biggest financial cases. This time they're looking into possible bank fraud committed by Tether [1], while their previous case was settled without admitting wrongdoing [2], but their investigation showed Tether wasn't fully backed for activities in NY, while their records of their backed assets have been sealed and CoinDesk / others were denied their FOIA request to access them due to "adverse business impact" - so it seems like there's a whole hell of lot of smoke around their likely fire... From [2]: "Meanwhile, Tether has resolved government accusations that it overstated its holdings. From June to September 2017, Tether never had more than $61.5 million in funds while about 442 million coins were in circulation, the Commodity Futures Trading Commission said last year." [1] https://www.bloomberg.com/news/articles/2022-10-31/tether-bank-fraud-probe-gets-fresh-look-by-justice-department https://www.bloomberg.com/news/articles/2022-10-31/tether-ba... [2] https://ag.ny.gov/press-release/2021/attorney-general-james-ends-virtual-currency-trading-platform-bitfinexs-illegal https://ag.ny.gov/press-release/2021/attorney-general-james-...
- dustingetz 4y ago
  so tether mkt cap / 10 = the amount of fake leverage in btc price? is it true?
  - baobabKoodaa 4y ago
    No. The ratio you refer to was specifically from a 2-month period in 2017. Furthermore, not all of that can be considered to be levering btc price up.
- 1vuio0pswjnm7 4y ago
  According to the "public disclosure" they made back in March 2021 under the agreement with the NYAG, a whopping total of 3.87% of tether is backed by cash. Over 65% is backed by IOUs, i.e., unsecured promises to pay in 270 days or less, or, if one prefers certain terminology, commercial paper. https://web.archive.org/web/20210513120449/https://tether.to/wp-content/uploads/2021/05/march-31-2021-reserves-breakdown-tether.pdf https://web.archive.org/web/20210513120449/https://tether.to... Of course, Tether does not tell us who are the "I's" in the IOUs. They could all be affiliated entities (like Alameda was to FTX) or other crypto startups. Does it make any difference who are the entities, or individuals, that have promised to pay.
tgsovlerkhgsel 4y ago
Even if counterparty/protocol risk don't eat you, "the market can remain irrational longer than you can remain solvent" applies here and the interest can eat you.
Sebb767 4y ago
It's a sidenote, but part ("Act") 1 has a strange structure. They start off with Tether doing dodgy business and most likely being insolvent (a very good and sound point), but then end with > Tether’s most public executive, CTO Paolo Ardoino, uses a Twitter avatar that seems to be a pear with the face of the Joker. and > His wife, Claudia Lagorio, began working at Bitfinex as a Mobile Application/Frontend Developer in 2016. Three years later, she was appointed Chief Operating Officer of both Bitfinex and Tether. Those are extremely weak claims. The latter is at least a meager allegation of nepotism, although, without more context, it's really not that strong. The avatar, on the other hand, is a distraction at best. Ending the paragraph on those claims makes the argument appear a lot weaker, if not even disingenuous.
- notahacker 4y ago
  Agree with you on the Joker avatar being pretty irrelevant, but there's a bit more than just nepotism implied a growth-stage financial services company trading billions in assets which had already experienced serious regulatory and fund loss problems deciding the C level appointment their operational issues needed was someone with no prior finance experience but plenty of reason to be loyal to the founders who'd been hired a little earlier to implement the UI for their app. Even in the hacker-founder world of Silicon Valley, that would be an unusual promotion path, for a troubled company in a regulated field like finance it's a red flag...
- ShamelessC 4y ago
  It is written in the form of a casual blog post. Really, all he is saying is that he doesn't respect these people on a personal level and "knows the type" (or what have you). If you disagree, that's fine, but if you want a more formal type of discourse, pay some journalists. It also _does not_ strike me as "weird in context", but I guess you're just hoping people don't actually read the thing (which, fair enough - no one does here).
actinium226 4y ago
I, for one, think I'll get in on this trade with some play money just because this seems like a nice way to learn about smart contracts and defi and maybe get paid to do so.
- c7b 4y ago
  Just make sure that you know whether/how you need to report this in your taxes.
- spaceman_2020 4y ago
  Borrowing and lending requires a lot of transactions. Make sure to do it on a cheaper blockchain (NOT Ethereum) otherwise you'll end up paying a ton of money in fees. I would recommend Polygon (Matic) or AVAX since they're much cheaper than Ethereum and have decent liquidity on AAVE.
faangiq 4y ago
Good luck cashing out that USDC broski …
dominojab 4y ago
[dead]
uconnectlol 4y ago
What exactly is hard about running a fiat backed stablecoin? Don't you just accept money for your token and invest it in low risk crap? Isn't this exactly what a consumer bank does? Even Paypal does this [1]. So is the issue that they just (allegedly) got greedy and made high risk investments? Can't Google or some company just make their own stablecoin overnight and have guaranteed profit then? Of course only if it fits with their PR. 1. https://www.paypal.com/us/webapps/mpp/ua/useragreement-full https://www.paypal.com/us/webapps/mpp/ua/useragreement-full > Any PayPal balance you hold represents an unsecured claim against PayPal and, except as provided below, is not insured by the Federal Deposit Insurance Corporation (FDIC). PayPal combines your PayPal balance with the PayPal balances of other PayPal customers and invests those funds in liquid investments in accordance with state money transmitter laws. PayPal owns the interest or other earnings on these investments. However, the claim against PayPal represented by your PayPal balance is not secured by these investments and you do not have any ownership interest (either legal or beneficial) in these investments. These combined balances are held apart from PayPal’s corporate funds, and PayPal does not use these balances for its operating expenses or any other corporate purposes. Additionally, PayPal will not voluntarily make these balances available to its creditors in the event of bankruptcy. Note: quote obtained by proxy (https://www.paypal-community.com/t5/My-Money-Archives/Does-paypal-earn-interest-on-monies-held-while-verifying-a-sale/td-p/1522805 https://www.paypal-community.com/t5/My-Money-Archives/Does-p...) as Paypal needlessly block my shared IP.
- dzdt 4y ago
  What's hard is the temptation. If you are running a fiat backed stablecoin with a big market cap, and you are willing to be a bit dishonest you can make yourself obscenely wealthy. There is no one making you keep your hand out of the cookie jar. Resisting that is hard.
  - mlyle 4y ago
    And here "a bit dishonest" is just a matter of leverage. Slightly increase the risk, and on average you'll come out ahead and have extra money you can siphon off. This is one reason why economic downturns always expose fraud.
paulpauper 4y ago
So now we wait, paying 12.36% a year for the eventual pleasure of saying “I told you so”. Seems like a pretty good deal to us. Not really. most of your money will be gone in just 6 years if nothing happens Obviously, borrowing in usdt is very good if it goes to zero.
EVa5I7bHFq9mnYK 4y ago
I'm willing to take the bet. Let's send $10k each to a reputable escrow. If after a year USDT trades under $0.9, you get $20k. Otherwise, I get it.
- qeternity 4y ago
  That is not the bet they are taking, the r/r is completely different.
- bagacrap 4y ago
  Their bet doesn't require tether to blow up in the next one year. It's only a total loss for them after 6 years or so.
  - EVa5I7bHFq9mnYK 4y ago
    Well, quite possible it will blow out at some point. Not because they are not 1:1 backed by USD and quality assets, they are. But because there is no KYC in USDT transfers.
spaceman_2020 4y ago
I've been deeply involved in crypto the past 3 years and everyone in the space knows that Tether is a scam. No serious investor holds USDT over USDC in their personal wallets. Tether only exists as a way to trade on centralized exchanges. The problem is that everyone in the system is so deeply reliant on USDT that they will do everything possible to prop it up. Honestly, the only thing that can bring down Tether at this point is either the collapse of one of the major central players (such as Binance) or government action.
- sshine 4y ago
  > everyone in the space knows that Tether is a scam For those interested, Coffeezilla did a piece on Tether: https://youtu.be/-whuXHSL1Pg https://youtu.be/-whuXHSL1Pg And yes, it’s a scam. Hodlers seem to tolerate it because crashing Tether would impact their net value. It’s sad.
  - MuffinFlavored 4y ago
    so BTCUSD is like $15-$16kish now if anything happens to Binance, Coinbase, or Tether, it’s most likely going lower I feel like a lot of people who still dollar cost average into cryptocurrencies shouldn’t. If you make $300k/yr, you can do whatever you want with your money in my opinion. If you make $15/hr working part time, you probably shouldn’t touch crypto. The risk is too low. What’s the upside chance?
    - rrdharan 4y ago
      I agree with you - but I think you meant "the risk is too high" if you're a low income earner?
      - MuffinFlavored 4y ago
        I just feel most people who are obsessed with crypto that I’ve come across in my personal life are some of the least financially responsible/educated people I’ve ever met that and r/bitcoin comment sections are very delusional cult to me
0x53 4y ago
Currently you can get a variable rate of around 3% on compound finance. https://v2-app.compound.finance/ https://v2-app.compound.finance/ might be a cheaper way to do this.
josh2600 4y ago
I feel like most people look at stablecoins and say "this is such an easy business!" and in a way they're right, but they're also wrong. Stablecoins derive stability through a system. This system uses collateralization to present a fixed price. In its most simplistic form the system has $1 for every $1 in it. Unfortunately, in such a system, there is no point in the virtualization, which is called hypothecation in finance. Hypothecated assets exist to allow asymmetric risk. Think of it this way: * Alice runs a bank and has dollars in it. * Bob runs a stablecoin and wants it to be backed by dollars. * Alice says "you can mint $1 of hnUSD for every dollar I have in my bank." * Bob mints 1 hnUSD. * Alice invests the dollar in their bank into US treasuries to earn a yield backed by the full faith and credit of the United States Government. * Bob is free to use his hnUSD for whatever he wants to do in his ecosystem and Alice will be able to redeem it when he brings it back to Alice's bank when she sells her US treasury. The problem in all of these systems is actually hauntingly simple: Liquidity is king. In the event that Bob needs dollars quickly, Alice may not be able to sell treasuries quickly. This is called a liquidity crisis. Before we start pointing fingers at cryptocurrency, take a second and think about how banks work. All of banking is built on hypothecation and risk management. The businesses that stand the test of time in finance are the ones that manage risk most effectively. There is a time to be bullish, and a time to be bearish. Having the wisdom to know the difference is often won only with battle scars. I am thankful for the public-private partnership that facilitates humanity's collective dream through finance. I am hopeful that we can learn the lessons of the past to not repeat history's mistakes. The future of finance is on-chain governance/on-chain proof of reserves/on-chain liquidation.
- grogers 4y ago
  AFIACT Tether doesn't even aspire to any fixed time frame for redemptions, so it's even easier than a typical money market scenario. If all their assets were 30 day treasuries or shorter you don't even need to sell them - just wait the 30 days and then pay people then. Though I expect that even at tether's scale, markets for short term treasuries are liquid enough.
pearjuice 4y ago
Lots of people have been saying Tether is a fraud for years now. Even some very smart and highly regarded people; patio11 comes to mind. Yet in all those years, Tether had no major depegging event, bankrun or any other noteworthy chain reaction whilst big frauds unwinded, hacks happened and over-collaterized bubbles popped. I'm not saying Tether isn't a fraud, but I feel the chance it falling as an unbacked stable coin is long gone. More likely they will end up OFAC sanctioned (such as happened with tornado cash) for roleplaying as the federal reserve.
arez 4y ago
just short coinbase, if tether blows up, the whole crypto market will blow up, therefore coinbase will blow up. There's no way coinbases stock price wouldn't go down if tether and bitcoin go to zero
femto113 4y ago
Tether effectively denominates the entirety of all crypto valuations, so going to any exotic length to do a specific "short Tether" trade seems silly. Just shorting BTC/USD will have the same effect.
- rewtraw 4y ago
  But with crypto’s tendency for huge volatility, it’s much more difficult to maintain a short BTC position without getting blown out.
- baobabKoodaa 4y ago
  No, shorting BTC/USD has a completely different risk profile than shorting Tether (USDT/USDC or similar pair). The key difference is that BTC can spike up to basically any value (thus liquidating your short, even if it eventually comes back down), whereas USDT won't trade above $1.05 or so.
  - femto113 4y ago
    Considering the two risks as independent surmises that BTC goes up substantially (in USD terms) via some mechanism other than printing Tether, which AFAICT never happens. If/when BTC does go up you can simply short again at the higher level. If you're not sufficiently capitalized to handle margin calls you really shouldn't be doing shorts, but even small investors can do this trade by buying the BITI ETF.
    - baobabKoodaa 4y ago
      > Considering the two risks as independent surmises that BTC goes up substantially (in USD terms) via some mechanism other than printing Tether, which AFAICT never happens. BTC goes up and down for a multitude for reasons. For example, Matt Damon going on tv makes BTC go up. You have an extremely simplistic view of the markets if you believe the only reason for BTC to go up is "Tether money printer goes brrrr". Yes, it's one of the reasons. It's not the only one. > If/when BTC does go up you can simply short again at the higher level. If you actually tried to put this proposal in an excel and model the returns, you would immediately notice that "short BTC" and "short USDT" have completely different outcomes and "simply short again" is not a remedy that fixes this issue.
tim333 4y ago
Good luck with the shorting but 10% seems kind of steep. I guess if there's a >10% risk they go to zero in a year it's ok. I shorted Tether briefly on Kraken and then was horrified to find they were charging me ~25% per year for so doing.
JayStavis 4y ago
A prediction market feels like a straightforward way to short something like this. Also I feel like there's plenty of people who would take the other side of the bet. Who wants to make it?

244 points by yoelo 4y ago

deleted 4y ago

[deleted]

It's a clever trade, and I appreciate that the author pointed out the main drawback: > What does that mean? Essentially that we’re exposed to the risk of something going wrong with Aave itself and not being able to get our money back. (Aave’s own explanation of its risks is here.) In order to withdraw our money from Aave, Aave actually needs to have the money we want to withdraw. When we deposited USDC collateral on Aave, Aave lends out that USDC to other users who deposit their own collateral on Aave. At the time of this writing, about 53% of Aave’s USDC is lent out. Author states that they only have "a couple hundred dollars" risked on this trade. Seems that they're just looking to win Internet points by being able to say that they shorted Tether.

actionablefiber 4y ago
Funny how the only entities that let you short Tether are the ones that will go bust and won't be able to pay you back if you're right.
- rhaway84773 4y ago
  What this post does more than anything (and I think that is the goal) is illustrates that for all the crypto bluster, it’s currently a terrible financial system that has all sorts of massive risks that are not just hypothetical but have already been realized.
- scotty79 4y ago
  Isn't it nice that one of the main dangers to your stable coin doesn't exist because shorting it is not profitable enough for the risk?
  - toss1 4y ago
    You want to imply that the short is unprofitable because the asset is so good that it'll never decline in value. That is the exact opposite of the reality (and misses the entire point of the article). The point is that shorting tether is likely to be enormously profitable, but you won't be able to collect your profits This is because no well capitalized and stable broker or exchange will touch Tether, and the only counterparties who might lend you the Tether to short are extremely likely to go bankrupt when Tether does collapse. So, you'll put your millions of dollars at risk on deposit, pay your interest, and end up with a $100 million or whatever profit, owed to you by a now-bankrupt exchange, so your profit will never arrive at your bank account, and your best case is suing the husk of a bankrupt exchange whose shady owners absconded to a non-extradition country. The trade is bad because only disreputable and insufficiently capitalized counter-parties will touch it, not because Tether is great in any way.
    - scotty79 4y ago
      > You want to imply that the short is unprofitable because the asset is so good that it'll never decline in value. Absolutely not. I think tether is garbage that benefits almost noone except its creators. I'm just amused by the fact that stability of a bad thing is increased because betting against it is worse than for it. > The point is that shorting tether is likely to be enormously profitable, but you won't be able to collect your profits. Hence not profitable at all. :-) Betting for it is risky, betting against it is risky. Maybe that's a huge part of its stability? Like stability on the edge of the knife held over lava pit. Nobody benefits from going to either side despite equilibrium being uncomfortable?
      - grey-area 4y ago
        No it’s stable because they’re lying about what it is backed by. It’s easy to make a scam look superficially stable if you are not called on it or make it impossible to call you on your promises.
        scotty79 4y ago
- sebzim4500 4y ago
  Exchanges typically back client USDT/USDC assets partially with USD and partially with fixed interest products. If USDT goes to zero some of the big exchanges will make billions. These are your counterparties when you short USDT vs USD.
- dmurray 4y ago
  This isn't really true and the guy saying "If someone showed me a way to do it with Goldman Sachs as a counterparty, I’m in" is also misstating things, perhaps intentionally. I'll take the long side of the Tether bet for 30% a year (I'll buy one-year Tether forwards at 70c). I'm not as creditworthy as Goldman, but for small amounts, it's pretty close. I could collateralize the trade with my house, and in any case I don't have the kind of correlated portfolio that means if Tether goes bust, I can't pay you. But enough about me - some trader at Goldman will absolutely do the same deal! Maybe they can even do it for 72c. There is a market-clearing price for this trade if done between two creditworthy parties. I don't know what that price is because there isn't a big public market for it, but if you shop the trade around, you'll find a price. The people bemoaning they can't short Tether mean they can't short it at what looks like it should be the right price, say, paying 5% a year to borrow it. But that's not the right price! That's the price that already includes you taking a lot of wrong-way counterparty risk. Against Goldman, the price is 20% or 30% or something, and you can do the trade, but you don't want to. So the fair price of one-year Tether forwards is 75c or whatever, but the spot price is clearly $1.00. How do you reconcile this in financial markets terms, that the prices don't converge? Same reason other commodity futures might have backwardation - holding Tether provides some value to its owners. Like having steel today allows you to build a skyscraper and start collecting rent, so spot steel trades higher than future steel if the construction business is good. In Tether's case, that value is the freedom to participate in other crypto trades, or perhaps to escape even riskier assets in China, or something else.
  - Nowado 4y ago
    There's also a scale issue. If a product is not standardized, that Goldman trader isn't going to work with 'a couple hundred dollars' mentioned in the piece.
- drexlspivey 4y ago
  When you are shorting something you receive money and you are the one that needs to pay back not them.
  - actionablefiber 4y ago
    It is not that simple. In many cases the money you receive from short selling is the collateral for your short position. You need to return the borrowed asset to get your collateral back.
yborg 4y ago
The author's Internet point is that they think Tether is bust and why big money is not shorting it (you can't find a counterparty to make a big trade with that is any less dodgy than Tether itself). They then describe a mechanism for making the trade in which the counterparty is a DeFi protocol that is, of course, just as dodgy as Tether itself. The whole ecosystem currently remains a giant confidence game, as Matt Levine described well in a recent article. This doesn't mean there isn't a lot of money to be made - casinos make a lot of money at an activity with no direct economic value - but right now you are best served only putting in money you can easily lose.
- Aperocky 4y ago
  Big money is not shorting it because there's no way to short it at scale. There are no broker that will survive to close the short, and you need a broker to short.
  - OJFord 4y ago
    That's the same thing GP is saying - nobody reliable, not 'in the game', wants to take the other side of the trade. (Presumably there is a price at which they do, but also at which nobody's remained interested.)
    - Aperocky 4y ago
      want vs reality. In fact, I would want to bet against USDT with a reasonable proportion of my savings, but there are no safe way to ensure such a contract will be honored in the case that it actually went to 0.
  - dghlsakjg 4y ago
    USDT is super interesting since it doesn't behave like a normal market priced asset. You know it won't ever go up in value, and you know that if it goes down, it goes down to 0 VERY QUICKLY, with maybe a chance of a claim against unverified assets that might pay out after years of litigation.
SilasX 4y ago
Yeah I was going to say these are ridiculously small numbers to try the bet with -- each of those transactions mentioned was around $3 worth of ETH, which adds up fast. I wouldn't try something like this for less than $5k.

britneybitch 4y ago

Even if your premise is right, your timing has to be right too. The SP500 has doubled since 2014 which lines up with the traditional 7% per year. Meanwhile they're paying 12% per year to short, so their approach is a compounded 22% worse[1] than VTSAX-and-chill (before even considering capital risk). This is still gambling, just not in the usual direction. [1]: 1.07/(1-0.12) = 1.22

aardvarkr 4y ago
I agree with your premise but the s&p isn’t going up by 7% right now and the author is just taking a calculated risk. That’s his business. If he thinks Tether is going to collapse then he’ll make a massive return on his investment. He’s essentially gambling $46/yr to get a $450 payout if Tether collapses.
- scotty79 4y ago
  > massive return Just around 100%. That's not massive for crypto gambling. You could just buy BTC and have 600% in less than 3 years if only BTC won't break out of its 12 year trend. And that's a very conservative gamble.
  - eli 4y ago
    Not if you believe BTC is wildly overvalued. I personally don’t think it sets a new record high, ever, and is mostly down from here
    - swyx 4y ago
      look i'm as skeptical as the next HN'er but the evidence of past history is against you and "ever" is a very long time... BTC doesn't have to win mass adoption for it to set new highs, it just has to be the "store of value" (i know, i know) for enough people and for the next QE cycle to start in 3 years to get going again
      - 4y ago

mouse_ 4y ago

Money printers bad. Including the Federal Reserve (since its inception 109 years ago, the US Dollar has lost 96% of its value.) There is an argument that deflationary currencies are bad because people will not want to spend them as they accrue value, but that value has to go somewhere; either stays in your pocket with deflationary currency or goes to some billionaire's fourth yacht's heated seats with inflationary.

wpietri 4y ago
The Federal Reserve has done a pretty good job on inflation in recent decades: https://www.macrotrends.net/countries/USA/united-states/inflation-rate-cpi https://www.macrotrends.net/countries/USA/united-states/infl... The 1970s were bad, but we had a 40-year period of low, stable inflation, which is the goal. Now's not great, but it's not the Federal Reserve's fault; between a global plague, supply chain disruption, and a land war in Europe, inflation is up across the globe: https://tradingeconomics.com/country-list/inflation-rate https://tradingeconomics.com/country-list/inflation-rate Compare that to the economic chaos that was much more common before the rise of strong central banks and I'd say "Federal Reserve baaaaad" is somewhat lacking in nuance.
- bottlepalm 4y ago
  Global plague nope, supply chain disruption nope, a land war in Europe nope. Printing 13 trillion dollars for corona stimulus, yep. Though I guess that's more the fault of the legislature than anyone else.
  - mouse_ 4y ago
    +1
  - WinstonSmith84 4y ago
    Yeah ... But I think he must have been sarcastic with "The Federal Reserve has done a pretty good job on inflation". The FED can't be totally blamed, respective governments share a big part of the incompetency

jboogie77 4y ago

https://twitter.com/oppositeinvict2/status/1536510984654929921?s=46&t=rhQ1D6juAEaQ8ThDNnbZxQ https://twitter.com/oppositeinvict2/status/15365109846549299...

hoschicz 4y ago

Note that interest rates on USDT went down now and now it costs around only 3 % APR to short it. I've been short for a year now and will be fairly rich if Tether burns to the ground.

retube 4y ago
How are you managing the counterparty risk?
scotty79 4y ago
How's that profitable when compared to buying bicoin year after the crash and hodling for 3 years?
- albntomat0 4y ago
  The probability of Tether collapsing and Bitcoin going to/beyond its previous peak are definitely different. They're also quite possibly inversely correlated (e.g. Tether collapsing could also tank Bitcoin).
  - scotty79 4y ago
    I'm not that sure. At least not in the short term. When people exit tether they'll mostly exit into other cryptos and this will generate demand vastly exceeding the supply.
    - albntomat0 4y ago
      In that scenario, I agree that the price of other cryptos in Tether will go up, if Tether seems like it's actively collapsing. However, that'd be due to Tether's perceived value being significantly less than 1 normal US dollar, or 1 of another US dollar stablecoin. BTC per Tether goes up, BTC per anything else is unchanged, without considering the loss due to yet another crypto blowup.
      - scotty79 4y ago

cgb223 4y ago

Has anyone found a reliable platform in the US to legally short / take out PUTs on a crypto currency in the US? I went looking last year and couldn’t find anyone allowing this feature. Binance had something close but only on their .com site not their American .us site

throwaway1777 4y ago
Until regulators approve such things they won’t be offered legitimately after all the saber rattling from the sec.
marcrosoft 4y ago
IBKR has futures trading for bitcoin. You can go both directions with futures.
wpietri 4y ago
You could do it the old fashioned way. You find somebody who thinks the value of their crypto will go up. You pay them to borrow their crypto for, say, a year. You then sell the crypto for dollars and in a year you hope you can buy it back for less than you made. The legal way to do it would be with an old-fashioned paper contract between two known parties. But as web3isgoinggreat.com has made clear to me, the more effective way to do it is to use some crypto site for the deal. If you're lucky, the tools/sites/curriencies you've used will just have gone out of business. And even if not, apparently you can just say, "Oops, I used the money to do other things so I'm not giving anything back to you."
- foobarian 4y ago
  Wasn't ETH created just for this purpose by accomplishing these deals via smart contracts?
  - c7b 4y ago
    Yes, and they exist, that's also what the article's author ended up using.
4y ago

WinstonSmith84 4y ago

More like "Shorting Tether for Fun and Slow Bleeding"... 8 years of FUD and still here, it doesn't take 8 years to do a safe 2x in crypto, not even in trad-fi.

wpietri 4y ago
Yes, if there's anything I've learned from the crypto markets lately it's that a few years of (apparent but vigorously unaudited) success is proof that it is very safe and won't come apart precipitously.
- WinstonSmith84 4y ago
  not sure whether this was sarcastic, but if it really is, then you shall just extend your time horizon. Those who bought bitcoin at the worst moment of 2014 are still now at a comfortable ~20x (and roughly ~2x on the spx)
  - reducesuffering 4y ago
    How does that help whether to buy or sell in 2023? You could say the exact same paragraph last year, but someone would’ve bought and lost 2/3 now. That means it could happen again.
    - wpietri 4y ago
      Hey now. The Bitcoin price is heavily dependent on financially naive people putting dollars in. If you're just going to run around countering hype with facts and reasonableness, how are they going to get the bubble to reinflate?
  - wpietri 4y ago
    Oh wait, is the game we're playing Pick an Arbitrary Time Period That Lets Me Be Right? How fun, let me try. In which case I am happy to extend my time horizon. We could go back 15 years, where all of this stuff was worthless. We could go back 20 years where the online currencies Beenz and Flooz had just collapsed into worthlessness. We could go back 150 years to the wildcat banking area, the last time we let chumps just make up magic money, which was such a disaster that it was foundational to the modern regulatory regime. Or how about we go back 300 years and look at the South Seas Bubble and Isaac Netwon's time reforming British currency so it was less of an exploitable clusterfuck. You're right, extending my time horizon really does help put cryptocurrency in perspective.

vgatherps 4y ago

An potential failure case for defi is that some contract: * Is looking at USDT pairs as well as USD pairs for a price oracle and doesn't handle USDT pairs going to infinity well (i.e. BTC/USDT skyrockets) when tether goes to zero * Effectively hardcodes the value of Tether to $1 (can happen by accidentally treating a X/USDT pair as an X/USD pair) I suspect that the major lending protocols (AAVE, Compound) have enough attention and effort to not make such a basic mistake but there's a whole wide world of less competent protocols out there. This can happen to centralised venues as well of course but as far as OP is concerned those are too risky for the tether trade (an assessment I agree with).

tornato7 4y ago
This indeed happened to a few protocols that had the value of UST hard-coded at $1. The big players mostly use Chainlink though, which uses a diversity of price sources and doesn't make that type of assumption.

adrianchifor 4y ago

You know who already made tens of millions in profits and will continue to because of stories like this? Market makers that redeem billions of USDT for cash with Tether/Bitfinex every time it goes under $0.99. Borrow USDT on leverage, cash out at $1 to US bank, mint USDC with Circle, swap to USDT, repay USDT loan and bank the difference, rinse and repeat until it's back to $1.

Aperocky 4y ago
It's not a risk free proposition, it's probably a losing proposition in the long term. Every time it dips under $0.99, there's a chance it goes straight to $0 and cannot be cashed out anywhere.
- charcircuit 4y ago
  >there's a chance it goes straight to $0 Since Tether is fully backed the chance is really small.
  - bagels 4y ago
    They merely claim it is fully backed.
    - charcircuit 4y ago
      No, they also have third party attestations that it is fully backed.
      - bagels 4y ago
        Apparently those attestations are relatively recent in their history, but also not very convincing: https://www.coindesk.com/markets/2021/03/30/tether-takes-step-toward-transparency-with-first-accounting-firm-report-card/ https://www.coindesk.com/markets/2021/03/30/tether-takes-ste... "as noted later in the article the composition of Tether’s assets is not spelled out in the attestation" Meaning they may be backed by loans or fraud coins or anything.

lvl102 4y ago

It’s been more than a decade and it’s still not that cheap to short crypto. I am 100% convinced that’s by design. If you think equity is rigged, crypto is a complete circus. I rather not deal with it even if money can be made. It’s going to slam you at some point.

djtango 4y ago
On OddLots they interviewed someone who shorted Luna and borrow fees were insanely high in part due to the fact that it would yield 20%.
323 4y ago
Nobody is stopping you from creating an "unrigged" way of shorting crypto. If what you say is true, you will have huge demand. Also, you can short crypto on CME. Is that rigged too?
- s28l 4y ago
  > Also, you can short crypto on CME. Is that rigged too? I think your first point is fair, but I think you're overselling things here. Yyou can only short Bitcoin, not all crypto, but the real issue is that the Bitcoin futures curve is in backwardation, which implies a certain financing cost to go short. The settlements for the various contracts can be found here[0]. Nearly all of the volume is concentrated in the front month contract (Jan 23 at the moment), so if you want to be able to trade any size at all, you'll have to do so by selling that contract. However, the issue is that the future price is consistently lower than the spot price. So if you bought a Bitcoin today and then sold a future for the front month (i.e. so you locked in the price you could sell the Bitcoin at in the future), you would be guaranteed to lose money. And you will effectively have to do exactly that every month: as your short contract approaches expiry, you'll need to roll it over for the next month's contract. As the front month gets closer to expiry, its price will trend to the Bitcoin spot price, meaning you'll have to buy it back at a higher price then you will get when you sell the next month contract. I don't have access to the historical settlement prices for the CME contracts at the moment, so I can't estimate the exact roll cost you'd pay over the course of a year. If we guess that it's about $100 each roll, then you'd pay $1200 over the course of the year per bitcoin (as well as having to commit 50% of the price of bitcoin in margin). The OP posted 185 USDC net as collateral and has a short position of 450 USDT, which he's paying about 13% on. In the CME case, the collateral requirements are higher (50% of the notional shorted) but the financing cost is lower (less than 10% of notional shorted). [0] https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.settlements.html https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bi...

ptero 4y ago

I admit that I only skimmed the article, but the first thing that jumps at me is counterparty risk; the same risk the author is trying to avoid in his rejected "just short Tether" option. The proposal seems to put a bunch of crypto exchanges in the transaction path which, thinks me, can bring trouble* should the Tether collapse the way FTX did. More generally, while Tether may be a house of cards that will eventually collapse, placing a bet on it has actual costs. And "the market can stay irrational longer than you can stay solvent" is an adage worth remembering. My 2c. *either directly, by failing to deliver the winnings should the trade go the authors way; or indirectly, via clawbacks when govvies and lawyers go after those who made profits to (minimally) compensate those who was left holding the bag.

dktp 4y ago
Act III describes this risk and Act IV addresses how they dealt with it
- ptero 4y ago
  I think Act IV describes shifting it to a different defi counterparty, which might carry lower counterparty risk. Or not.

ansible 4y ago

Man, I'd love to short Tether too. But that would mean giving actual USD to some other exchange, and I'm yet to be convinced that there are any exchanges who aren't running some kind of fraud scheme as well.

tornato7 4y ago
You can short tether purely with ETH collateral on-chain, and then you're not exposed to any exchange risk. Of course you are then exposed to ETH price risk.
- polygamous_bat 4y ago
  It's like sawing off a tree branch you are sitting on: if Tether falls Ethereum prices will be severely impacted as well.

rthomas6 4y ago

I still like DAI. Nobody seems to have heard of it or remember it exists, but it's a stablecoin that doesn't rely on "trust me bro". It's soft pegged to the dollar through its algorithm. While the crypto world seems to have been almost entirely replaced people interested in and having a basic understanding of the technological side of it with people who want to get rich quick while understanding nothing, DAI has remained successfully pegged to the dollar. Not perfect but also not likely to take a permanent dump.

greenthrow 4y ago
Algorithmic stablecoins are not a good idea. See: Luna/Terra.
- m00dy 4y ago
  Algorithmic stable coins are the future, they just need a reliable utility.
  - polygamous_bat 4y ago
    Are you saying... they're a solution looking for a problem?
- yokem55 4y ago
  The main difference between MakerDAO/DAI and Luna/UST is that Maker doesn't accept their native token as collateral. You have to use collaterals external to the protocol which won't inflate in response to where DAI is relative to a $1 peg. In contrast, UST only had LUNA as collateral, and ended up minting more and more LUNA as UST fell off it's peg. That's not to say that DAI doen't have it's own risks as they have a lot of potentially censorable USDC as collateral, there could be situations where they can't liquidate borrowers fast enough if a collateral falls in USD price too fast, and they run their own oracles which could fail or misbehave. Not to mention the DAO has a fair amount of governance drama on a regular basis. But those risks are quite distinct from what took luna/ust down.
- G3rn0ti 4y ago

deleted 4y ago

[deleted]

low_tech_love 4y ago

”Tether’s large enough by now, and significant enough to the crypto ecosystem, that crypto’s major players will likely do just about anything they can to stop it from failing.” Where have I heard that before…

m00dy 4y ago

> If USDT collapses to a price of, say, $0.01 USD / USDT, you can buy up 100M USDT for $1M USD, and hand back that Tether to Genesis to satisfy your loan. Why would Genesis be still alive after Tether's collapse ?

HomeDeLaPot 4y ago
The article goes on to raise that exact point. Did you stop reading halfway through?
jtsiskin 4y ago
…keep reading :)

deadlast2 4y ago

Keep away. Obviously crooks involved in the tether from the beginning. These crooks are big financial institutions and you might get sucked in to a short squeeze.

Invictus0 4y ago
A short squeeze on a stablecoin? lol
tornato7 4y ago
Shorting stablecoins is pretty uniquely risk off because the price of Tether will not go much higher than $1.

gitfan86 4y ago

During the '07 housing crisis people bought "Synthetic CDOs" which where actually bets on a particular set of mortgages defaulting. For example, they bet that a group of mortgages where the borrower had no proof of income and a mortgage with a very high interest rate in a location where prices were falling would fail. It seems like a reasonable bet, but they didn't take into account that the people taking these bets had no limit to how many times they could take the bet. Eventually they had enough money to just payoff the mortgages and win the bet. I would be very concerned here that the same type of risk could happen

qeternity 4y ago
You're confusing a synthetic collateralized debt obligation (CDO squared) with a credit default swap (CDS).
- gitfan86 4y ago
  Good, the last thing I want is to be an expert in the details of the obfuscation and misdirection of the scammers on Wall St. during '07
  - baobabKoodaa 4y ago
    Why are you responding with snark and sarcasm to someone who pointed out a factual error in your post? Don't do that.
    - gitfan86 4y ago
      I'm not being sarcastic, I think it is a huge waste of time to try to understand the details of a system that is specifically designed to be obtuse and confusing when if you zoom out you can understand the system just fine at higher levels.
      - baobabKoodaa 4y ago
        That's tangential to the point. You accidentally posted misinformation to the internet and somebody corrected you. Don't go off on a raging tangent, just say "thanks" or something.

GlitchMr 4y ago

The problem with shorting cryptocurrency is that you are assuming that market is fair, when this is absolutely not the case - the market is heavily manipulated.

jqpabc123 4y ago

Tether is the support mechanism underlying the entire crypto market. You're basically betting that the crypto market will collapse ... but the exchange/broker/whoever you're dealing with will survive and have the necessary funds to cover your short. It all seems rather contradictory to me --- you think it's all going to collapse ... but at the same time you're willing to bet that your little chosen piece of it will somehow survive just fine. And not shutdown withdrawals at the first sign of trouble (like others have done) so you can collect your payout. This is almost like playing the lottery --- winning is pure dumb luck beyond your control.

logifail 4y ago
> You're basically betting that the crypto market will collapse By coincidence, my wife was watching The Big Short (2015) with our eldest two kids tonight, it really is worth watching [again] if you've not seen it [recently]. > ... but the exchange/broker/whoever you're dealing with will survive and have the necessary funds to cover your short Michael Burry has pretty much exactly that conversation with Goldman in the film.

queuebert 4y ago

The problem is no one can calculate a Sharpe ratio for crypto. The variance is not well understood.

chollida1 4y ago
Sharpe ratio uses a backward looking variance as it tells you how you traded wrt to the volatility. I assure you, we can trivially look back to see the variance. I mean, how could we calculate a sharpe without knowing the return and volatility, we always use historical for both, its one measure of how we track portfolio returns, which again, are backward looking. Though sharpe isn't used as much as it was 15-20 years go due to it penalizing volatility in positive returns as much as it penalizes volatility in losses.
- queuebert 4y ago
  That is a backward/ex-post Sharpe ratio. Bankroll management requires knowing the forward Sharpe ratio for VAR. You can't know VAR without knowing the forward expected variance. This is why black swan events wipe out traders who think they know their risk but really don't.
  - chollida1 4y ago
    Hmm I worked in a bank and ran these calcs and we never use forward variances as you can’t know it for any instrument and you can’t know your return as well. Crypto has nothing to do with this. Are you certain if your facts here because something doesn’t seem right. VAR makes abut more sense but still uses a backward looking variance. Sharpe never uses a forward lookingvariance as this makes no sense as you don’t know your returns ahead of time unless you are Madoff And for VAR we either typically use historical VAR or Monte Carlo, again because you never know your returns ahead of time so trying to do any risk measure with estimates returns is useless
    - queuebert 4y ago
      This is why banks fail. Just kidding.... :-P Estimated Sharpe for a trade would be what you think the return should be (e.g. fair market value - current price) divided by the estimated future variance. This is what you estimate for VAR and compare to your risk tolerance. The eventual accuracy of the estimates will determine whether it's a ho-hum trade or a black swan that wipes you out. Black swans are essentially situations in which variance estimates were completely wrong (as opposed to return estimates). Variance is a function of a bunch of things (and correlated with every damn thing). Simply taking historical variance and assuming it will be the same in the future is the laziest possible solution. Black Swan events have woken people up to platykurtic Gaussians and the fact that many real life distributions aren't even Gaussian. This is why you use Monte Carlo, because it doesn't need to assume a kurtosis or even Gaussianity, but is more computationally intensive, but not terribly so, but also suffers from low sample number at the tails, so it's not that accurate in extreme situations either. An additional red flag is that, if you have to use MC, then you don't know the distribution underlying the process, and if you don't know that there might be other things you don't know. Crypto is one of the newest markets, so we understand a lot less about its extreme conditions and the tails are very uncertain. Even with Monte Carlo I wouldn't trust crypto Sharpes one iota. Sorry if you know all this stuff. Thought I should clarify where we probably actually agree but may be thinking of it differently.

jeffreyrogers 4y ago

For it be worth doing for a hedge fund they'd need to be able to put on a sizable trade. Let's say $1mm but probably a lot more. Is there enough liquidity to do this? I have no idea.

paulusthe 4y ago

You don't have to short tether specifically. If tether goes under, everything will go under. Just short whatever large ish coin which has cheapish carrying costs.

itake 4y ago
The difference though is tether can only go down and when it does it goes to zero. If you short a large ish coin you’re exposed to value increases and the unlikely hood of the count going to zero

charcircuit 4y ago

Tether is 100.38% backed by assets. This means they can always trade Tether for USD. About 80% of their assets are liquid meaning that Tether's supply can shrink by up to 80% and they can still pay out within a couple of days.

arisAlexis 4y ago

Please refrain from doing what OP is proposing for your pocket’s sake

deleted 4y ago

[deleted]

acjohnson55 4y ago

I had this same idea a few months ago: https://mobile.twitter.com/AlanJay1/status/1418786319199780865 https://mobile.twitter.com/AlanJay1/status/14187863191997808... I'd bet on USDT failing in 3 years. But I'd want to understand how the close-out works under the assumption that the non-stablecoin collateral in Aave crashes and the liquidation process isn't able to preserve the value of the pool. I haven't studied that in depth. My guess is there's non-negligble risk of not being able to get that return on the last leg of the trade, even if the hypothesis is right.

c7b 4y ago
I guess most people who looked at crypto had that idea, and most people who thought about for more than a short moment probably came to similar conclusions as the OP (if you do it, do it through DeFi, and ideally only with what's probably play money for them). One thing they didn't mention that someone who just wants to play around should keep in mind is that you might incur tax reporting obligations. On the technical point: USDT isn't used as collateral in the protocol, apparently, so the main risk is that other assets in the collateral pool like Ether drop so sharply that the liquidation mechanism can't keep up / that the price oracles get messed up. That's a known unknown, there are also unknown unknown, eg bugs/unexpected behavior in the protocol. There's also the question whether/how you'd be able to convert your crypto holdings back into fiat dollars at that point (most centralized exchanges might be in trouble, with USDC you need to create a business account with Circle, but still seems like a feasible off-ramp).

jupp0r 4y ago

There's also the risk of collateral damage to BTC and other crypto assets. That sweet money you are making is coming from somewhere.

darawk 4y ago

All the people mindlessly saying "counterparty risk" clearly didn't read the article. He has thought about this carefully. His counterparty in this case is Aave, a DeFi smart contract. Smart contracts famously get hacked frequently, of course, but Aave has been around a long time, and it's probably reasonable to be somewhat confident in its security, at this point. The second thing you have to worry about is Aave's liquidation mechanism: under the market conditions implied by a Tether collapse, will Aave's liquidation mechanisms function efficiently and effectively? The answer to that question would depend on exactly how the collapse unfolded (i.e. how quickly it was certain, the degree of insolvency, how much the market moved how fast, etc). However, it is important to note that the only thing at risk here for him is the profit from his short plus the collateral factor haircut, not the entire principal. The trade he did was to deposit $x usdc on Aave, borrow $y usdt, and then sell that usdt back to usdc. That means he physically has CF * principal USDC in his possession, and no matter what happens, Aave can't take that away from him. Now, he looped this twice, so it's actually CF^2 * USDC that he has, but that's still not that big a risk. Finally, he has to worry about the solvency of USDC. However, USDC is regulated in the US and has fairly real audits. Almost nobody seriously thinks USDC is insolvent. I think there is very little to worry about here. Personally, I think Tether is pretty obviously at least mostly solvent, and I think shorting it is a dumb trade that will lose him money. But he's going to lose money paying the interest, not losing his principal. People have been predicting a Tether collapse for literally years now, and despite all the market stress and volatility which should have clearly exposed their supposed fraud, they're still standing, and the peg trades with solid liquidity at $1 today. My own theory of what's actually going on here is that Tether is intentionally obtuse, because it allows them to make seignorage profits against their own users. If you issue a stablecoin and you know you are solvent, then you can hint to the market that maybe you're not, and buy (your own) assets that you know are worth $1 at a discount, making a tidy profit in the process. I think this is their real strategy, always has been, and they've gotten very rich doing it. It's possible they've been under-collateralized at various times, and maybe are even slightly so now, but I seriously doubt they are currently insolvent to the degree people like this think.

hiq 4y ago
> My own theory of what's actually going on here is that Tether is intentionally obtuse, because it allows them to make seignorage profits against their own users. From https://www.bloomberg.com/news/articles/2022-12-14/hedge-funds-drawn-to-crypto-s-big-short-tether-after-ftx-reveals-cracks https://www.bloomberg.com/news/articles/2022-12-14/hedge-fun...: > Tether concealed the loss of more than $850 million of reserves to a Panamanian entity called Crypto Capital Corp. as recently as 2018, the New York Attorney General found. In a separate case, the Commodity Futures Trading Commission found Tether didn’t have enough fiat reserves to back circulating tokens more than two-thirds of the time, in a period between 2016 and 2018. so it's more than just being obtuse. I don't think they're playing with the trust of their own stablecoin to get cheap USDT, it'd be better for them to be more trustworthy and have more USD to invest in safe investments with low interests, but they're probably losing some market share to more trustworthy (US-based) stablecoins because of how shady they look.

nickpinkston 4y ago

Note that the current Tether investigation just moved to the SDNY DOJ office that handles the biggest financial cases. This time they're looking into possible bank fraud committed by Tether [1], while their previous case was settled without admitting wrongdoing [2], but their investigation showed Tether wasn't fully backed for activities in NY, while their records of their backed assets have been sealed and CoinDesk / others were denied their FOIA request to access them due to "adverse business impact" - so it seems like there's a whole hell of lot of smoke around their likely fire... From [2]: "Meanwhile, Tether has resolved government accusations that it overstated its holdings. From June to September 2017, Tether never had more than $61.5 million in funds while about 442 million coins were in circulation, the Commodity Futures Trading Commission said last year." [1] https://www.bloomberg.com/news/articles/2022-10-31/tether-bank-fraud-probe-gets-fresh-look-by-justice-department https://www.bloomberg.com/news/articles/2022-10-31/tether-ba... [2] https://ag.ny.gov/press-release/2021/attorney-general-james-ends-virtual-currency-trading-platform-bitfinexs-illegal https://ag.ny.gov/press-release/2021/attorney-general-james-...

dustingetz 4y ago
so tether mkt cap / 10 = the amount of fake leverage in btc price? is it true?
- baobabKoodaa 4y ago
  No. The ratio you refer to was specifically from a 2-month period in 2017. Furthermore, not all of that can be considered to be levering btc price up.
1vuio0pswjnm7 4y ago
According to the "public disclosure" they made back in March 2021 under the agreement with the NYAG, a whopping total of 3.87% of tether is backed by cash. Over 65% is backed by IOUs, i.e., unsecured promises to pay in 270 days or less, or, if one prefers certain terminology, commercial paper. https://web.archive.org/web/20210513120449/https://tether.to/wp-content/uploads/2021/05/march-31-2021-reserves-breakdown-tether.pdf https://web.archive.org/web/20210513120449/https://tether.to... Of course, Tether does not tell us who are the "I's" in the IOUs. They could all be affiliated entities (like Alameda was to FTX) or other crypto startups. Does it make any difference who are the entities, or individuals, that have promised to pay.

tgsovlerkhgsel 4y ago

Even if counterparty/protocol risk don't eat you, "the market can remain irrational longer than you can remain solvent" applies here and the interest can eat you.

Sebb767 4y ago

It's a sidenote, but part ("Act") 1 has a strange structure. They start off with Tether doing dodgy business and most likely being insolvent (a very good and sound point), but then end with > Tether’s most public executive, CTO Paolo Ardoino, uses a Twitter avatar that seems to be a pear with the face of the Joker. and > His wife, Claudia Lagorio, began working at Bitfinex as a Mobile Application/Frontend Developer in 2016. Three years later, she was appointed Chief Operating Officer of both Bitfinex and Tether. Those are extremely weak claims. The latter is at least a meager allegation of nepotism, although, without more context, it's really not that strong. The avatar, on the other hand, is a distraction at best. Ending the paragraph on those claims makes the argument appear a lot weaker, if not even disingenuous.

notahacker 4y ago
Agree with you on the Joker avatar being pretty irrelevant, but there's a bit more than just nepotism implied a growth-stage financial services company trading billions in assets which had already experienced serious regulatory and fund loss problems deciding the C level appointment their operational issues needed was someone with no prior finance experience but plenty of reason to be loyal to the founders who'd been hired a little earlier to implement the UI for their app. Even in the hacker-founder world of Silicon Valley, that would be an unusual promotion path, for a troubled company in a regulated field like finance it's a red flag...
ShamelessC 4y ago
It is written in the form of a casual blog post. Really, all he is saying is that he doesn't respect these people on a personal level and "knows the type" (or what have you). If you disagree, that's fine, but if you want a more formal type of discourse, pay some journalists. It also _does not_ strike me as "weird in context", but I guess you're just hoping people don't actually read the thing (which, fair enough - no one does here).

actinium226 4y ago

I, for one, think I'll get in on this trade with some play money just because this seems like a nice way to learn about smart contracts and defi and maybe get paid to do so.

c7b 4y ago
Just make sure that you know whether/how you need to report this in your taxes.
spaceman_2020 4y ago
Borrowing and lending requires a lot of transactions. Make sure to do it on a cheaper blockchain (NOT Ethereum) otherwise you'll end up paying a ton of money in fees. I would recommend Polygon (Matic) or AVAX since they're much cheaper than Ethereum and have decent liquidity on AAVE.

faangiq 4y ago

Good luck cashing out that USDC broski …

dominojab 4y ago

[dead]

uconnectlol 4y ago

What exactly is hard about running a fiat backed stablecoin? Don't you just accept money for your token and invest it in low risk crap? Isn't this exactly what a consumer bank does? Even Paypal does this [1]. So is the issue that they just (allegedly) got greedy and made high risk investments? Can't Google or some company just make their own stablecoin overnight and have guaranteed profit then? Of course only if it fits with their PR. 1. https://www.paypal.com/us/webapps/mpp/ua/useragreement-full https://www.paypal.com/us/webapps/mpp/ua/useragreement-full > Any PayPal balance you hold represents an unsecured claim against PayPal and, except as provided below, is not insured by the Federal Deposit Insurance Corporation (FDIC). PayPal combines your PayPal balance with the PayPal balances of other PayPal customers and invests those funds in liquid investments in accordance with state money transmitter laws. PayPal owns the interest or other earnings on these investments. However, the claim against PayPal represented by your PayPal balance is not secured by these investments and you do not have any ownership interest (either legal or beneficial) in these investments. These combined balances are held apart from PayPal’s corporate funds, and PayPal does not use these balances for its operating expenses or any other corporate purposes. Additionally, PayPal will not voluntarily make these balances available to its creditors in the event of bankruptcy. Note: quote obtained by proxy (https://www.paypal-community.com/t5/My-Money-Archives/Does-paypal-earn-interest-on-monies-held-while-verifying-a-sale/td-p/1522805 https://www.paypal-community.com/t5/My-Money-Archives/Does-p...) as Paypal needlessly block my shared IP.

dzdt 4y ago
What's hard is the temptation. If you are running a fiat backed stablecoin with a big market cap, and you are willing to be a bit dishonest you can make yourself obscenely wealthy. There is no one making you keep your hand out of the cookie jar. Resisting that is hard.
- mlyle 4y ago
  And here "a bit dishonest" is just a matter of leverage. Slightly increase the risk, and on average you'll come out ahead and have extra money you can siphon off. This is one reason why economic downturns always expose fraud.

paulpauper 4y ago

So now we wait, paying 12.36% a year for the eventual pleasure of saying “I told you so”. Seems like a pretty good deal to us. Not really. most of your money will be gone in just 6 years if nothing happens Obviously, borrowing in usdt is very good if it goes to zero.

EVa5I7bHFq9mnYK 4y ago

I'm willing to take the bet. Let's send $10k each to a reputable escrow. If after a year USDT trades under $0.9, you get $20k. Otherwise, I get it.

qeternity 4y ago
That is not the bet they are taking, the r/r is completely different.
bagacrap 4y ago
Their bet doesn't require tether to blow up in the next one year. It's only a total loss for them after 6 years or so.
- EVa5I7bHFq9mnYK 4y ago
  Well, quite possible it will blow out at some point. Not because they are not 1:1 backed by USD and quality assets, they are. But because there is no KYC in USDT transfers.

spaceman_2020 4y ago

I've been deeply involved in crypto the past 3 years and everyone in the space knows that Tether is a scam. No serious investor holds USDT over USDC in their personal wallets. Tether only exists as a way to trade on centralized exchanges. The problem is that everyone in the system is so deeply reliant on USDT that they will do everything possible to prop it up. Honestly, the only thing that can bring down Tether at this point is either the collapse of one of the major central players (such as Binance) or government action.

sshine 4y ago
> everyone in the space knows that Tether is a scam For those interested, Coffeezilla did a piece on Tether: https://youtu.be/-whuXHSL1Pg https://youtu.be/-whuXHSL1Pg And yes, it’s a scam. Hodlers seem to tolerate it because crashing Tether would impact their net value. It’s sad.
- MuffinFlavored 4y ago
  so BTCUSD is like $15-$16kish now if anything happens to Binance, Coinbase, or Tether, it’s most likely going lower I feel like a lot of people who still dollar cost average into cryptocurrencies shouldn’t. If you make $300k/yr, you can do whatever you want with your money in my opinion. If you make $15/hr working part time, you probably shouldn’t touch crypto. The risk is too low. What’s the upside chance?
  - rrdharan 4y ago
    I agree with you - but I think you meant "the risk is too high" if you're a low income earner?
    - MuffinFlavored 4y ago
      I just feel most people who are obsessed with crypto that I’ve come across in my personal life are some of the least financially responsible/educated people I’ve ever met that and r/bitcoin comment sections are very delusional cult to me

0x53 4y ago

Currently you can get a variable rate of around 3% on compound finance. https://v2-app.compound.finance/ https://v2-app.compound.finance/ might be a cheaper way to do this.

josh2600 4y ago

I feel like most people look at stablecoins and say "this is such an easy business!" and in a way they're right, but they're also wrong. Stablecoins derive stability through a system. This system uses collateralization to present a fixed price. In its most simplistic form the system has $1 for every $1 in it. Unfortunately, in such a system, there is no point in the virtualization, which is called hypothecation in finance. Hypothecated assets exist to allow asymmetric risk. Think of it this way: * Alice runs a bank and has dollars in it. * Bob runs a stablecoin and wants it to be backed by dollars. * Alice says "you can mint $1 of hnUSD for every dollar I have in my bank." * Bob mints 1 hnUSD. * Alice invests the dollar in their bank into US treasuries to earn a yield backed by the full faith and credit of the United States Government. * Bob is free to use his hnUSD for whatever he wants to do in his ecosystem and Alice will be able to redeem it when he brings it back to Alice's bank when she sells her US treasury. The problem in all of these systems is actually hauntingly simple: Liquidity is king. In the event that Bob needs dollars quickly, Alice may not be able to sell treasuries quickly. This is called a liquidity crisis. Before we start pointing fingers at cryptocurrency, take a second and think about how banks work. All of banking is built on hypothecation and risk management. The businesses that stand the test of time in finance are the ones that manage risk most effectively. There is a time to be bullish, and a time to be bearish. Having the wisdom to know the difference is often won only with battle scars. I am thankful for the public-private partnership that facilitates humanity's collective dream through finance. I am hopeful that we can learn the lessons of the past to not repeat history's mistakes. The future of finance is on-chain governance/on-chain proof of reserves/on-chain liquidation.

grogers 4y ago
AFIACT Tether doesn't even aspire to any fixed time frame for redemptions, so it's even easier than a typical money market scenario. If all their assets were 30 day treasuries or shorter you don't even need to sell them - just wait the 30 days and then pay people then. Though I expect that even at tether's scale, markets for short term treasuries are liquid enough.

pearjuice 4y ago

Lots of people have been saying Tether is a fraud for years now. Even some very smart and highly regarded people; patio11 comes to mind. Yet in all those years, Tether had no major depegging event, bankrun or any other noteworthy chain reaction whilst big frauds unwinded, hacks happened and over-collaterized bubbles popped. I'm not saying Tether isn't a fraud, but I feel the chance it falling as an unbacked stable coin is long gone. More likely they will end up OFAC sanctioned (such as happened with tornado cash) for roleplaying as the federal reserve.

arez 4y ago

just short coinbase, if tether blows up, the whole crypto market will blow up, therefore coinbase will blow up. There's no way coinbases stock price wouldn't go down if tether and bitcoin go to zero

femto113 4y ago

Tether effectively denominates the entirety of all crypto valuations, so going to any exotic length to do a specific "short Tether" trade seems silly. Just shorting BTC/USD will have the same effect.

rewtraw 4y ago
But with crypto’s tendency for huge volatility, it’s much more difficult to maintain a short BTC position without getting blown out.
baobabKoodaa 4y ago
No, shorting BTC/USD has a completely different risk profile than shorting Tether (USDT/USDC or similar pair). The key difference is that BTC can spike up to basically any value (thus liquidating your short, even if it eventually comes back down), whereas USDT won't trade above $1.05 or so.
- femto113 4y ago
  Considering the two risks as independent surmises that BTC goes up substantially (in USD terms) via some mechanism other than printing Tether, which AFAICT never happens. If/when BTC does go up you can simply short again at the higher level. If you're not sufficiently capitalized to handle margin calls you really shouldn't be doing shorts, but even small investors can do this trade by buying the BITI ETF.
  - baobabKoodaa 4y ago
    > Considering the two risks as independent surmises that BTC goes up substantially (in USD terms) via some mechanism other than printing Tether, which AFAICT never happens. BTC goes up and down for a multitude for reasons. For example, Matt Damon going on tv makes BTC go up. You have an extremely simplistic view of the markets if you believe the only reason for BTC to go up is "Tether money printer goes brrrr". Yes, it's one of the reasons. It's not the only one. > If/when BTC does go up you can simply short again at the higher level. If you actually tried to put this proposal in an excel and model the returns, you would immediately notice that "short BTC" and "short USDT" have completely different outcomes and "simply short again" is not a remedy that fixes this issue.

tim333 4y ago

Good luck with the shorting but 10% seems kind of steep. I guess if there's a >10% risk they go to zero in a year it's ok. I shorted Tether briefly on Kraken and then was horrified to find they were charging me ~25% per year for so doing.

JayStavis 4y ago

A prediction market feels like a straightforward way to short something like this. Also I feel like there's plenty of people who would take the other side of the bet. Who wants to make it?