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I happened to dig up an old write-up from a Matt Levine newsletter a few years ago about how margin calls work in Crypto: > In traditional finance, if you have
by legitster 2y ago
I happened to dig up an old write-up from a Matt Levine newsletter a few years ago about how margin calls work in Crypto:
> In traditional finance, if you have borrowed money to buy some stocks, and the stocks have gone down, your broker will call you up and say “hey could you post more collateral.” Ideally you post the collateral and everything is fine. Sometimes you don’t, and your broker sells the stocks at hopefully a high enough price to pay off your loan. But sometimes you say “sorry, I can’t post any more collateral today, but I can try tomorrow,” and your broker gives you another day.
> In decentralized finance, if you have borrowed money (stablecoins) to buy some crypto, and the crypto has gone down, a robot sells your crypto at hopefully a high enough price to pay off your loan, automatically and without bothering to call you.
Because everything is "smart-contracts" and automated, there is basically no buffer between being under and over leveraged, so market swings are much rougher than in traditional finance.
- jncfhnb 2y agoWhy would you offer more collateral? What’s in it for you?
- sudosysgen 2y agoIf you think the market will move in your favour, offering collateral means you avoid selling at a price you think is suboptimal.
- triceratops 2y agoNot getting liquidated at a loss.
- rsynnott 2y agoSay you’ve borrowed money to buy a billion dollars worth of BigCorp, and BigCorp has some bad results. Oops, suddenly your share of BigCorp is worth 800m, and your lenders want more collateral. The next day BigCorp releases [whatever amazing thing], and its stock doubles. You should probably have provided the collateral.
- jncfhnb 2y agoAre these things full recourse? Because while a doubling sounds quite nice, you would need to earn 25% from the current state of 800M to break even on that additional collateral of 200M. Sounds strictly worse than just liquidating the original loan to achieve net zero and then doing a different loan with your 200M of extra assets. If you can liquidate 800M to rid yourself of a 1B loan then it seems fairly obvious to do it?
- temp2022account 2y agoYou're liquidating the 800M and still owe your broker 200M, it's risk avoidance not a church full of forgiveness.
- jncfhnb 2y agoNon recourse loans are a thing, including the majority of mortgages.
- triceratops 2y agoThis isn't unique to crypto. Some traditional discount brokerages also auto-sell without warning when you drop below their margin requirements.