
The Bear Case for Crypto, Part II: The Great Bank Run - wglb
https://prestonbyrne.com/2017/11/26/the-bear-case-for-crypto-part-ii-fractional-reserve-marmot/
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1053r
This article appears to be written under the assumption that coinbase and
other exchanges are counterparties to the price. They are not. They are market
makers. It's impossible to have a run on dollar demand for BTC, because the
price floats. If there are sufficient people selling, the price will simply
fall, and has done so several times in the past, before recovering when
equilibrium returned to the market. Exchanges are not taking loans to back the
dollar value of BTC.

The author appears to lack basic understanding about how markets work in this
space.

~~~
pjbyrne
Hi, author here. A liquidity crunch is not the same thing as a fall in
Bitcoin's price. A liquidity crunch implies that the people who provide the
dollars to this market (banks, I'm informed) cease doing so because they don't
have confidence that the money they lend to provide USD liquidity to fiat
on/offramps will be able to be repaid by their counterparties during whatever
the maturity period is of the facility. As a result, companies like those
on/offramps run out of dollars, and Bitcoin cannot be shifted through those
platforms for any price.

This happened to the London interbank lending market during the week of 15
September 2008, when LIBOR jumped to 8% and the banks simply stopped providing
loans to each other. The reason? Because they weren't sure the assets their
counterparties (other banks) were sitting on were worth anything (resi
mortgages) and they didn't want to find themselves an unsecured creditor.

Mortgages during the subprime crisis didn't fall in price so much as they were
impossible to price. This made the credit risk of bank borrowers impossible to
price. So funding headed for the doors.

Change up the parties a bit and the banks --> offramps, mortgages --->
Bitcoin, and liquidity --> fiat, as in 2008.

There is simply no way that, as Bitcoin goes parabolic, the on/offramps are
prepared to handle a change in the weather which results in a huge influx of
withdrawals unless their own bank balances rise significantly. My informed
supposition is that most such entities should have high-cost liquidity
facilities with commercial banks that can step in and address some of that
withdrawal demand.

As then, a liquidity shock (availability of dollars) could break the system
without needing a precipitous drop in the market price of Bitcoin.

~~~
modeless
> the people who provide the dollars to this market (banks, I'm informed)

You are misinformed. The people who provide the dollars to this market are the
customers of the exchanges. It seems like you are not familiar with how a
currency exchange works.

A currency exchange does not buy or sell the currencies traded at the
exchange. All it does is match buyers with sellers, like an auction house.
Buyers must deposit all the dollars that they use to buy _before_ buying, and
sellers must deposit all the bitcoins they sell _before_ selling. When someone
withdraws dollars after selling, the exchange simply transfers to them the
dollars that the buyer deposited earlier. It already has the dollars on hand
and does not need to borrow them from a bank, ever.

Now, not all places you can sell Bitcoin for dollars are currency exchanges.
There are also brokers that do trade directly with their customers, rather
than matching customers together to trade. In fact, Coinbase provides this
service. However, they can simply obtain dollars by trading at currency
exchanges themselves, and they adjust the price they offer to match the
exchange price (plus a fee) so they can't just run out of money. Again, there
is no need to borrow dollars from a bank. Furthermore, trading volumes at true
currency exchanges absolutely dwarf the volume of any Bitcoin broker.

All that said, nothing prevents a crash in the Bitcoin price. If too many
people want to sell and not enough want to buy, the price will go down a lot.
But this is true in any market, and it has nothing at all to do with bank
lending. Not even a little bit.

~~~
tradersam
> You are misinformed. The people who provide the dollars to this market are
> the customers of the exchanges. It seems like you are not familiar with how
> a currency exchange works.

I fear _you 're_ misinformed. Besides localBitcoins, how does one get fiat to
an exchange?

That's right — a bank. Exchanges like Bitfinex only survive because of things
like Tether, which requires other _fiat accepting_ exchanges.

If all exchanges were like Bitfinex, there would be a liquidity crunch, as the
OP is saying.

~~~
modeless
No, that's not what OP is saying at all. Read his posts. He's under the
impression that exchanges take out bank loans to pay dollars to their
customers, which is false.

When banks refuse to deal with an exchange like Bitfinex, it has nothing to do
with liquidity concerns. It's because banks are required by law to verify who
they are transferring money to (AML/KYC), and they don't believe Bitfinex
abides by those laws (they are right).

BTW, Bitfinex recently reopened bank deposits and withdrawals.

~~~
tradersam
> No, that's not what OP is saying at all. Read his posts. He's under the
> impression that exchanges take out bank loans to pay dollars to their
> customers, which is false.

Although that would be incorrect, there still are valid fears for a liquidity
crunch, as I stated. This, regardless of _why_ (be it laws or fund
availability) does create a concern due to liquidity.

> BTW, Bitfinex recently reopened bank deposits and withdrawals.

Clearly not true. Especially for U.S. customers:
[https://www.bitfinex.com/posts/227](https://www.bitfinex.com/posts/227)

~~~
modeless
True that US customers are banned from Bitfinex, however they _did_ recently
announce that bank deposits and withdrawals are reopened for other countries.
If you don't believe them that's fine, I don't trust them either, but they did
announce it.
[https://www.reddit.com/r/BitcoinMarkets/comments/7enpoo/bitf...](https://www.reddit.com/r/BitcoinMarkets/comments/7enpoo/bitfinex_reopens_usd_deposits_and_withdrawals/)

~~~
tradersam
The first string of comments says they haven't announced yet (besides on
reddit) and nothing on their site claims anything to that affect either.

Also, if the Fed barred any Bitcoin sales/buys with USD (however unlikely)
almost all reputable bank would drop those as well, regardless of country.
This has been discussed in detail on r/BitcoinMarkets, actually.

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brndnmtthws
Hacker news has become a terrible discussion forum for new technology relating
to cryptocurrencies. It's a shame. Nothing but misinformation, FUD,
whataboutism, and naysayers.

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45h34jh53k4j
Preston has been wrong about cryptocurrency for 5 years now. I do wonder if he
will ever 'get it'.

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walrus1066
I think it'll be more of an old fashioned speculative bubble burst.

The smart money will start taking profits by selling their coin, as the price
goes down those that bought the high will lose their nerve and sell to stem
their losses. Then the rest will start selling shortly after. Eventually
there'll be nobody willing to buy at any price, it'll be worthless.

~~~
superbrama
If that occurs, that’s your long term buy signal, right at the moment when it
seems like nobody wants it anymore from having fallen so far and hard.

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0xCMP
This article assumes that depositor money is used for purposes other than
backing the amounts of USD a depositor has in their account. I believe he also
thinks that it's possible the money is being used in a fractional-reserve
fashion and backed by some bank to ensure liquidity if there is a momentary
issue, but there is a real panic the bank will stop lending the money to cover
for the moment and cause a real problem.

e.g. it's possible, as it has happened before, that a trusted financial
institution is playing a dangerous game to make money off sitting cash and
uses someone else as a backup.

The real question is: Does Coinbase (or any other exchange) do anything with
the money (fiat) and how much is actually reserved? Same with Bitcoin.

We can assume 100% on each side because they make money on fees of the
exchange, but that's the real question here.

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Top19
Found out today you can only take $10,000 a day out of Coinbase. I guess this
could be good, because it’s essentially a “bail-in” that forces people to stay
in the market and prevents a run, but still I had no idea of the lack of
liquidity in bitcoin with the current system.

~~~
seehafer
I think that actually exacerbates the psychological dynamic that the author of
this post is talking about. Not being able to get your money out will drive
additional panic.

