Hacker News new | comments | show | ask | jobs | submit login
An $814M Mystery Near the Heart of the Biggest Bitcoin Exchange (bloomberg.com)
348 points by rayuela on Dec 5, 2017 | hide | past | web | favorite | 341 comments

I found this comment, by Richard Berger on SeekingAlpha, compelling:

> STOP! and think about what this author has revealed. Even IF Tether is NOT running a fraud, the arbitrage positions that automatically exist between Bitcoin and any tether are real and do create incentive to create an arbitraged feedback loop whereby a pegged tether between Bitcoin - any_generic_tether - USD does exist and self feeds, driving up Bitcoin exactly as the author contends may be happening with the current Tether. So long as such a scheme emerges naturally out of the system design, the design is fatally flawed and must asymptotically compound grow to an infinite exchange rate (impossible and unsustainable by definition), or it must ultimately collapse.

> Thus, the author has demonstrated a basic inherent flaw to crypto-currencies that can not be repaired other than by legal estoppel. Legal estoppel will never occur because jurisdiction is off-shored and proving a case by case would generate infinite litigation along with each estoppel creating a crash. This in itself would kill the cryptos as surely as the fatal flaw itself will.

> It is meaningless to argue WHETHER the author's speculation as to Tether's actions are fraud. The ONLY question is if his identifying of the nature of the available arbitrage can exist in reality. If it can, crypto is dead. No other conclusion is available.


That author is plain wrong and shows deep ignorance about bitcoin and the crypto-market.

An unsustainable price of bitcoin will lead to the collapse of other exchanges since people cashing out on these exchanges requires enormous amount of real money.

This will create a situation where the price of bitcoin in Bitfinex is higher than other exchanges by a big gap. This is not the case, actually the opposite is true: Bitstamp, Gdax, and Gemini prices where higher for substantial durations in the last few weeks.

You can only artificially pump the price to an unsustainable high for a very short period of time (2013/mtgox) or have this market restricted (no withdrawals/deposits, etc...). However, this is not the case. You can withdraw/deposit to bitfinex and their coldwallet shows 1.6bn usd worth of bitcoins.

TL;DR: The author fits the "butt-hurt" category, refuses to accept the reality and tries to find non-real argument for his hypothetical flash crash.

Disclosure: I currently hold no Bitcoin but some bitcoin cash positions. I also think the market is in a bubble. But a bubble with real people dollars flowing in.

Naive question: when an exchange sells, I assume they can decline to buy if they don't have a buyer or too much inventory?

For example, if suddenly everyone wants to sell BTC, the price would drop, at which point the exchange could buy the BTC at a much lower price, or not buy at all?

(unless they commit fraud, massively purchase BTC without having the actual money to back it, then not be able to wire money out of our accounts?)

The exchange doesn't sell/buy. It just connects the buyers/sellers. There are brokers that do that but you can't call them an exchange. I also think regulation prevent exchanges from trading on their own exchange to avoid front-running and since they have lots of information about the users/deposits/etc...

>I also think regulation prevent exchanges from trading on their own exchange to avoid front-running and since they have lots of information about the users/deposits/etc...

hahaha, regulation. That is hilarious

Thanks. Makes sense. I guess the "instant buy" on some exchanges gave me the impression that they kept coins in stock. (edit: I just saw the other comments regarding Coinbase, which answer that issue)

However I'm a bit confused by:

> An unsustainable price of bitcoin will lead to the collapse of other exchanges since people cashing out on these exchanges requires enormous amount of real money.

To cash out, other people need to buy, typically with fiat currency, so it's unlikely that their bank accounts would empty overnight? (assuming no fraud, bugs, not running the exchange at a loss, etc)

>To cash out //

Isn't the problem that an exchange can [pretend to] credit your account to the tune of $n million, use your bitcoin to sell for that amount, then keep/use the proceeds of the sale.

This is what traditional banks do with fractional reserve banking, except here the fraction of your bitcoin held is zero ;0).

Also, if bitcoin plummets you're probably not going to be happy when the exchange says "oopsies, our bad, that transaction failed, here's your bitcoins back".

From coinbase TOS:

You acknowledge that the quoted Buy Price Conversion Rate may not be the same as the Sell Price Conversion Rate at any given time, and that Coinbase may add a margin or “spread” to the quoted Conversion Rate.

If that's in the GDAX TOS, it's an unnecessary disclaimer. The best Bid and Ask are by definition not the same price, otherwise one or the other order would have been at market and matched against the other, and there is always a non-zero spread between the two.

Coinbase is not an exchange, it is a direct seller. Gdax is the exchange.

Same TOS

I'm having trouble locating it but it is the same for Gdax except that it is individual market makers who make the spread and not coinbase itself.

Thank you for the clarification.

I like how they say "may add"... haha, they always add it! I assume they're talking about the GDAX order book but if you watch the live coinbase price data on tradingview.com and try to buy bitcoin on casebase at the exact same time, it's always a little higher on coinbase.com (about 0.5% higher from my experience). I wouldn't mind if they weren't also charging an additional ~4% fee on top of that.

So that's more fee than the worst wire transfer or credit card currency exchange?

Definitely more than a wire transfer, but I'm not sure where else to buy with a credit card at a lower fee. Buying instantly at a known price is much better than a wire transfer that comes through in 2-3 days -- who knows what the price will be when it comes through!

Sound analysis! Quick question: what do you think is going to happen to BCH when coinbase unlocks users' tokens?

Most coinbase users withdrew their coins. I'm guessing they have way less than 100k BCH. Xapo recent dump of 25k in a couple days barely moved the price downed considering its volatility. I'm guessing we triple/quadruple from here by early next year. Don't take this as investment advice. I'm not responsible for your losses or your life.

ZeroHedge recently had an article posted here showing that there were just $6bn of actual inflow into Bitcoin go account for its $330bn market cap. Thoughts on that?

There's no reason arbitrage should push up the price of Bitcoin. Tether exists to normalize arb opportunities between exchanges. That's what it was created for. There is indeed a real question as to whether or not Bitfinex has issued more Tether than it has in reserve, or whether or not they will actually pay people out for their Tether tokens. But there is no 'arbitrage feedback loop' driving the price rise.

It only works that way if you trust Tether and the exchanges. Given how shadowy the big ones are, I'm not sure that's a good idea.

It appears this kind of arbitrage is designed to push up the price of BTC -- as long as the price keeps going up, people aren't going to withdraw. Once we start to see a sell-off though, the exchanges will stop being able to pay in USD pretty quickly.

My thought is that every time Tether/Bitfinex sees a sell-off happening (which, being an exchange, they can) they issue a bunch of new Tether, push the price higher, and take the money of some more suckers entering the market by selling BTC. If true, this is basically just a ponzi scheme.

Without evidence to the contrary, this is the safest assumption at least. I cashed out a few days ago regardless; but I do think there's a big crash coming. I don't think cryptocurrency is inherently bad, just that Bitcoin is all hype.

Yes, but there is no evidence that that is happening. Bitcoin has a $200B market cap. There is only approximately 800 million usd worth of Tether on the market. It's easy to make up stories about what might be happening, but just because it's possible something is happening doesn't mean that it is.

You are underestimating the extent to which a finite $200M injection can make it seem like the price is skyrocketing for exogenous factors and therefore yield real money coming in. Classic pump and dump strategy.

If you don't mind my asking, how long had you held for?

About 4.5 years? Bought some on Coinbase when I saw them at SXSW a few years back then promptly forgot about it. Pretty sure I'm gonna be one of the few "casuals" who manages to take any money away from BTC when this is all said and done...

I'm no expert but mulling it over.... If Tether is big enough that the price of BTC is effected by it, such that investors feel they can cash out and that is part of their risk calculation, then a tank in Tether would also cause a drop in BTC.

If Tether is backed by loans and not hard cold cash that's a risk and effects the value.

If someone is able to buy Tether on credit, and the credit is actually backed by BTC then there could be a loop.

I'm not sure about the likelihood of this but if Bitfinex is overleveraged somehow then anything is possible. At least I think that was the argument.

>If someone is able to buy Tether on credit, and the credit is actually backed by BTC then there could be a loop.

Indeed, one of the BFX employees accidentally let it out that Tethers are not backed by USD but perceived value of cryptos held by the exchange.


Anybody claiming that a loop does not exist has to be in some kind of denial.

But is $845m enough to pump the entire crypto market by billions in market cap? Maybe there are secondary effects here, like increasing peoples confidence in crypto because of a false sense of liquidity, or something like that.

Market cap defined as price * total supply is a fallacy because it does not account for liquidity. Order books are fairly [0] thin even at the larger exchanges that you only need to buy/sell a few thousand BTCs to have a significant impact on price. If you consider the potential of wash trades it gets even easier. Bear in mind that up to 1/3 of all bitcoins mined could have been lost[1] and only a small amount of actively traded anyway.

A good parallel would be that Tesla is valued by the market at 500+ billion, but it's impossible for all shareholders to sell their shares for 500 billion because there are no buyers with 500 billion in cash waiting to buy Tesla stocks, and if anyone tried the price will crash after the first few percent has been dumped.

[0]:https://www.bitfinex.com/order_book [1]:http://fortune.com/2017/11/25/lost-bitcoins/

If traders lose faith in Tether, they would sell Tether and buy Bitcoin in a flight to safety. Bitcoin prices would rise as traders try to get out of Tether.

Conceivably, a crisis with Tether could affect confidence in the entire cryptocurrency ecosystem, which would put downward pressure on the Bitcoin exchange rate.

It's not clear which of these factors would dominate, so it's not clear what would happen to exchange rates.

But currently Tethers trade 1:1 for USD on multiple exchanges, so markets aren't showing evidence of lost confidence.

> If traders lose faith in Tether, they would sell Tether and buy Bitcoin in a flight to safety. Bitcoin prices would rise as traders try to get out of Tether.

That might be the outcome, however:

- If there would be the slightest bit of panic btc transactions would be congested for days.

- If people would loose money by Tether their btc margin positions would be getting closed.

- Because they loose faith in one crypto they would by another?

If Tether is garbage, the only way to get your money out is by converting Tether to something worth real money.

We saw this in Mt. Gox. When USD withdrawals failed and people suspected Mt. Gox was insolvent, the only way to get money out was to buy BTC and withdraw that. The Mt. Gox exchange rate inflated because everyone knew dollar balances on Mt. Gox were worthless.

If Bitfinex is insolvent and Tether fails, we'll probably see panic selling across the market as people start fearing Bitcoin is a giant tulip scam.

>If traders lose faith in Tether, they would sell Tether and buy Bitcoin in a flight to safety. Bitcoin prices would rise as traders try to get out of Tether.

The Tether:Bitcoin rate would rise, but I’m not sure that the Bitcoin:USD price would follow suit.

> Tether exists to normalize arb opportunities between exchanges. That's what it was created for.

What things are created for and how they actually behave often diverge.

Wasn’t it _actually_ created to allow export of funds after the parent exchange was banned by the US and Taiwanese banking systems?

Sure. Not claiming it can't have secondary effects. But there's no argument been presented that establishes that it does.

Does not the claim, that Tether is not actually backed by dollars, also double as an argument that it would be difficult for it to behave as intended? - i.e. to the extent that the former may be correct, the latter is likely?

Claiming that it doesn't behave as intended is not equivalent to claiming that it pumps the price of Bitcoin.

> Even IF Tether is NOT running a fraud, the arbitrage positions that automatically exist between Bitcoin and any tether are real and do create incentive to create an arbitraged feedback loop whereby a pegged tether between Bitcoin - any_generic_tether - USD does exist and self feeds, driving up Bitcoin exactly as the author contends may be happening with the current Tether.

This purported mechanism needs a more thorough explanation from the author before it can seriously considered. How, exactly, does this arbitrage opportunity work?

Tether price is 80cents. Person trades bitcoin for tether. Person redeems tether for $1, profiting 20cents. Tether issues more (fraudulent, not backed) currency. Repeat.

If someone sells bitcoin for tether (because they want to redeem the tether and collect 20 cent profit) the price of bitcoin goes down, not up.

Which markets confuse tethers with USD? They are clearly two different assets. The former is a private currency, issued by a company and redeemable in USD, while the latter is the USD that the former IOU is denominated in.

I see how this would affect the price of bitcoins in tethers, but not how it would affect the price of bitcoins in USD (unless the market, as a whole, conflates the two).

Also, where do these alleged arbitrageurs redeem their tethers? As I understand it, the corporation that issues tethers was cut off from doing international wire transfers, thus rendering tethers irredeemable.

Can anyone explain how this "arbitraged feedback loop" allegedly works? Arbitrage causes prices to converge, not spiral up or down.

Tether artificially inflates the price of tether to $1. It's "tethered"

The claim is this phenomenon exists even without printing unbacked tethers.

> Even IF Tether is NOT running a fraud

I can't wrap my head around this. Who is silly enough to sell bitcoins for 'worthless' Tether?

Why not. Sell your coin to tether to weather short term price dips and transfer between exchanges.... If tether is unsustainable long term, who cares?

If the fire that this smoke points to is really there, someday soon a lot of people are going to be left holding a bag of worthless tethers. That'd be a pretty bad day, wouldn't it? Kinda like being stuck in Mt. Gox during the end days.

sure, you just have to move quickly, which USDT enables you to do (versus USD, which to do transfers has ECH delays).

I don't think we're talking about the same problem here. If the day comes that Tethers are proven to be insolvent (because there isn't actually a USD in reserve for each Tether in circulation), moving quickly won't make a damn bit of difference. You can't quickly unload an asset when there is no taker. Somebody will be left holding a big fat stack of nothing.

I don't know what's going on with Tethers, honestly, it's not something I've followed very closely; so this may not be a problem at all (and if it's not, I would assume the people involved would be eager to get an audit done and results published so the money train can keep rolling). I'm just saying that unless you believe strongly that Tethers are backed 1:1 by USD, it would be irrational to hold Tethers, even for a short time.

I found it worrying that when the guy they interviewed tried to move his Tethers to another exchange, he couldn't find enough takers (and Bitfinex wouldn't let him exchange for dollars either). So, the argument that Tethers trading at roughly $1USD across exchanges is "proof" that Tethers are sound is shaky, at best. If you can't sell more than a handful of Tethers without crashing the market for Tethers, it's not actually the market setting the price. Something else is going on...something that would be illegal in a regulated market.

You'll be able to unload, but basically only into other crypto. Exchanges that deal with crypto will see crypto prices skyrocket, then shortly collapse, as people buy BTC or other coins then try to move to other exchanges to sell for real USD.

Why would anyone sell you crypto for Tethers if Tethers are found to have no USD backing? I mean...isn't that the entire point of Tethers?

If it's 1-1 to USD, why not just swap coin for USD?

That's the point, you can't do that now and more than likely ever...

What are you talking about? I can do so easily on gdax.com and I assume other places as well.

I saw a bitcoin ATM at the mall the other day.

I get that I guess it's not easy for someone in a major city or whatever.

Then you'd have to pay capital gains taxes.

> who cares?

Cryptocurrency markets are dominated by highly rational traders with deep pockets.

Just because a bunch of newbies are buying 0.002 BTC on Coinbase doesn't change that fact.

Highly rational traders with deep pockets do care. Getting hand-wavy talking about "irrational markets" doesn't adequately explain why Tethers trade at parity to USD.

People without USD accounts. To them selling for USD is just getting them a promise of USD which they're never going to cash out anyway.

People who want a liquid USD tethered asset on many exchanges and aren't needlessly paranoid over absurd conspiracy theories that have yet to present a single ounce of real evidence.

Precautionary Principle.

Likelihood of a problem x the cost of the problem happening = how much you should worry/care/act

When someone asks 'how sure you are' about something and you say 'really sure', unless you pull out a slide deck with numbers and graphs, that's an emotional estimate, and has no bearing on the precautionary principle. We naked apes get tripped up by this because we are used to dealing in social interactions, where your intuition works pretty well. Statistics, not so much.

You loan your friend your car when you're pretty sure that they won't wreck it, scratch it, make it smell like pork rinds. A business is not your friend. There's no social capital at play. Without that social capital you would never lend your car to a business. You don't owe them the benefit of the doubt nor do you reap a non-monetary benefit from doing so. Only when there is such a benefit (community building, networking, etc) would you even consider doing so.

I have certainly defended companies in forums because I felt they represented some part of a world I wanted to live in. That's my social capital in that case. The best way to predict the future is to create it, and I had a small part in that. I participated.

But in this case if you're wrong, instead of losing out on a toy, or a pillow that is always the exact right temperature, or a fridge that always has chocolate milk in it, you're going to lose money, face, and probably that world you hoped for. There's been enough shenanegans that the confirmation bias that kicks in if Tether is allowed to continue to grow and turns out to be a pyramid scheme has a real potential to have deleterious effects on the whole concept.

How willing are you to back Tether if it means there will never be a similar company that is actually legitimate? What are the objective odds of that outcome at this point? If you really want this world, you should be demanding transparency from everyone you support in this space at this point.

Bitfinex is also lacking in evidence when it comes to showing that Tethers are backed by USD.

This is what regulation is for. No regulation? Then people are stealing. History suggests it's that simple.

How would they prove it? Twitter a picture of the bank balance?

At the very least, inform the public about which banking institutions they are currently using ever since Wells Fargo dropped out.

Contracting a reputable firm to conduct an in-depth audit and publicly releasing the results would also be a useful step.

And not refuse to name banks without an NDA signed and in place...

Did I misread the article, or weren't the banks they refused to name the banks involved in shutting them out of the US?

As far as I believe Wells Fargo is the bank that severed ties:

"After Wells Fargo severed ties, Tether won’t name its banks"

"On Dec. 2, Bitfinex released a quarterly report announcing it would no longer serve U.S. customers because it’s too expensive to do business with them. This followed Wells Fargo & Co.’s decision earlier in the year to end its role as a correspondent bank through which customers in the U.S. could send money to Bitfinex and Tether’s banks in Taiwan. Bitfinex and Tether filed suit against Wells Fargo, but later withdrew the case."

"However, Ronn Torossian, a spokesman for Bitfinex and Tether, refused to identify their current banks unless a reporter signed a non-disclosure agreement, an offer that wasn’t accepted."

Ok, now I question the validity of everything I've ever read on Seeking Alpha.

Don’t they pay per article you write? Is there any vetting?

I once tried to write an article for Motley Fool (for ~$50) and they kicked it back to me and said I didn’t have enough stock tickers in the article.

It seemed that only spelling and referencing a bunch of stock tickers are what they care about (probably due to SEO). In the end, I didnt re-submit my article because I didn’t want my name on it.

I'm not sure I follow.. There is no BTC-USD tether?

USDT is tethered to USD.

For better context, here's the related article he was commenting on: https://news.ycombinator.com/item?id=15852750

There doesn't need to be an official BTC-USD tether, BTCUSD on bitfinex is exactly that in practice and in fact.

That's not a tether though, that's an exchange rate.

A tether is like a fixed (pegged) exchange rate[1], where there is an arbitrage opportunity. But that's not BTC-USD.

[1] https://en.wikipedia.org/wiki/Fixed_exchange-rate_system

BTCUSD floats freely, based off the latest trade. It's not pegged.

Is it speculative to think Tether has the means to forcibly make Bitcoin collapse?

Am I reading that right?

can you explain this like you would to a five year old?

I really hope this was an intentional quote from the movie Margin call

I don’t think I quite follow the reasoning here.

> Causality is difficult to prove, but based on the correlation between the supply of Tether and Bitcoin and Tether Limited operating model, I am highly confident that the issuance of unbacked Tether is driving the insane rise of Bitcoin in USD.

Is this a parody?

When something doesn't make sense, usually it's because information is missing.

Every market participant knows that Tether doesn't prove their reserves, and yet the market exchange rate to USD stays in a tight band between 0.98 and 1.02 across multiple exchanges.

If the market doesn't trust Tether, then it should trade at a deep discount to USD, not at parity.

Similarly, the conventional wisdom says cryptocurrencies are in a massive speculative bubble. The negative sentiment on Bloomberg, WSJ, NYT, Twitter (not to mention HN) far outweighs the fanboys.

This is the most unregulated free market we've ever seen with many exchanges in many countries, person-to-person facilities like https://localbitcoins.com, margin trading, short selling, futures, options, etc.

If everyone knows the whole thing is a Ponzi-bubble-hype-scam, why isn't that information reflected in the markets?

There must be missing information that would make this make sense.

Bear in mind that this is bitcoin. People continued pumping money into mtgox for _months_ after it was clear to anyone who’d been paying attention that it was dead.

And currently bitcoin’s in an unusually large bubble, so there are lots of people buying into it who’ve never previously had experience of it. I see ads for, basically, “get rich quick with bitcoin” every day now. The people clicking those are not the world’s greatest critical thinkers; if the site on the other end says “buy tethers with our affiliate code to BUY BITCOINS AND GET RICH”, they’ll do it.

There are sufficient people buying tethers at face value, from the company, to keep parity. And I don’t think there’s really a facility to short sell them (that might change things a bit)

As it stands, according to Bitfinex (who is has same management as Tether) individuals do not buy tether from the Tether (the entity). They buy from Bitfinex, with dollars, transfer internally to Tether, Tether generates new tethers, they transfer to Bitfinex tether hot wallet, who then deposit in customers trading account.

One issue, is that they just revealed this arrangement. The Tether website makes it look like you can both buy and redeem tethers through an online wallet on that site, but apparently nobody has done so.

The core issue is, that despite promising to do so, Tether has not released an audit proving that they only issue new tethers on receipt of dollars.

If in fact they are issuing them unbacked, they can easily fake demand for Bitcoin. Tethers are transferable via block chain between exchanges, and are used by exchanges without access to real US dollar banking to conduct trade in (nominal) across cryptocoin-USD(T) pairs.

It’s unclear whether there have been any significance redemptions of tethers for dollars. There have been ~$800m tethers issued this year.

> Bear in mind that this is bitcoin

It's still a market, so market logic should apply.

> get rich quick with bitcoin

I see the same shit with real estate.

> sufficient people buying tethers at face value

It's a market. Smart money can sell tethers. When there's information that all market participants know, the market price should reflect that information.

Markets are wrong all the time. See the dotcom crash, the 2008 crash, etc.

So a crash is a market being wrong?

A crash is a market realizing it had been wrong about something, yes.

Or, a "crash" as defined a dramatic plunge rather than a downturn over time is usually some kind of feedback loop where prices falling creates expectations that prices will drop even further and so on, often if the market is mostly driven by greater-fool-theory herd behavior.

To a large extent, yes, often. See the dot-com bubble, for instance.

Why are markets inherently "smart?" And why is a crash not the market being "wrong?"

What even is the market? If it's the people in it, and they're smart, why did they buy subprime loan investment instruments and nuke the housing market and lose all their money?

> What even is the market?

A democracy where people vote with their money. Since their is significant risk involved, said people are assumed to do at least some due diligence/research before placing their "votes." And for that reason people have confidence that markets are right/smart, because why would so many intelligent people put themselves at enormous risk by placing their confidence in a bad investment?

Of course if the original investors get rich, eventually this leads to ignorant people (i.e. people who have not done their research) jumping in and the smart market becomes something else.

I know I am oversimplifying

Is it really the mindset in the current decade that those that "vote with their money" put any more consideration into their decisions than those that "vote with their vote?" AKA very little whatsoever?

I only ask because most of what I've been reading has assumed the market is irrational.

> I see the same shit with real estate.

And that, famously, _never_ crashed.

Housing prices didn't crash after many years of vastly disproportionate negative sentiment.

Housing prices crashed after most of the negative voices capitulated and bought into the speculative fervor, until there were no more buyers.

Today, nearly everyone's gut instinct is that cryptocurrencies are scams, frauds, bubbles, Ponzis and tulips.

Popular sentiment has been negative for years. How will this thing unravel before the majority capitulates?

Actually, housing crashed when lots of people who had bought housing on credit turned out to be unable to service the debt. I don't think there's a similar scenario with bitcoin.

On the other hand, a large secular demand will always exist for housing. The same is not true for bitcoin.

> Actually, housing crashed when lots of people who had bought housing on credit turned out to be unable to service the debt.

For completeness, "housing crashed when lots of people who had bought housing on credit turned out to be unable to service the debt and couldn't sell to someone else for more than they paid"

That italicized part is what caused the downward spiral, and that's the part that's relevant to Tethers and cryptocurrencies.

Most people with worries about escalating real estate prices had capitulated and bought in before the crash. With no more buyers, the self-reinforcing cycle went into reverse.

With cryptocurrency, the vast majority of wealthy people already think it's a scam, bubble, Ponzi or fraud. Unclear how a bubble can form when most people think it's a bubble.

A "bubble" doesn't require the participation of all or even most market participants. As long as prices are being driven by short-term speculation, it's a bubble.

I think that bitcoin prices are being primarily driven by long-term speculation - if everybody hoping to flip BTC for overnight profit exited the market tomorrow, it wouldn't make that much a difference in the end. Wouldn't surprise me if I am wrong though.

I think there is always a demand to instantly transmit value across any distance or borders, which cryptocurrencies do very well as long as they have any value at all.

At least for Bitcoin, it’s going to be cheaper and easier just to go to a traditional bank or money transfer company. Unless you somehow have a notion that using it will hide the money from the taxman...

> Smart money can sell tethers

I don’t think that many people are really holding onto tethers all that much; who has tethers to sell? Bitfinex itself?

Current issuance of tethers is ~$850m, according to the story told by Tether/Bitfinex, these should be held mostly by users. There’s no reason for exchanges to hold (unless they were buying for their own account).

Presumably when redeemed for money they go back to tether/bitfinex?

> It's still a market, so market logic should apply.

How many levels of deranged libertarianism are you on? The market never makes mistakes?

> I see the same shit with real estate.

Right, and the real estate market spectacularly imploded and took the global economy down with it when it turned out the market was wrong. Is that your point?

> When there's information that all market participants know, the market price should reflect that information.

It should, but it empirically does not. "The market can remain irrational longer than you can remain solvent" - i.e., smart investors know that you don't bet against a bubble, even if you're 100% right that it is a bubble, unless you have very deep pockets, because you can't know how long it will continue to grow (and thus how much money you'll lose) before it pops.

Even if you know it's a bubble, the rational thing to do is to ride with it, make as much many as you can and try to get out at the right time. Hence bubbles can exist and grow even if every participant knows what's going on.

The market can stay irrational a lot longer than you or I can stay solvent.

the market is extremely illiquid. even if you know it's a scam you have few options if you want to cash out.

you can trade bitcoin for cash balances at various exchanges but actually withdrawing those balances is subject to miniscule daily/monthly withdrawal limits and if there's a run on the market those exchanges will almost certainly collapse. there's no significant over the counter market. you can swap your bitcoin or tether for other crypto currencies but none of those have independent exchanges/markets. the best you can probably do with them is trade them back for bitcoin.

if you're a market participant who thinks things are a scam your best option is to withdraw what you can while you can and do everything you can to prop up the price until you are liquidated

> the market is extremely illiquid

Trading is dominated by smart money -- whales, arbitrageurs, etc. Coinbase may have a lot of newbies buying 0.002 BTC, but these aren't the ones trading Tether.

Whales and arbitrageurs have many facilities for withdrawing national currencies. They've completed the AML/KYC process. They have access to multiple banks in multiple countries.

If the smart money knows Tethers are fractional reserve, if they know cryptocurrencies are bubbling, wouldn't they withdraw?

Wouldn't the smart money put downward pressure on exchange rates?

And if the market is that illiquid, a little downward pressure would be magnified into even more severe price drops.

Since that's not happening with Tether, BTC or ETH, there must be another explanation.

Maybe the smart money knows something that isn't obvious to the rest of us.

I don't understand how people can confidently characterize the nature of crypto trading volume. How do you know where the bulk of trading volume is coming from? There's nothing whatsoever stopping wash trades. With sufficient capital you can massively manipulate trading volume.

To put downward pressure on the exchange rates the smart money would have to be holding tons of tether to liquidate in the first place -- is there any reason to believe they are?

Who holds Tethers, the Reddit guy who just bought $200 of BTC on Coinbase? No, it's the guys trading large blocks on exchanges.

> you can trade bitcoin for cash balances at various exchanges but actually withdrawing those balances is subject to miniscule daily/monthly withdrawal limits and if there's a run on the market those exchanges will almost certainly collapse.

Afaik Bitstamp doesn't have any withdrawal limits for verified users.

Cool, so Satoshi comes along and says "I'll have $100 Million please" then Bitstamp have the cash to cover it?

For an exchange there needs to be a counterparty. While Bitstamp is known as 'an exchange', they are not the counterparty AFAIK.

If Satoshi rocks up with 1 meeeelion BTC, if faith evaporates, the bid price could well be zero.

Unlimited wire transfers out of Gemini, too.

Tether is how you short bitcoin -- it's hard to move USD out of exchanges, people are worried about a bitcoin (or "all cryptocurrencies") drop, so they move into tether hoping to buy back in after bitcoin goes down without having to do the expensive/difficult bitcoin-usd move.

This assumes that the price of bitcoin will go down but the rest of the system (exchanges, tether, mining, etc.) will stay intact.

As long as people want to short bitcoin there will be lots of demand for tether at a little over a dollar that the tether company will be happy to supply. These people will balance out anyone who wants out of tether in the short term, and it's impossible to lever your "tether goes down" position.

In the future, when people decide to turn around and sell in bulk for a little under a dollar, tether might not be able to make good, particularly if they were holding their balances in bitcoin instead of USD like they claim.

Bitcoin shorters might be willing to gamble that they can move faster than the tether market will collapse in that situation and not be the bagholder.

There's no way to short "the whole mess" aside from just not getting involved in the first place or trying to get your money out while you can.

> Tether is how you short bitcoin ... so they move into tether hoping to buy back in after bitcoin goes down without having to do the expensive/difficult bitcoin-usd move.

"Shorting" means borrowing bitcoin and then selling the borrowed bitcoin. What you've described is simply selling bitcoin for USDT, unless I'm missing something.

It's short in the sense that you're selling before you buy and profiting off the thing bought/sold (bitcoin) going down between the two trades. Sell -> wait -> buy as opposed to the 'long' position of buy -> wait -> sell.

Since nobody-ish lets you borrow for bitcoin margin trades you have to "borrow from yourself" (already own bitcoin) and be long-bitcoin in the long run for that to make any sense.

But if you're a to-the-moon true believer that also thinks that bitcoin is in a bubble and going to make a temporary correction you could make a ton of bitcoin by being right... if you can actually make the trades and not get screwed by a counterparty.

Futures are opening for trading in the next two weeks on regulated US exchanges with daily / weekly USD cash settlement and central clearing. For every long futures position, someone else is short. I think that's a lot safer way to short bitcoin than holding tether.

> As long as people want to short bitcoin there will be lots of demand for tether

Interesting observation.

Most people here are say fractional-reserve Tethers are inflating the exchange rate of other cryptocurrencies.

But that doesn't really make sense, because buying cryptocurrencies means selling Tethers, pushing down the exchange rate for Tethers. But Tethers are trading 1:1 for USD, so something doesn't add up.

You say that Tether demand is strong because traders are selling Bitcoin, and that's propping up the exchange rate of Tether.

So what happens if a Tether fraud is revealed and traders want out of Tether -- does the Bitcoin exchange rate go even higher?

See https://en.wikipedia.org/wiki/Gresham%27s_law where Tethers are the "bad money" causing traders to hoard Bitcoin, the "good money".

I am not sure I follow you on people being worried about a BTC drop from their own selling of BTC. We are in a bull market; one person selling BTC for USD on an exchange is not going to have a significant impact.

"so they move into tether hoping to buy back in after bitcoin goes down without having to do the expensive/difficult bitcoin-usd move."

How does this help them avoid an expensive bitcion-usd move? They will still have to buy btc with tether and then do a transaction for USD incurring blockchain fees.

>Similarly, the conventional wisdom says cryptocurrencies are in a massive speculative bubble. The negative sentiment on Bloomberg, WSJ, NYT, Twitter (not to mention HN) far outweighs the fanboys.

Sentiment of people not in the market (readers of WSJ, etc) doesn't really affect the price all that much. They didn't want to buy bitcoin at $4 they don't want to buy it at $14,000.

For mature markets, short sellers might do such a thing. But bitcoin is hard to short and the market is so irrational its risky to try. The CME might fix the former, but it won't fix the later.

Your claim is one that the market should be efficient, and thus, there must be missing info. Remember that markets are only efficient if P = NP. (Strong form efficiency is impossible, and weak form efficiency is only possible if P = NP).

So, IMHO, the most likely possibility is simply that your market is inefficient.

Can you explain this a bit more?

> When something doesn't make sense, usually it's because information is missing.

Either that, or because too much irrelevant information is present, combined with an inability to separate the wheat from the chaff. In other words, it also quite frequently happens that the necessary information is there, hiding in the midst of all the noise.

Welcome to the real world. It's not "efficient".

> Neither Tether nor Bitfinex disclose on their websites or in any public documents where they’re located or who’s in charge, but information is available elsewhere.

> Jan Ludovicus van der Velde is CEO of both Bitfinex and Tether, Torossian said by email on Dec. 3. A LinkedIn page for someone named J. L. van der Velde, who identifies himself as Bitfinex’s CEO, says he speaks Dutch, English, German, Italian and Chinese, attended National Taiwan Normal University from 1985 to 1988 and was previously CEO of PAG Asia Inc

I'm continually amazed that people will put $1,000s of dollars (or coins, or whatevers) in the custody of an entity whose location they can't even identify, let alone locate.

The only thing I can see stopping them from running off with whatever assets they currently do have are either:

- They're extremely profitable.

- They're broke.

- They're scared of mafia style entities following up where regulation hasn't.

Well, they're also on the regulatory radar, now, almost certainly. Now if they try to run off, that turns into a fugitive-like situation versus a potentially just oops-type one. There's a lot of leeway for business fuckups in most jurisdictions. Although in this case, there seems to be a strong case for fraud, so who knows.

No, they are starting to piss themselves realizing that their swindle went out of control. They also remember what happened to CEOs of other funky enterprises that attempted to screw what US thinks are its interests:

* Think of other bitcoin exchanges

* Think of betting companies

Aside from the discussion on Tethers I am sure this is not going to stop cryptocurrency buffs from talking/selling another round of "stable" coins.

The unfortunate thing is time and again same old story is presented about either:

how the company releasing the coins will act as lender/buyer of last resort or

how "markets" will prevent the peg from going out of whack.

The former logic forgets about how it puts a lot of power in hands of one company and leads to questions, like Tether.

While latter logic forgets markets are not efficient. And sometimes it can remain irrational longer than someone can remain solvent.

This whole thing is not a maths problem but an economics and market microstructure problem, two apparently least understood topics in cryptocurrency circles.

> how "markets" will prevent the peg from going out of whack.

One only needs to read about Long-Term Capital Management to see how flawed this is.

If anyone is looking for books to read during holiday down time, they could do worse than 'Liar's Poker' [0], followed by 'When Genius Failed' [1], following the career of John Meriwether and the rise and fall of LTCM.

[0] 'Liar's Poker', Michael Lewis

[1] 'When Genius Failed', Roger Lowenstein

For a 'light reading intro to finance' trilogy, add 'A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation', by Richard Bookstaber.

Complementing this good list, if you really want to understand what the stock market is (despite all the advertisement), read Frenzied Finance: The Crime of Amalgamated. In this book, a participant of the early markets in the 20th century explain what they really do under the covers. The laws changed a lot from that time, but the goals didn't.

JWMP is the successor to LTCM, built using the same models with less leverage. They also blew up in 2007-2009.

It's cool, I just submitted a paper on LTCM yesterday. AMA?

Will you be writing the third book in the Meriwether trilogy? :)

"_Long-Term_ Capital Management": established 1994, collapsed 1998. It's like the "_People's_ _Republic_ of China" or the "Union of Soviet _Socialist_ _Republics_" of "fake it till you make it" names.

Isn't ltcm an example of markets keeping a dumb, dumb, dumb trading model ungrounded in reality from going out of whack?

It was an example of what happened when everyone believes the so called "smartest people in the room" without questioning. It also represents what happens when the market adjusts to what you're doing but you fail to adjust and also the nature of tail risk. Was their model dumb? Tough to say, they did win a nobel prize in economics for it. I think warren buffet has some quote about how they were "risking a million to make a nickel".

Well given that their model was predicated on price movements being normally distributed and for around 100 years price movements have been known to be levy alpha distributed (alpha ~1.6 for the most volatile and usually ~1.8), I'd say it was dumb.

Tether is a pegged currency. A stablecoin is something different, see this: http://slides.com/ethereummadrid/cryptoeconomics101-stableco...

Tether shows the problem with non-shortable securities. If even 1% of traders believe it's valuable and 99% don't, the 1% can happily trade amongst themselves at full value. If there were a short market, the majority non-believers would drive the price down.

I think you could find 1% of cryptocurrency traders that believe any theory you care to name.

You can short Tether on Kraken.

Shorting Tether is pretty strange, since if it works as designed it will essentially never increase in value, there's no risk on that end. And if it's a fraud that collapses, the short pays off big.

Can somebody explain how that effect would get priced into the market? I can't think of another commodity like that.

The price is the interest you pay on the borrowed short shares

Interesting point :)

Futures coming soon. Look what happened to subprime when it became possible to go short.

it wasn't possible to short subprime in the past?

You can't short real estate easily because it's a physical thing. Subprime was bonds that were secured by mortgage loans on real estate. You can short bonds but it's not easy because you have to find some to borrow. But then someone invented credit default swaps for subprime bonds. CDS are derivatives insuring bonds from default. They are similar to futures by being a 2 sided contract where cash flows between the two parties and the winner pays the loser the difference. One side is long and the other short. In subprime they took it a step further and made packages of these CDS contracts so you could go short a ton of subprime all at once. These instruments coming out coincided with the top of the real estate market in 2005 and their peak popularity was at the peak of the subprime boom in 2007.

Nobody did it until someone did. Then it went big! For reference watch the movie: The big short.

This whole discussion reminds me of the Argentine peso. Pegged to the dollar, economy slumps, harder and harder to back with actual dollars, then government decides to float the currency.

US did this moving off the Gold standard as well. I guess these backing commitments are useful for some stability? But it won't entirely eliminate risk, so instead of relying on the wild swings of the market you're now relying on a single institution's trustworthiness / solubility.

Take the risk you're willing to accept and hedge the others? A market for all kinds I guess! Either way, this model feels like it's already been run at scale a few times.

I'm not sure but, isn't this how the real banks operate, too? For example let's take a legal, legit, Bank named X in a country. If all the account owners wanted to retrieve their money, at the same time: can that bank serve that demand?

Because normally for every 1 dollar deposited inside, bank can give away 5 dollars worth of credits to other people. (the ratio changes in every country probably).

So accusing a virtual currency corporation with "you don't own all that money you claim" applies to a real, physical currency banks. I guess.

Fraction reserve lending doesn't mean "for every 1 dollar deposited inside, bank can give away 5 dollars worth of credits to other people" - it means that if people deposit 5 dollars, you can give away 4 dollars of them as loans and only keep 1 dollar in reserves (as opposed to keeping all 5). It still has to have more assets than liabilities, except that some of those assets can be not available on demand, but loans to other people.

It does mean that a short-term run (e.g. if all depositors request all of those 5 dollars back) can be a problem, but it's a problem of liquidity (you have enough assets to pay all of them back, but they aren't available right now), not one of missing assets. Tether, on the other hand, has not properly shown that they have enough assets to buy back 100% of tethers to USD at a 1-to-1 rate; we don't expect them to hold 800m dollars in large bags of cash, but we'd expect them (just like a "real physical currency bank") to show that they hold 800m of assets backing this.

The banking system can expand an initial deposit of $100 into a maximum of $1,000 at a 10% reserve ratio when subsequent loans are re-deposited. ($100+$90+81+$72.90+...=$1,000). This all gets counted as M1 money.

Yes, the total supply of funds in circulation is increased by making it circulate; however, this question was about solvency. We're not expecting Tether to hold 800m in liquid reserves, but we definitely are requiring Tether to have 800m in assets (as they claim to do) and to demonstrate that it really is so.

The claims others have on you must be balanced by claims you have on others, otherwise you're defrauding your depositors; and if you want to accept money from the public, your words can't be taken at face value but need to be verified (and publicly supported) by trusted, independent external auditors.

Just for reference, M1 of the US Federal Reserve is $3 trillion. Compare this to the US national debt of $14 trillion or the GDP of $19 trillion.

In the US banks have reserve requirements that are regularly audited by regulators. A localized run on a bank is possible (particularly for cash on hand), but reserves combined with FDIC insurance make it a non-issue.

You guess wrong. If a bank does not have enough liquid capital, it can borrow from the central bank. If the value of its deposits exceed the value of its loans, it’s insolvent. Stockholders lose everything. Depositors are insured up to $250,000, which is enough to prevent them from participating in bank runs.

Banks are secured by the government. If you have deposits up to a limit (I think it is $250K), the government guarantees the money will be there no matter what happens to the bank.

> Because normally for every 1 dollar deposited inside, bank can give away 5 dollars worth of credits to other people.

That's not the reason they can't pay everyone back in that scenario.

Even if they could only loan out the dollars that were deposited, it would still be the case that if all account owners wanted to get their money at once, they wouldn't be able to because the money is loaned out.

The only way it could be possible that everyone shows up at once, withdraws all their money, and actually gets it (without the bank borrowing it from another bank) is if the bank has all of the money sitting in a vault doing nothing.

Banks are FDIC insured.

Can anyone with a more studied background in economics help hypothesize the after-effects on Bitcoin and other altcoins if this 814M 'digital counterfeiting' for lack of a better term, is true? For example, 800M has been artificially pumped into the Bitcoin and general crypto ecosystem, like air in a bicycle tire.

And this is a game theory sort of question, too:

If this is true: now, what?

If people want to pull dollars out of bitfinex, and can't redeem tethers, then the price of bitcoin will skyrocket on bitfinex due to tether hyperinflation (we're probably already seeing that, and have been for months). People will be buying bitcoin at basically any price on usdt denominated exchanges, and start moving them to other exchanges to sell. At that point, you'll start to see price differences between usdt and usd exchanges, as the bitcoin price skyrockets up on bitfinex and drops on gdax.

Probably at some point, bitfinex will become insolvent and shutdown withdrawals entirely. Not sure what will happen then-- probably the price of bitcoin collapses in a general panic.

Note that this basically happened with mtgox. It took a surprisingly long time to shake out.

Bittrex also uses USDT as their base, though.

And I don't know who else. I think this is bigger than Bitfinex.

Look to history: https://99bitcoins.com/price-chart-history/

Speculation: When Mt Gox froze withdrawals and closed it either triggered or participated in a massive correction. If Tether allegations are true, I would speculate increased volatility in a bearish direction. It should start with rising volume on USD exchanges and shrinking volume on USDT exchanges as traders withdraw BTC, USD/USDT volatility on Kraken, BTC/USD and BTC/USDT price diverging across exchanges. Chicago futures if they open will set the reference price. If BTC anchor price is volatile alts will probably get hurt. KRW fiat rates will probably be affected. If it dips in the long run it could be a good buying opportunity.

> For example, 800M has been artificially pumped into the Bitcoin.

This is impossible with Bitcoin. Bitcoins can only be created via mining, Bitcoin mining is a proof-of-work crypto currency. Crypto's typically use proof-of-work or proof-of-stake in order to have value.

Tether, on the other hand, seems to have no proof-of-work or proof-of-stake at all and just claims to have a 1:1 ratio of their currency to dollars. Seems there is some skepticism around this claim of a 1:1 ratio.

If Tether, was found out to be a fraud I think it would have minimal impact on real Crypto currencies that use proof-of-work or proof-of-stake. The only negative impact would be the people that exchanged a real Crytpo for Tether might be burned and decided not to use/accept Crypto at all, which could impact the larger Crypto market a bit, but IMO I don't think it would shake it too badly, unless of course the main stream media took the story and click baited it with crappy headlines and poorly written articles that would falsely come to the conclusion that such a artificial pump is possible with real Crypto.

The statement that "this is impossible with bitcoin" is false. While initially bitcoins are issued as proof of work, as soon as there is a somewhat liquid secondary market then bitcoin becomes a financial asset with a value determined by the market. That value is effectively completely indepdent of any "inherent value" and fully determined by supply and demand

> fully determined by supply and demand

With bitcoin you cannot manipulate the supply, therefore you can't magically create $800M out of thin air.

But the demand can change. Given a constant quantity supplied and an increase in demand, price goes up

If you cannot increase supply in response to a higher price driven by higher demand, prices will increase even more

See this Econ 101 chart [1]:

Y axis represents price, x axis represents quantity. The lines represent simplified supply and demand curves (Wikipedia can explain why they are shaped as they are)

Initial supply and demand is represented by supply "s" and demand "d". Their intersection gives us initial price "p1" and quantity produced "q1".

If demand increases from "d" to "d2", normally suppliers would produce more to meet the new demand. So the price would increase to "p2" and quantity increase to "q2". So even here you get a price increase

But with supply constrained assets like bitcoin, you can't increase quantity supplied to q2. So the only way the market can absorb new demand is by a further price increase. Basically more people want a good, but more can't be made, so sellers rationally realize they can charge more. In the chart, the new price would be the point where the dotted vertical line above q1 intersects with d2

[1] https://goo.gl/images/PT23GG

Just like housing in the bay area. The supply can never increase, hence prices must go up, even if no almost no one can afford it. All that matters is that the .001% of the population that's buying houses can afford those higher prices.

You're fundamentally missing the main idea here. If you don't understand the fake Tether situation then in this case consider:

Someone makes 1M of counterfeit US Dollars using their own printing machine and puts it in a suitcase, and they exchange that suitcase with you, and in return you give them 1M of bitcoin in their digital wallets.

Now do you understand the thread?

Your example is a reflection on counterfeiter and the person being deceived. That has nothing to do with the value of bitcoin.

The value of BTC skyrockets back in 2014 with MtGox due to the WillyBot (https://willyreport.wordpress.com)...

The price of BTC on other exchanges (which had no direct trades from that bot) was still affected and it went up across the board on all exchanges.

So the value of BTC can be manipulated...

Not true. A simple recipe for manipulating Bitcoin supply by acting as a bank:

1. Create accounts for customers. Balances are private and not connected to wallets

2. Keep Bitcoins used to cover the accounts in a single bank wallet.

3. Rely on the observation that customers won't withdraw all their Bitcoins at the same time and use bank wallet for trading in the bank's name.

This is basically how every normal bank in the world operates, except that the amount of money the have to keep in reserve is heavily regulated so that this scheme does not turn into an infinite pool of money. There is no such regulation for cryptocurrencies.

that's not how markets work. bitcoin has no intrinsic value, just a exchange rate with other things

that is exactly how markets work.

> bitcoin has no intrinsic value, just a exchange rate with other things

1. It has proof-of-work, which gives it value 2. Supply of the coin and demand for the coins determine the price.

The only thing that can vary widely is the demand, the supply cannot be fucked with (unlike fiat currency). It is impossible for whole bunch of new coins to suddenly appear out of thin air. There is no way to artificially inflate the supply.

>1. It has proof-of-work, which gives it value

"I burned a bunch of electricity and created a cryptographically provable magic token".

There is no value here beyond exchanges with the other bitcoin speculators around you. The value you describe is no different to the value of a pixel on the million dollar homepage.

There will be a point where the emperor is revealed to have no clothes and when you try to extract actual value from the bitcoins that you are holding (i.e. sell them), you will find there is nobody who wants to buy.

Although if you like, I'll trade for beanie babies. I've got rare ones, nobody else has these. They only made a few.

Proof of work doesn't give it value. That value (energy) is lost to heat, and the amount put in tends to rise with the market value.

The value dictates the amount of PoW needed, not the other way round.

we're not talking about the number of bitcoins though, we're talking about it's value

you can't talk about value without talking about supply

You’re assuming that the balances claimed by the exchanges are actually held in reserve.

> Bitcoins can only be created via mining

Why do people think that it's impossible for exchanges to do fractional reserve with bitcoin?

Because you can't lend out a Bitcoin you don't have, unlike fiat currency.

This is like saying you can't lend out a dollar bill you don't have. It's strictly true, but doesn't accurately represent how the banking system work. The $1,000 dollars in my Charles Schwab account don't correspond to 1,000 physical dollar bills somewhere. They are simply a number in a database somewhere. When I go and withdraw that money, I get back a random selection of $1 bills that other people have deposited.

A bitcoin bank would work the same way. You deposit bitcoins by sending them to the banks wallet. They put a number in a database saying that you have 20 bitcoins in your account. If you then withdraw it, you will get a random selection of bitcoins they have in their wallet.

Unfortunately fractional reserve isn't safe for a currency that is this volatile. Depending on what the "fraction" is, some major withdrawal demand against one of these exchanges would topple it

So you are a Big Fish. You have a boatload of money in exchange X. You go to take it out and they don't immediately give it to you. They say, "Listen, we can't get to it, it's in our cold wallets, it will take a week." A week goes by, they say, "Listen, here's 10% of what you asked for, we'll get you the rest shortly.". This goes on, they periodically give you some of the money but there's a lot of evasion.

What's the Big Fish to do?

a) Quietly keep pressure on the exchange, taking the money as it comes, while not putting any back into the exchange.

b) Make a big stink, bring in lawyers, write press releases and bring down the exchange, possibly destroying any opportunity of getting the money back.

A is obviously the choice here... but that's a problem if you have a lot of big fish trying to get their money but can't. The price should be tanking, but everyone is too afraid to trigger a run on the exchanges that would kill their investment. There's really no way to know if this is happening. It could have already started.

Move coins to another exchange

How? They have your coins.

Yes, that is precisely what the problem is. There will one day be a run on the exchanges and it will get nasty very quickly.

But as an exchange, you can lend out Bitcoin you have, while still displaying unchanged balances on people's accounts. So you have a fractional reserve.

Couldn't they do it partially by betting that not all their customers would withdraw their funds simultaneously? Lot of less technically inclined people seem to keep their coins on one exchange like Coinbase

But then if this was true, that would mean the real bitcoin supply is actually worth more than it is now.

Good point. I am taking for granted that people will have their coins in their wallets, and lot just leave them up on an exchange.

how many people do you think keep their bitcoins in wallets vs on exchanges?

don't know, but I would think leaving it on an exchange is a terrible idea (Mt. Gox)

2 camps:

USD 814M accumulated over a year, legit vs not legit?

You don’t really need to think hard, who is these 30 mil, 30 mil deposit? If you divide by a year, they need to have an average 2.2 millions of deposit a day. That’s just to Tether. That’s a lot. Just moving these amount of money in any country will put your account in question.

Will you do it if their T&C doesn’t guarantee withdrawal? A bank actually need a govt to issue deposit insurance for it to work? People are depositing 2.2 millions without any deposit insurance, with shady T&C?

I mean you can believe in it, but I’m definitely skeptical.

Stable coin systems are going to be massively important and there's a ton of different projects trying to make it happen.

This [1] is a really solid explanation on how one of them, Dai from MakerDAO, works.

[1] https://medium.com/cryptolinks/maker-for-dummies-a-plain-eng...

One of the other parallels that interests me is that there's very little incentive to be publicly skeptical of the nonsense.

People were immensely critical of Warren Buffett during the dot-com bubble. He was frank that their valuations didn't make sense to him, and he took a pasting for it. He turned out to be right, but only after taking a lot of heat: http://news.bbc.co.uk/2/hi/business/1217716.stm

There's little glory or money in being critical of Bitcoin and cryptocurrencies. But there is a great deal of money and attention for hyping them. That means anybody new to the topic receives an unbalanced information diet, deepening the problem.

Even if I were a Bitcoin fan I'd be concerned about this; bubbles misallocate resources and cause a lot of damage when they pop. The taint can last a long time. E.g., it took Florida decades to recover from their 1920s land boom.

I think Warren Buffet also questioned Bitcoin a few years ago, will try to find that reference.

I also just remembered that I questioned it too on Twitter, after seeing some hype from Andreessen, and he promptly blocked me.

Calling bitcoin a bubble seems like the wrong word. There are basically two possible outcomes: total market cap zero, or in the trillions. How much you think bitcoin is worth depends on your guess (and it really is just a guess, nobody has any idea what is going to happen) about the relative likelihood of each.

From Wikipedia:

"An economic bubble or asset bubble (sometimes also referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania, or a balloon) is trade in an asset at a price or price range that strongly exceeds the asset's intrinsic value."

Seems like a reasonable description of bitcoin to me

I have yet to see a well thought out, rational, specific description of the intrinsic value of bitcoin. If it is the case that people think it will either be zero or a trillion market cap, that suggests to me that people aren't thinking seriously about the real world end game for bitcoin and thus that there's is no solid bounding of the potential intrinsic value

Bubbles are formed by people who think they are being rational, but in fact are not. One sign that you aren't being rational is when you don't think critically, quantitiavely, specifically and probabalistically about possible future states

Is Gold in a bubble right now? Because the current price of Gold strongly exceeds the intrinsic value of the material and it has been like that for a while.

Bitcoin has pivoted away from being a currency. Bitcoin is now a store of value, like gold.

gold has always been a weird instrument since it was decoupled from fiat currency, and it has a unique position because it has been around for a long time so investors sort of understand it. the value of gold is determined a lot by confidence in the asset's performance as a "non correlated" backup medium of exchange. there is a long track record here, which matters, despite how "soft" and "squishy" this line of thinking may seem to someone who doesnt work in markets. bitcoin doesnt have this: it is not widely used as a store of value, and it does not have a track record. basically, the perceived probability of it going to zero is infinitely higher than the perceived probability of gold going to zero

this article does a much better job than i just did: http://www.businessinsider.com/economist-jim-rickards-bitcoi...

and heres an intersting history of gold: https://www.investopedia.com/articles/investing/071114/why-g...

The optimistic scenario is that Bitcoin becomes a currency like cash or a store of value like gold, in which case it will be valued in the trillions. Somewhat conservatively let's say that the market cap in these scenarios is $2 trillion USD. At today's ~200B market cap, this implies the market is giving 10 to 1 odds that bitcoin is going to zero.

Not sure how any of this is on its face "irrational".

the irrational part is 1) an overestimation of the likelihood of bitcoin becoming worth $2 trillion in a reasonable timeframe (1 in 10 odds of that happening!?) and 2) underweighting the value of large changes in low probability levels: based on the above back of the envelope math, you ascribe 10 to 1 odds of bitcoin failing. the math that supports that is so imprecise as to be almost nonexistent, but the details are important: if the odds of it succeeding were 1%, or 0.1%, would you still invest? what evidence do you have that this number should be 10 to 1 rather than one of the above? have you given any thought to this, or to what probability of failure would make you get out of bitcoin?

have you thought through the likelihood that one of the binary scenarios you describe doesnt actually happen, but in fact that a gray area wins out: for example, bitcoin may continue to exist as it does now, as a fringe speculative asset class with vaguely defined but high potential. it may stabilize into the go-to currency for money laundering, funding illegal activities, etc. it may serve as a stable currency for a subset of the digital economy that just likes the libertarian appeal of bitcoin. if you look at where bitcoin is now, and try to draw a straight line to the future, it seems to me that youd intersect one of these scenarios rather.

if you havent thought these things through, but still invest, you are being irrational

edit: maths

If the odds of success are anything less than .1, then buying at the current price is a bad idea. I agree with you that the odds are in fact less than .1 but it's just a guess - if somebody else thinks it's .5, well, who am I to say that they're wrong.

Pretty much any investment thesis involves guesswork at some point. That doesn't make investing irrational.

I would have thought the third was that it maintains some sort of marginal utility, but isn’t worth much. Though it’s becoming increasingly useless, really.

Sure, you can't definitively say something's a bubble until later. If the value ends up high, it's a boom; if not, it's a bubble. But every serious Bitcoin proponent should be concerned that we have crossed from boom to bubble, because the latter can be harmful to serious participants.

I also think there are reasonable cases where Bitcoin ends up with a modest non-zero value. It's not a bad technology for a narrow slice of the cross-border money transfer market, and people could make it more useful if they wanted to. But those outcomes are much less likely if they're a giant crash.

> total market cap zero

The end game for any currency is a market cap of zero, with a long enough t -> infinity.

> or in the trillions.

Nonsense. That's like saying that the total market cap for vkou's collectible post-it-notes may be in the trillions.

Surely option 3 is "it finds a niche and hits some sort of equilibrium" ?

Of course this option exists, but given that it's less likely to happen, that the market cap in this scenario is unknowable, and that when averaged with the two scenarios I mentioned it doesn't move the needle, it's almost irrelevant to any kind of reasonable investment thesis.

Dai seems like a clever idea, but I'm not convinced it will ultimately be necessary.

For one thing, the idea that dollars are stable is illusory. And the volatility we see in BTC these days is largely due to the ratio of speculation to storing value in its usage pattern.

So if you buy 500 Dai with Bitcoin today, and the price of Bitcoin goes up, you simply have more Dai to spend, and if the price goes down, you have less to spend, but all the while Dai was pegged to USD and the exchange was going on behind the scenes.

Two factual quibbles with the article, in case you can offer insight:

The example about doing a bet using Ether does not make sense, because chances are the smart contract would collect collateral for the bet at the time it was made, with the idea that upon resolution of the outcome the collateral would be used to pay off the bet. So if I bet 1 ETH on the superbowl outcome, 1 ETH is collected from me and from my counter-party, and then after the game finishes the smart contract awards 2 ETH to the winner.

The other issue has to do with commerce. What's the difference between a store marking prices in USD and also accepting payment in BTC vs marking prices in Dai?

During checkout, if I'm paying with BTC I'll see how much BTC my purchase will cost. If the price in dollars is more useful to shoppers than the price in BTC, then merchants will denominate in dollars. Dai would seemingly just involve a predefined method of doing the exchange rate math (and fees), but I'm not clear on why this is really a significant advantage.

>every tether is always backed 1-to-1 by traditional currency held in our reserves

>There is no contractual right or other right or legal claim against us to redeem or exchange your tethers for money. We do not guarantee any right of redemption or exchange of tethers by us for money

Then it's not backed by anything, is it?

Rising complexity of financial instruments? Check. Uncertainty about the capital backing of a booming market? Check. FOMO fever? Check.

Where have I seen this before?

The sheer scale of these potential frauds - including the total ambiguity of massive $ raised for ICOs is not only consistent with the shenanigans of the .com - it's much worse.

In .com - companies were creating value, and we all assumed people would pay for 'email' - turns out consumers would not - so many businesses failed, and there was a stampede out of equities.

All of this coin and ICO fraud, including 'regular company' valuations of 300x P/E rations - is absurd.

In 2000 - the bubble was popped with a little bit of an interest rate hike that caused major funds etc. to scramble, causing a stampede.

Markets are definitely emotionally positioned for a black-swan event to cause a scramble.

The markets have to correct for all this sketchy/possible fraud going on.

The scale is different, probably by several orders of magnitude. Crypto isn't pushing the stock markets up. The damages will mostly be limited to those speculators risking their own money.

Parent was talking about the 2008-2009 GFC, not the 2000 .com stock bubble. The .com stock bubble was just speculation about a new technology, not massive worldwide fraud.

In "Atlas Shrugged"?

Pretty sure he means the subprime crisis

BTC Trading volume over the last 24hrs is $6,795,970,000 (https://coinmarketcap.com/currencies/bitcoin/#markets)

Tether trading volume over the last 24hrs is $803,868,000 (https://coinmarketcap.com/currencies/tether/#markets)

At most tether can make up 11.8% of BTC's daily trading volume. If tether tanks, then it seems that worst-case BTC could suffer a 10% drop in demand, ceteris paribus.

Please tell me if there is a flaw in this logic. Seems like there is a valid critique about BTC being boosted by tether, but that doesn't come anywhere close to explaining the exponential growth of value in BTC.

It could be misleading to look at volume. For example how much of that $6.8B is due to wash trading? Also Bitcoin is paired with literally hundreds of altcoins, which make up a portion of that volume. We would want to focus on how much BTC is purchased with USD vs how much is purchased with USDT.

Reputational risk from BTC being tied to Tether?

What is that style of art/animation the video uses? I feel its aesthetic is really 'greasy', kinda covered in grime from cigarettes. I've seen it before in order graphic design.

It looks like 60s graphic design with a vibrant modern color palette to me, but when it first opened I thought 80s PBS

I find this whole set of crypto-currency experiments fascinating. It's a grand libertarian experiment -- what happens if you create a new market, without any government regulator? It looks like you initially have chaos (makes sense), and I think there are now groups of people working together. The one thing we definitely don't have is transparency. I'm a bit worried that the groups of people working together are manipulating prices, but without transparency, I have no idea.

Is there a single person in HN that has profited more than $1M through Bitcoin? And I mean someone who has actually sold and now has $1M more in the bank?

Are you looking for a documented case, or just wondering about the probabilities? The former is "no", and even if there was, I doubt it was formally verified. Think about it, if you made millions in bitcoin, why would you paint a huge target on your back by posting to an online forum? The latter is "probably yes", considering that at least 20% of hners heard about bitcoin when it was cheap (< $100).

I would highly, highly recommend moving money off of Bitfinex in the near future (especially if you are a U.S. customer)...

Yeah, good luck. They only recommend using a few exchanges, only one of which seems able to get your money back into USD...

If your anxious about things going to crash because of tethers the best way you can hedge against the volatility is watch the markets like a hawk lol. Can be very profitable too with all the volatility

Checkout the live charts and forecasts at https://bitbank.nz

Problem is there's no safe rail to exit a position.

You can sell to USD but can't withdraw overnight and deposit in the morning so you're exposed to counterparty risk which in the crypto sphere is enormous.

Only safe position is to be out of this market currently.

Why would anyone buy more new tethers @ $1 when they're selling for less than $1 at Kraken?

Basically Tether does what banks did in 19th century - printing their own dollars. It worked for banks back then because of gold reserve. Without enough gold ( or dollar in case of Tether) reserve we have an opening scene of Cryptonomicon in the near future.

This is off topic but since a lot of people seem to be experts I just wanted to ask.

Can someone explain this to me


The flat-lines. I have seen it several times. Is is because of lack of data of trading or lack of trading or what's making the price flatline like that?

It's due to large order volume at those prices. If an unusually large limit order or group of limit orders is placed at $11,800, then incoming market orders can chip away at the remaining volume available at that price but not move the externally visible price.


It's definitely not the lack of trading that's causing this. It's funny that you would even think that haha.

Why is it funny? Is there some obvious explanation for this I am missing? Seen it a couple of times now.

It's funny because the trading volume of Bitcoin is huge - about 250 million dollars worth of Bitcoin is bought and sold per hour around the world, 24/7.

My guess is that the reason we see the horizontal lines is because let's say someone places a large sell order (say 1000 Bitcoins) at $11600. It takes a few minutes for the market to absorb it. The price stays flat until the entire order is bought.

Yes, which is why I was asking.

I have had bitcoin since early on so I am aware of increased trading volume.

Thanks for the explanation.

https://makerdao.com/ is a decentralized stablecoin that is coming soon hopefully.

This sounds like what would happen to stocks if NYSE/NASDAQ are able to print USD to just keep the stock market going up...oh, wait the FED is doing that...

Is ETH a better alternative?

There has been a blogger/journalist tracking this and writing some great analysis on Tether and BitFinex


It's really unfortunate that Bitfinex is now suing this person because of simply trying to bring some transparency to the situation. I'm really glad the news outlets are picking this up and hopefully Bitfinex and their shady PR firm stop trying to silence this person.

WARNING: Auto-playing video with possibly loud sound.

Why sites continue to do this is beyond me.

But, fortunately, disabling auto-playing in Firefox is actually not that hard. about:config, then set "media.autoplay.enabled" to false. Done.

Yes, but I do want YouTube and other sites to autoplay.

It's not quite there yet, but very close - consider qutebrowser. Work on per-domain settings is ongoing (so you can disable autoplay for everything but YouTube) and disabling autoplay is present in Qt 5.11 so hooking it up to a qutebrowser setting is probably trivial.



There's also addons that let you remember a choice per site.


That's a great idea (especially disabling preloading as well). Unfortunately, it doesn't seem to actually do anything on FF 58.

yepp youtube then no longer even works

there are million of front ends for youtube with better search which will work woth autoplay off. plus they show the emded version of videos that usually have less ads (because advertisers rightly deny their ads out of the main domain)

or you could just use uMatrix and whitelist sites where you want video to play

Good shout, thanks. Can you point to any good YouTube frontends? I just use MPV with sites, but I could do with good search/related functionality.

Thats should be the default really


"do not link sites with autoplay videos" should be added to the guidelines imo.

When I encounter interesting articles on such anti-user sites, I don't bother browsing the site, I use a script to extract the article and rehost it on a public pastebin. I'd rather avoid them at all, and that wouldn't even be necessary if everyone used atom/rss feeds.

see example for this one: https://0x1a4.1337.cx/o_27/

You can blacklist bloomberg.com & co from your browser with extensions such as https://addons.mozilla.org/en-US/firefox/addon/blocksite/

Watch the ad. If you want to read the article it’s the cost of doing so. Otherwise don’t read it.

My complaint with this article isn't about watching the ad or not, its that it autoplays with sound. For example, I didn't see the warning and I played it in work. Luckily nobody heard it because I closed it quickly enough, but, still, auto play is not ok.

Nope. Their revenue model isn't my problem. uBlock Origin enabled for 99.9% of sites I visit.

By doing so I'm basically using a browser unable to render their ads or be in tracked by their advertisers, I don't see anything wrong with that.

I'd understand if they ask not to rehost their content tho.

For chrome I have JS disabled on Bloomberg and that seems to do the trick to stop the autoplaying and not disrupting the article content.

Off-topic, but Firefox offers the option to turn off auto-play. My go-to for news browsing.


Guidelines | FAQ | Support | API | Security | Lists | Bookmarklet | Legal | Apply to YC | Contact