Although in fairness that only communicates that the fees for shorting luna etc are high compared to the certainty on precisely when they will collapse. The issue is timing not destination.
These stable coins are not long-term stable, the incentives around them are horrible. Every stablecoin custodian has huge incentives to spend the fiat until their coin is only partially backed, and then sooner or later there will be a run. They're all going to collapse.
Much like traditional banks in fact - there is no uncertainty that eventually they will go bankrupt. It is easy to predict what the mechanism will be. But maybe they'll last long enough to be useful.
Do you really think that Circle and Coinbase are spending USDC reserves on their own behalf? Do you really have so little faith in the US financial regulators that you think they would allow publicly traded companies to steal their customers' money in such an obvious fashion?
And what do you mean by "much like traditional banks in fact - there is no uncertainty that eventually they will go bankrupt"? Are you saying that all banks eventually go bankrupt? When should we expect Barclays to go bankrupt, now after having existed for 300 years? When should we expect Bank of New York to go bankrupt, now after having survived for 250 years?
I suppose I could just write "Yes". USDC will probably change their policy somehow to enable fractional reserves at some point since the incentives to do so in the future are huge.
Also a company surviving for a long time is not an especially solid predictor of future lifespan. The list of financial institutions founded at the same time that didn't survive is so large nobody bothers to keep track and the management today is (in the style of the ship of Theseus) completely different from the historical decision makers.
There is no way any institution powered by humans can be trusted to sit on a couple of billion (or trillion) dollars in liquid assets and leave them alone for long periods of time. Are they trustworthy today? Maybe. 10 years? Maybe. 30? No. 100? Very emphatic no.
Some bright spark will notice that they don't need all these untouched reserves and will do something with them, increasing the risk and, eventually, getting hit with a bank run.
If in 10 years from now we are still as dependent from the USD as we are today, I will safely consider all of crypto a failed experiment.
There should be by then other mechanisms to get liquidity and that can represent the economic output of the world. It could be a basket of CBDCs from multiple countries, or tokenized (and legally standing) representations of bonds, titles and property. But the current system is far from the final design.
A couple of billion in liquid assets is a pretty low bar that includes lots of corporate treasuries that hold custodial accounts that aren’t nearly as regulated as a bank.
Basically every sizable payment processor for instance meets that bar and it’s incredibly rare to have a scandal with those institutions.
IIRC Circle was planning to get a full bank license to have USDC being backed 100% by reserves at the FED. That could nuke the traditional banks because who would want to hold their money as IoUs at an institution with single digit backing when there is no upside compared to holding it in USDC.
> who would want to hold their money as IoUs at an institution with single digit backing when there is no upside compared to holding it in USDC
Convenience, security? The backing doesn't matter, your bank account is insured. Why do people keep cash in bank accounts instead of under their mattress.
Holding USDC yourself is risky, you expose yourself to hacks. Most people don't know how to manage their crypto keys securely.
Converting it to UST and getting 20% yearly returns on your stablecoins! ... Sorry, I wrote this comment last month, did something happen in the meantime?
But that’s not how banks work. They don’t lend out the capital of depositors. Rather, when they lend money, they record a receivable from the borrower, and at the same time credit the borrower’s account at the bank. Bank lending creates money.
Yes, things are mostly virtualized, but if what you say were true than then it would be impossible for a bank run to collapse a bank.
Money in your account a debt the bank owes you. It's not money you can spend until after you withdraw it and the bank has liquidity to honor the withdrawal.
I think a lot of people knew it was coming soon, and that triggered the death spiral. Everyone knows 20%apy staking rewards can't last forever, and people on Reddit of all places (if Reddit knows then it is far from a secret) saw that reserves would run dry by June with the current trajectory, and they were adjusting rates way too slow to prevent any kind of shock. So people started to jump ship, which caused the initial depegging since people were selling both UST and LUNA to get out of the ecosystem entirely.
Where would you go to short crypto? If the answer is "the Blockchain" then your numeraire has as much volatility as your asset. Was anyone signing real delayed delivery contracts for Tether with prices denominated in USD?
So to go short a crypto token you’ve actually got a lot of options. If you want to do size call up the nice folks at e.g. Wintermute and borrow from their OTC desk.
On a more retail scale you’re sort of gambling on the liquidity of an exchange, but if you want to hedge that buy puts on CoinBase or whatever.
The most liquid instrument in which you can go directionally short at retail size is a “perpetual swap”, which is kind of like a future but with important differences that are better explained elsewhere.
You can definity short XYZ coin if you want, and you can definitely hedge against the liquidity of the counter party at least roughly.
Any explanation that’s going to fit in an HN comment is going to be oversimplified, but it’s basically a derivative instrument tracking some underlying. It’s paired/netted (ish) so you can go short if someone wants to go long (ish).
If the derivative (“perp”) is trading above the underlying then longs pay shorts a fee on some cadence, making long positions progressively less attractive holdings and creating sell pressure. Vice versa.
This tends to push the derivative close to the underlying.
This has two big advantages and a shitload of problems. The two advantages are:
- short sentiment can be expressed without an up-front load, kinda like a put
- entering a position is much like a CME future, you don’t have to put up the whole price, just wherever geometric Brownian motion is likely to set you back (“implied leverage”)
Used responsibly this isn’t insane, but the ways it can be abused? Think housing never goes down in 2007.
You deposit USDC as collateral into dydx (or another derivatives exchange) and then you go short the perpetual (kind of like a future). I made 150% on my account equity shorting Luna when UST fell under 0.95.
Do it at any place that lets you borrow the coin. I’m not especially familiar with the offerings in the market, but I know Binance will let you borrow one coin and stake a different coin as collateral.
Borrow the coin you want to short, then sell it, and you now have a short position on that coin.
Is there some specific reason you think coins would be immune to shorting? This sentiment seems to come up frequently, but shorting is something you can do with basically anything that holds a value over time and is (sigh) fungible, because at its core it's just a transactional set of promises ('borrow' asset, sell asset, buy asset again at your target date, 'return' new assets).
If anything, the modern round of coins with smart contracts are probably uniquely suited to shorting, or enabling the shorting of other coins.
How would that work? They can just hold the instruments to maturity and it’s all either highly liquid treasuries which would be practically immune to shorting or illiquid commercial
paper with no borrow.
At this point professional trader groups are doing it. Sam Bankman Fried got super rich super fast (faster than if he just made an exchange without using the trading data that he’s getting from it), I wouldn’t be suprised if he would be behind a big short like this.
Insider trading securities is illegal in US, but probably not in Bahamas, where FTX is located.
Sam got super rich in valuation because he owns a large part of FTX. Like CZ from Binance.
Sure, he also made a lot trading, but that's not how he became a billionaire.
Also, US has a long arm, this is why foreign exchanges forbid US citizens.
Insider trading has a very narrow scope, typically equities. To my surprise I learned that there is no such thing as insider trading in forex (from a legal point). But there are other laws that might apply to the client trading data you mentioned.
Just look at the title. The peg had to break anyways, as it was a bad idea, so I support its breakdown as soon as possible before people really start to trust it.
I'm a Bitcoin only person for a reason: the devs prioritize system security over adding new features.
So if you can flood UST and LUNA with enough volume to drop the price, you could send LUNA into a massive selloff. UST would then start to flood LUNA with shares which would accelerate the sell off.
Wondering when the crypto “Big Short” book will inevitably arrive.