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The Bear Case for Crypto, Part II: The Great Bank Run

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Re: The Bear Case for Crypto, Part II: The Great Bank Run

#41

Post by mrb »

vasilipupkin wrote: post #14
ifdefdebug wrote: post #12

Earlier quoted context omitted.

but that's a different problem. If you want to sell BTC for dollars, you depend on the order book to have enough bids in it to satisfy your request, or you have to make a sell order and hope for someone to take it. Exchanges don't have to show liquidity for that, they have to show liquidity when people want to withdraw their assets (edit: complete truncated sentence).

yes, that's the problem. the order book is already quite thin - and in a panic, it can disappear and reappear at a much lower price.

Bitcoin's trading volume (and implicitly order book) is already bigger (impl. deeper) than stocks with comparable market capitalization, eg:

BTC: $160B market cap, ~$5B traded/day

INTC: $200B market cap, ~$1B traded/day

So if there was panic selling of INTC, the stock would presumably dive deeper and lower than a panic sale of BTC...

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#42

Post by vasilipupkin »

fleitz wrote: post #38
vasilipupkin wrote: post #29

Earlier quoted context omitted.

that argument makes no sense to me personally. For example, if I rented a warehouse, filled up that warehouse with iphones and hired workers to systematically destroy those iphones with hammers, there would be a cost to that activity. but it wouldn't a price floor on anything. The thing itself has to have value, the cost of the thing is not a price floor

You should make a blockchain based on smashing an iPhone taking a picture of it and then hashing the picture. You could probably make a lot of money and drive up the value of old iPhones. Revolutionary new proof of work algorithm. Call it Instachain or something.

On a completely serious note, I am happy to pay 1 or more developers to help me create a bitcoin fork. why not?

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#43

Post by walrus1066 »

pedrocr wrote: post #33
georgecarlin wrote: post #24

Earlier quoted context omitted.

No. "stocks/bonds/land/etc" are not actual assets backed by anything OTHER than scarcity. Land has value due to scarcity and utility (everyone needs somewhere to live). Stocks have value almost exclusively due to capital appreciation. You don't get anything for owning non-dividend-paying stocks. And owning dividend paying stocks just means money is not being reinvested (notice that Berkshire Hathaway has never paid d…

>No. Starting replies like this is getting to be a theme online. It adds nothing to the discussion except make people argue in extreme and entrenched ways. >"stocks/bonds/land/etc" are not actual assets backed by anything OTHER than scarcity. I specifically said they were backed by scarcity (land) and by economic activity (stocks and bonds). >Stocks have value almost exclusively due to capital appreciation. You don't…

At least gold has some practical uses (i.e. In electronics). So if people gave up on the idea of holding gold for the sake of holding gold, it would still have some residual value.

Bitcoin, however, seems to have no practical uses whatsoever.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#44

Post by modeless »

pjbyrne wrote: post #27
1053r wrote: post #2

This article appears to be written under the assumption that coinbase and other exchanges are counterparties to the price. They are not. They are market makers. It's impossible to have a run on dollar demand for BTC, because the price floats. If there are sufficient people selling, the price will simply fall, and has done so several times in the past, before recovering when equilibrium returned to the market. Exchang…

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

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

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

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

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

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

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#45

Post by dahdum »

pjbyrne wrote: post #39
mrb wrote: post #34

Earlier quoted context omitted.

I've already pointed out you don't seem to understand how Bitcoin exchanges operate: https://twitter.com/zorinaq/status/935016692270489600 Banks don't provide liquidity to Bitcoin exchanges. Exchanges don't borrow from banks. Exchanges don't trade with their money, or their users' money. Exchange users deposit money to exchanges, and exchanges dumbly execute orders specified by their users. That's it. For example BTC…

No, they aren't, because the price of BTC is growing exponentially without necessarily having dollar deposits grow at the same time. Here's a worked example. In a closed system: Day 1: $1 buys 1000 Marmotcoin Day 2: $1000 buys 1 Marmotcoin Day 3: 1000 Marmotcoin attempts to sell for $1,000,000 That's what the initial phases of a liquidity shock will look like. I can almost guarantee you that retail operations all hav…

That's not a worked example, it's ignoring everything they just explained.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#46

Post by pjbyrne »

panarky wrote: post #40
pjbyrne wrote: post #39

Earlier quoted context omitted.

No, they aren't, because the price of BTC is growing exponentially without necessarily having dollar deposits grow at the same time. Here's a worked example. In a closed system: Day 1: $1 buys 1000 Marmotcoin Day 2: $1000 buys 1 Marmotcoin Day 3: 1000 Marmotcoin attempts to sell for $1,000,000 That's what the initial phases of a liquidity shock will look like. I can almost guarantee you that retail operations all hav…

Your article assumes that to sell on Day 3, the exchange has to borrow $1,000,000 from a bank. That's now how an exchange works. For the price to be 1,000,000 USD for 1,000 BTC, there must exist buyers with 1,000,000 USD and sellers with 1,000 BTC with orders to trade at that price. There's no "house money" since exchanges aren't casinos where the players bet against the house. Buyers and sellers are transacting with…

You're still missing the point. If the exchange is providing a fiat on/offramp, then it will have to manage the possibility that the amount of USD deposits is massively exceeded by the amount of Bitcoin deposits which may one day call on the USD deposits to be redeemed.

For example. If I bought $1000 for 1 BTC from Coinbase on January 1st 2017 and try to exit that position on Jan 1 2018, once I sell that $10,000 bitcoin to Coinbase I'll be withdrawing $9000 more than I put in. Coinbase has to get the $9000 from somewhere, whether that be from other deposits which are more recent than mine, or from its own trading operations.

If you have a large number of people trying to withdraw a large number of dollars at the same time, your offramp could run out of dollars or, in the alternative, be required to (a) draw down a facility with a bank or (b) sell assets. In an environment where the asset price is falling rapidly it may not be able to avail itself of either option.

As occurred in 2008, with dire consequences.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#47

Post by coryl »

pjbyrne wrote: post #46
panarky wrote: post #40

Earlier quoted context omitted.

Your article assumes that to sell on Day 3, the exchange has to borrow $1,000,000 from a bank. That's now how an exchange works. For the price to be 1,000,000 USD for 1,000 BTC, there must exist buyers with 1,000,000 USD and sellers with 1,000 BTC with orders to trade at that price. There's no "house money" since exchanges aren't casinos where the players bet against the house. Buyers and sellers are transacting with…

You're still missing the point. If the exchange is providing a fiat on/offramp, then it will have to manage the possibility that the amount of USD deposits is massively exceeded by the amount of Bitcoin deposits which may one day call on the USD deposits to be redeemed. For example. If I bought $1000 for 1 BTC from Coinbase on January 1st 2017 and try to exit that position on Jan 1 2018, once I sell that $10,000 bitc…

I have a share of AAPL stock. I wish to sell it.

I place the sell order with my brokerage, and I get fiat USD deposited into my account. This is exactly how Bitcoin is exchanged.

Where exactly lies the fundamental liquidity problem for my brokerage/exchange?

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#48

Post by gruez »

pjbyrne wrote: post #46
panarky wrote: post #40

Earlier quoted context omitted.

Your article assumes that to sell on Day 3, the exchange has to borrow $1,000,000 from a bank. That's now how an exchange works. For the price to be 1,000,000 USD for 1,000 BTC, there must exist buyers with 1,000,000 USD and sellers with 1,000 BTC with orders to trade at that price. There's no "house money" since exchanges aren't casinos where the players bet against the house. Buyers and sellers are transacting with…

You're still missing the point. If the exchange is providing a fiat on/offramp, then it will have to manage the possibility that the amount of USD deposits is massively exceeded by the amount of Bitcoin deposits which may one day call on the USD deposits to be redeemed. For example. If I bought $1000 for 1 BTC from Coinbase on January 1st 2017 and try to exit that position on Jan 1 2018, once I sell that $10,000 bitc…

>Coinbase has to get the $9000 from somewhere

yeah, from the person that just bought BTC for $10,000.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#49

Post by JohnnyConatus »

pjbyrne wrote: post #27
1053r wrote: post #2

This article appears to be written under the assumption that coinbase and other exchanges are counterparties to the price. They are not. They are market makers. It's impossible to have a run on dollar demand for BTC, because the price floats. If there are sufficient people selling, the price will simply fall, and has done so several times in the past, before recovering when equilibrium returned to the market. Exchang…

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

Not saying you're wrong, but this argument is irresolvable unless you can give evidence that either 1) Coinbase/similar are using bank facilities to provide liquidity, and in essence, being the market makers. Or 2) They're using market makers who might bow-out in a similar fashion.

Re: The Bear Case for Crypto, Part II: The Great Bank Run

#50

Post by pjbyrne »

stale2002 wrote: post #10
ifdefdebug wrote: post #7

Earlier quoted context omitted.

Still Exchanges need to have two things: 1) enough coin to satisfy coin withdrawals, even in the middle of a panic run 2) enough fiat to satisfy fiat withdrawals, even in the middle of a panic run I think maybe that's what the author meant, not sure. But if the exchanges fail to show their customers' assets, they will reinforce any panic feedback loop that might be happening sometime in the future.

Sure, that it true. But this is only a problem if coinbase or whoever is acting as a fractional reserve system. As far as I know, every single dollar and Bitcoin that coinbase "says" you have is actually in an account somewhere, dollar for dollar and Bitcoin for Bitcoin. If this is NOT true, and coinbase is a fractional reserve system, that would be a huge scandal.

Bitcoin itself is a fractional reserve system.
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