The Bear Case for Crypto, Part II: The Great Bank Run • Hacker News Board

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

#51

Post by kpdxxx » Mon, Nov 27, 2017, 10:44 PM UTC

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…

No, _you're_ missing the point.

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

#52

Post by tradersam » Mon, Nov 27, 2017, 10:45 PM UTC

modeless wrote: post #44

pjbyrne wrote: post #27

Earlier quoted context omitted.

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…

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

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

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

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

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

#53

Post by mrb » Mon, Nov 27, 2017, 10:45 PM UTC

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…

Bids on an exchange's order book are definitely backed by dollars. I don't know why you insist they aren't.

You use strange language. Maybe the scenario you mean to describe is not about lack of deposits or lack of float, but is a classic panic sale (ie. order books not deep enough to absorb all asks). Yes, this could happen with Bitcoin, or basically any financial instrument: stocks, forex, etc.

As someone who has been trading bitcoins since 2010, I will retort that market depths have definitely been growing over time. I don't have precise data to show you, but for example GDAX's BTC/USD order book accounts for 1/20th of the worldwide BTC trading volume. Right now selling 3600 BTC on GDAX would net $30M and dip the price -20%. Assuming the same depth at other exchanges, this means traders could globally sell 72000 BTC at the same instant for $600 million and dip the price by only 20%. That's a pretty decent market depth.

If market depth grew proportionally to Bitcoin's price, it would mean that 7 years ago when Bitcoin was trading at $0.25 (1/36000th its current price: http://bitcoin.zorinaq.com/price/) then a sale of $16k worth of Bitcoins would have dipped the price by 20%. I don't know if we can find archives of MtGox's trading data from 2010, but I roughly remember selling blocks of 1000 BTC at a time on Mtgox for $0.70-1.00/BTC in February 2011 and each of my sale would dip the price by a few percents.

So my (vague) recollection seems to indicate I'm probably right that market depth increased proportionally to Bitcoin's price. Therefore Bitcoin would have been at an equal risk of a panic sale at any point in the last 7 years. And the fact there has never been a long-term panic sale is a testament to Bitcoin's resilience. The markets are deeper and are more resistant than you think.

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

#54

Post by vasilipupkin » Mon, Nov 27, 2017, 10:48 PM UTC

mrb wrote: post #41

vasilipupkin wrote: post #14

Earlier quoted context omitted.

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...

sure, panic selling is possible in INTC, absolutely. Valuing INTC is easier, though, because it actually pays dividends and because it can be compared to other stocks.

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

#55

Post by dwaltrip » Mon, Nov 27, 2017, 10:49 PM UTC

gruez wrote: post #48

pjbyrne wrote: post #46

Earlier quoted context omitted.

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.

Seriously, three comments in a row and he is still repeating the same fundamental misunderstanding. It's not a complicated concept, I don't get the confusion.

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

#56

Post by mrb » Mon, Nov 27, 2017, 10:51 PM UTC

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…

Exchanges don't provide fiat on/offramp. Exchange users do, by making deposits.

Every dollar that a user withdraws from an exchange is a dollar that was (already!) deposited by another user.

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

#57

Post by coryl » Mon, Nov 27, 2017, 10:53 PM UTC

pjbyrne wrote: post #50

stale2002 wrote: post #10

Earlier quoted context omitted.

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.

Fractional reserve systems have fixed maximum supply of currency?

According to the Bitcoin protocol, only a maximum of 21m BTC can exist. And that they are created via mining in a predictable schedule.

Respectfully, I think you need to revisit Bitcoin fundamentals.

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

#58

Post by modeless » Mon, Nov 27, 2017, 10:56 PM UTC

tradersam wrote: post #52

modeless wrote: post #44

Earlier quoted context omitted.

> 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…

> You are misinformed. The people who provide the dollars to this market are the customers of the exchanges. It seems like you are not familiar with how a currency exchange works. I fear you're misinformed. Besides localBitcoins, how does one get fiat to an exchange? That's right — a bank. Exchanges like Bitfinex only survive because of things like Tether, which requires other fiat accepting exchanges. If all exchang…

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

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

BTW, Bitfinex recently reopened bank deposits and withdrawals.

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

#59

Post by panarky » Mon, Nov 27, 2017, 10:57 PM UTC

mrb wrote: post #56

pjbyrne wrote: post #46

Earlier quoted context omitted.

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…

Exchanges don't provide fiat on/offramp. Exchange users do, by making deposits. Every dollar that a user withdraws from an exchange is a dollar that was (already!) deposited by another user.

Exactly. Here's a revised "worked example".

Day 1: Alice buys 1,000 Bitcoin from Bob for 1 USD on a street corner

Day 2: Market price on the street corner is 1 Bitcoin for 1,000 USD

Day 3: Alice sells 1,000 Bitcoin to Charlie for 1,000,000 USD on a street corner

The street corner doesn't have to borrow 1,000,000 USD from a bank.

Charlie brings the USD to the trade.

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

#60

Post by 45h34jh53k4j » Mon, Nov 27, 2017, 10:57 PM UTC

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…

Except for the pathological example of Bitfinex (another story), every $1 of coin sold is backed by the $1 that a depositor has made. There cannot be a 'bank run' like you describe unless the exchange is running a fractional fiat reserve. This is not the case is which you describe. If there a massive withdrawal of billions from coinbase, it means that there is a massive deposit of billion TO coinbase to make the trade. In the case of bitfinex, they appear to be doing peer to peer bank transfers to get round their own banking problems. (ie: you want 10m out, i want 10m in, we trade A->B, rather than through the exchange as a middle man).

You simply cannot sell it if there is no buyer to take it. You never 'sell' to coinbase -- this is a front for GDAX, their exchange. Every buy is taken from a seller on their market. The money is exchanged between you and their account, and they take fees.