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

prestonbyrne.com

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

#61

Post by pjbyrne »

panarky wrote: post #59
mrb wrote: post #56

Earlier quoted context omitted.

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.

You just proved my point. For this to keep working you need Charlie to show up with $1,000,000 new dollars.

In a panic, you need to flip this scenario on its head. Charlie is not going to show up and Diana, who got into Bitcoin in 2009 and hasn't done anything since, decides to take her profits on 1,000 BTC. So this system has $1,001 to meet $2,000,000 in deposit demand, assuming neither Alice nor Bob has withdrawn their USD and some Bitcoin hodlers pile in.

Particularly popular liquidity pools eg BitPesa or Coinbase may then be put under pressure to either cease operations, draw down liquidity facilities to buy BTC, or start selling their own assets in order meet demand of BTC holders who want to get out. Those are not good choices.

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

#62

Post by coryl »

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…

So wherein lies the liquidity problem?

I deposit USD to an exchange...then use that USD to place a Bitcoin buy order. Then I sell some Bitcoin another buyer on the exchange, who was only able to make this transaction happen because they too deposited USD or fiat into their account.

I get the money, they get the Bitcoin. Who is getting screwed?

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

#63

Post by tradersam »

modeless wrote: post #58
tradersam wrote: post #52

Earlier quoted context omitted.

> 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…

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

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

> BTW, Bitfinex recently reopened bank deposits and withdrawals.

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

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

#64

Post by 0xCMP »

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

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

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

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

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

#65

Post by tradersam »

coryl wrote: post #62
tradersam wrote: post #52

Earlier quoted context omitted.

> 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…

So wherein lies the liquidity problem? I deposit USD to an exchange...then use that USD to place a Bitcoin buy order. Then I sell some Bitcoin another buyer on the exchange, who was only able to make this transaction happen because they too deposited USD or fiat into their account. I get the money, they get the Bitcoin. Who is getting screwed?

If the banks cut off access to the funds (e.g.: GDAX can no longer accept USD deposits/withdraws, or possibly even the funds in their own accounts) they basically can't be considered an "off ramp" anymore. If all exchanges were barred from doing business from U.S. banks, than there is no way to get money from 1 BTC (or any other denomination/currency). Herein lies the screw.

LocalBitcoins would become a seller or buyers only recourse, for U.S. customers anyway, which takes a lot of coordination/time, and essentially becomes an obvious form of money laundering.

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

#66

Post by modeless »

tradersam wrote: post #63
modeless wrote: post #58

Earlier quoted context omitted.

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…

> No, that's not what OP is saying at all. Read his posts. He's under the impression that exchanges take out bank loans to pay dollars to their customers, which is false. Although that would be incorrect, there still are valid fears for a liquidity crunch, as I stated. This, regardless of why (be it laws or fund availability) does create a concern due to liquidity. > BTW, Bitfinex recently reopened bank deposits and…

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

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

#67

Post by tradersam »

modeless wrote: post #66
tradersam wrote: post #63

Earlier quoted context omitted.

> No, that's not what OP is saying at all. Read his posts. He's under the impression that exchanges take out bank loans to pay dollars to their customers, which is false. Although that would be incorrect, there still are valid fears for a liquidity crunch, as I stated. This, regardless of why (be it laws or fund availability) does create a concern due to liquidity. > BTW, Bitfinex recently reopened bank deposits and…

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

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

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

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

#68

Post by paulpauper »

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...

it is a lot lower than than that. you have to divide by the number of major bitcoin exchanges

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

#69

Post by dahdum »

pjbyrne wrote: post #61
panarky wrote: post #59

Earlier quoted context omitted.

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.

You just proved my point. For this to keep working you need Charlie to show up with $1,000,000 new dollars. In a panic, you need to flip this scenario on its head. Charlie is not going to show up and Diana, who got into Bitcoin in 2009 and hasn't done anything since, decides to take her profits on 1,000 BTC. So this system has $1,001 to meet $2,000,000 in deposit demand, assuming neither Alice nor Bob has withdrawn t…

In this panic, the price of bitcoin drops as Diana dumps her 1k BTC market sell on the book. The USD comes from whomever purchases - there is no liquidity problem.

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

#70

Post by vasilipupkin »

paulpauper wrote: post #68
mrb wrote: post #41

Earlier quoted context omitted.

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...

it is a lot lower than than that. you have to divide by the number of major bitcoin exchanges

Not sure I follow.
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