A systematic critique of Bitcoin's value proposition

Ah, I misunderstood what you were saying. I thought you were suggesting that the counterparties were passing money between each other. Instead, this _is_ a traditional short position. The counterparty is setting aside the cash, with LedgerX, who is actually a registered CFTC clearinghouse so does have oversight and is (theoretically) watching their operations and they are therefore using properly applied risk management for "other peoples money". But the counterparty risk remains with LedgerX. It hasn't gone anywhere and is still something that would need to be managed.

Its been a few years since I did risk management for a CFTC derivative exposed firm but at the time clearing house default procedures were very much up in the air. Dodd-Frank allowed for clearing houses to be declared as systematically important but only CME, ICE and OCC were designated as such. Has that changed?

Other than that, I'll be honest I don't remember what the debt claims were with regard to clearing houses. Is there some special provision of the bankruptcy law that makes "LedgerX doesn't own those Bitcoin or the customer deposits and never did." true? Because typically this would be up to a bankruptcy judge to decide (as opposed to say custodial assets at a brokerage or deposits at a bank which have senior claims by law). That doesn't look to be what has happened in this case by the way. In this case it looks like a bankruptcy judge looked at the books and said "yep these assets/liabilities balance appropriately so its an easy win to just sell the clearing house to someone else". Which is precisely what 'JumpCrisscross said.

So, I'm not put off by this, because its a message board. But maybe you should look at some of your statements to see if they meet your own standards. You've made a few claims that set my alarm bells ringing as someone who has actively worked in this space.

A few examples "actually get a payout in the worst-case scenario, and have effectively no counterparty risk" which is not true. "LedgerX doesn't own those Bitcoin or the customer deposits and never did" which is up to a fairly complicated legal disposition to figure out. "customer assets are held separately from their own assets and would be available for withdrawal" which is an article of faith.

Generally speaking, "no counterparty risk" is impossible in finance. With traditional finance there is a lot of law, regulation and precedence to help mitigate it but even then actors in the space manage counterparty risk as a matter of course, including by managing their clearing risk. When crypto is involved I think it would be charitable to be even more patient with people who are incredulous about that statement, even in cases like this where it is falling back on normal finance.

Sorry for the long delay to reply, these are good points that are worth addressing.

Yes, you're right, counterparty risk is not completely gone, and it never is. Even for a stock share in Schwab cash account, for all I know, it's some massive, elaborate fraud where the share never existed and I've never compensated for it not being there. Yet most of us would roll our eyes at someone insisting that you "can't profit from future [unexpected] successes at Google" -- even by owning shares -- because "lol counterparty risk".

I thought I was careful about hedging my remarks to allow for cases like this, and it feels like special pleading to scream bloody murder about that (very tiny) risk, when a) it applies to everything, even that Google share above, and b) that clearly wasn't the kind of counterparty risk that JumpCrisscross (JCC) was warning about to support his thesis that you can't short crypto.

Rather, he was claiming that the loss in value of crypto would cascade to your counterparty being unable to honor their side of the short position -- a position, mind you, that is fully backed by cash no longer in their control, and regarded as customer assets by the exchange. He's clearly working from a model in which any such counterparty is using margin, and where the resolution of the contract depends on later sales, with certain price minima, despite my painstaking re-clarification(s) that the short position's model and the exchange do not work like that.

Note in particular his comment "If you place 1 BTC short with LedgerX,", which was never part of my model, and not something LedgerX supports to begin with!

There are many things you can say about that kind of reply, but not "this is a meaningful attempt to engage with SilasX's point", so of course, I'm going to call that out.

(From all I've read, the status of one's deposits at LedgerX is the same as the stock at Schwab -- even if the stock market crashes and Schwab unable to pay its bonds, that Google share is still yours. If you have actual information on that topic, that would be useful to know -- I have a hard time parsing the regulatory filings myself -- but JCC certainly didn't, beyond re-parroting assertions about how LedgerX would definitely crash and use your money to pay off creditors.)

Bottom line -- JCC had many opportunities too root-cause the basis of the disagreement and narrow it down to substantive, resolvable claims about the world, but at every point elected to simply assert increasingly irrelevant points with greater confidence. I've never seen that lead to a meaningful dialogue. And so I wasn't surprised when, the following day, he played the same unproductive game.[1]

As for your point about bankruptcy: I have to remain skeptical that the hyper-savvy risk manager is worried about the Google long blowing up because of the risk that some general market crash would tear down Schwab, reveal that they weren't really holding shares, and then put your claimed Google shares junior to Schwab's creditors -- especially when we have a very recent example of a bankruptcy court electing not to do that (for FTX). If you disagree, I'm happy to hear why.

[1] https://news.ycombinator.com/item?id=35558582

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