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Tether Required Recapitalization in May 2022

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Re: Tether Required Recapitalization in May 2022

#41

Post by mathgenius »

gringoDan wrote: post #15
mathgenius wrote: post #11

It recently occurred to me, with the whole LUNA fiasco, that any "stablecoin" that is 1-1 backed by fiat can come under attack from leveraged traders, and get de-pegged. So it really doesn't matter what backing tether has, although more is obviously better. When the music stops it's anyone's guess what will happen.

Any stablecoin that is NOT backed 1-1 by fiat, correct? I.e., algorithmic stables. If you're 100% collateralized by USD in your bank account, how can it get de-pegged?

With leverage you can long or short more than the available supply of tethers. You are effectively creating fake tether with leverage, and then selling it (or buying it). This stuff also happens with equities, commodities, etc.

If there was no leverage, then yes, a 1:1 backed stablecoin would hold it's value.

EDIT: I mean the story here is far from clear, you also need to consider arbitrage bots that act between exchanges, etc. etc.

Re: Tether Required Recapitalization in May 2022

#42

Post by jandrese »

axg11 wrote: post #12

The most important point in this article is that whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine. Nobody should be under the illusion that Tether is decentralized or anything other than a bet on Bitfinex.

As an outsider this reads like someone in 2006 saying that these risky looking mortgage based products are fine because they'll be propped up by Fannie Mae and Freddie Mac.

Re: Tether Required Recapitalization in May 2022

#43

Post by wbl »

avalys wrote: post #37
winslett wrote: post #28

Earlier quoted context omitted.

It is one step closer to shutting the doors on Bitcoin as an isolated financial ecosystem. Bitcoin-to-actual-USD is a trackable / taxable event. Whales avoid it like the plague. By moving to a pseudo-dollar like Tether, market makers can hang out while they wait for a suspect better buy-in price in the future. Should pseudo-dollars go way, they actual-Dollar transactions get a taxable haircut. Additionally, the frict…

Aren't sales of Bitcoin for Tether taxable anyway?

You are assuming traders are being makpid about IRS compliance and reporting.

Re: Tether Required Recapitalization in May 2022

#44

Post by rglullis »

hansonkd13 wrote: post #13
glerk wrote: post #5

So Tether is doing something akin to fractional reserve banking? From what I understand, this shouldn’t cause a problem unless there is a massive run (everyone trying to convert their USDT into dollars at the same time). Since most of the USDT is owned by big exchanges who need it to provide liquidity and have no interest in crashing the crypto market, I don’t think this is likely to happen.

No they are not. That rationale is a coping strategy at best and deliberately misleading at worst. Tether is NOT a bank. They are not regulated and have no guarantee that depositors will be paid back. They promise a 1-1 backing and instead of people holding them to their promise their supporters desperately try to compare it to moderns banks. No. Tether is not a bank. It is not doing fractional reserve banking. It is…

This, a million times this. Speaking as HN's resident web3 apologist, it's amazing how people keep trying to defend cryptocurrencies based on some anti-finance-system ideology, but throw it all out of the window when it comes to Tether.

Tether is not a bank. Not in the US, not in the Cayman Islands, not anywhere. Everyone holding or trading Tether could be using a test network, and the monetary value of the token should be the same.

Re: Tether Required Recapitalization in May 2022

#45

Post by Aaronstotle »

candiddevmike wrote: post #21
billions wrote: post #7

Bitcoin is the real stable coin. Everything else is fluctuating in price discovery until hyperbitcoinization completes.

1 BTC = 1 BTC, just like 1 Monopoly dollar = 1 Monopoly dollar. Too bad I can't trade either for most goods/services/taxes.

There is a decent circular economy growing around bitcoin, at the very least you can purchase gift cards with them which hold dollar amounts to get whichever services you'd like!

Re: Tether Required Recapitalization in May 2022

#46

Post by graeme »

deweller wrote: post #19

> As of this writing, on May 20th, it has yet to regain the peg This is misleading. Tether has consistently traded between $0.998 and $0.999 between May 13th and May 20th. See https://coinmarketcap.com/currencies/tether/ Is it trading at 0.1% lower than it was before the Terra USD collapse? Yes. Has it "lost its peg"? No.

It’s not just 0.1% off the peg. It’s 0.1% off and facing large redemptions.

That makes the peg loss seem significant

Re: Tether Required Recapitalization in May 2022

#47

Post by qeternity »

mathgenius wrote: post #41
gringoDan wrote: post #15

Earlier quoted context omitted.

Any stablecoin that is NOT backed 1-1 by fiat, correct? I.e., algorithmic stables. If you're 100% collateralized by USD in your bank account, how can it get de-pegged?

With leverage you can long or short more than the available supply of tethers. You are effectively creating fake tether with leverage, and then selling it (or buying it). This stuff also happens with equities, commodities, etc. If there was no leverage, then yes, a 1:1 backed stablecoin would hold it's value. EDIT: I mean the story here is far from clear, you also need to consider arbitrage bots that act between exch…

This isn’t even remotely true. You’re conflating 3 or 4 things with this mistaken understanding.

Re: Tether Required Recapitalization in May 2022

#48

Post by gringoDan »

onesafari wrote: post #17

What happens if Tether fails, realistically? There's a lot of doomsaying around it, but after seeing the crypto market shrug off the loss of Terra Luna without contagion or bailout ala GFC crisis, the fear may be overblown. Terra was backed entirely by hot air, whereas Tether is mostly backed. Wouldn't the net loss be similar or even less?

So assume Tether loses its peg. Worst-case:

1. Anyone holding Tether tries to cash out. Whales and important customers are allowed to redeem USDT for USD at a 1:1 ratio. Tether sells its crypto and other assets to cover redemptions, driving down the price of those assets.

2. Eventually Tether limits the withdrawals.

3. You're stuck with Tether you can't withdraw. What do you do? Try to exchange it for BTC or ETH ("blue-chip" crypto), which you can then hold or cash out on an exchange that is USD- or USDC-denominated.

4. Any exchange with Tether-denominated crypto prices are going to see those prices EXPLODE as there will be no sellers of the crypto. So you'll see some sort of weird market where BTC on Bitfinex costs $500k but BTC on Coinbase costs $10k.

5. If you're still stuck with Tether, you lose all your money or everything gets tied up in court a la Mt. Gox.

EDIT:

Fun potential #6 - if you're holding crypto on an exchange with Tether exposure, they may not allow withdrawals. The holder of the private keys may seize your assets to cover their debts.

Not sure how likely this scenario is, but even Coinbase (about as regulated as it gets in crypto) recently admitted that its bankruptcy could wipe out user funds: https://fortune.com/2022/05/11/coinbase-bankruptcy-crypto-as...

Re: Tether Required Recapitalization in May 2022

#49

Post by ARandumGuy »

onesafari wrote: post #17

What happens if Tether fails, realistically? There's a lot of doomsaying around it, but after seeing the crypto market shrug off the loss of Terra Luna without contagion or bailout ala GFC crisis, the fear may be overblown. Terra was backed entirely by hot air, whereas Tether is mostly backed. Wouldn't the net loss be similar or even less?

It's almost impossible to say for sure. It could be anything from "the crypto market is shaken a bit, but quickly recovers" to "it leads to the downfall of the entire crypto ecosystem". Any more specific estimations are ultimately just a guess.

That being said, from an outside observer, the crypto market does not look healthy right now, and Tether is part of that. The safe guess is that the crypto market hasn't reached its low point yet, and its impossible to say if it will ever get back to November 2021 levels again.

Re: Tether Required Recapitalization in May 2022

#50

Post by JumpCrisscross »

axg11 wrote: post #12

The most important point in this article is that whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine. Nobody should be under the illusion that Tether is decentralized or anything other than a bet on Bitfinex.

> whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine

This is true for every pile of toxic crap that's ever been financially engineered.

The problem is the entangled financial health of the backer (in this case, Bitfinex and other crypto exchanges) with the backee (Tether). If creditors to the system (in this case, lenders to and customers of the exchanges together with holders of Tether) don't have transparency into the health of the nodes, a small crisis of confidence can prompt a run. (How do you know the parties are "well capitalized"?)

Critically, this can occur even if the original impetus was survivable. The opacity causes people to doubt the system's survivability, which avalanches into a run that no system can survive. Perversely, everyone knows this pattern, which increases the chances of small perturbations careening out of control. Add in that a crisis in any part of this system creates a systemic risk and the outcome becomes, as it's been across history, inevitable.

Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.

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