13 votes

The bit short: Inside Crypto’s doomsday machine

4 comments

  1. skybrian
    (edited )
    Link
    From the blog post from 2 days ago: [...] [...] [...] Looking at Kraken, it appears the peg is still holding for now.

    From the blog post from 2 days ago:

    The conversation went something like this:

    Me: You don’t own any crypto do you? I’m concerned some of the exchanges in the ecosystem might be fraudulent.
    Bob: I actually have a whole bunch of crypto on this exchange called Bybit. Do you know if that’s one of the risky ones?
    Me: I’m not sure. Does it let you trade in USD?
    Bob: No, but a lot of other exchanges don’t either. In fact, you can’t even deposit USD directly into a Bybit account.
    Me: Really? But then how do you get your money onto their exchange at all if they don’t accept USD deposits?
    Bob: You send your USD to Coinbase and buy Bitcoin with it. Then you move your Bitcoin onto Bybit and trade with it there.
    Me: Hang on. If that’s the case, then why would anybody ever use an unbanked offshore exchange that trades purely in crypto? What does Bybit offer you that Coinbase doesn’t?
    Bob: Leverage. I personally only use 2–3X leverage, but they let you leverage your positions up to 100X if you want. You can’t do that on Coinbase.
    Me: Gasps audibly
    Bob: They also do a ton of promotions. They’ve got a bunch of timed missions where you can earn Tethers for doing stuff like inviting friends onto the exchange, joining their Telegram group, or trading on their platform.
    Me: HOLY $#!@
    Bob: But thanks for the warning! I’ll pull my crypto out as quick as I can. It might take me a few minutes though, I’ll need to fire up my VPN first.
    Me: A VPN? But why, for the love of God?
    Bob: Because I need to spoof a Bolivian ISP to access the exchange. They’re illegal to use if you’re based in America.
    Me: Head explodes

    [...]

    From January 2020 to September 2020, the amount of all foreign currencies held by all the domestic banks in the Bahamas increases by only $600 million — going from $4.7B to $5.3B. (The table is in Bahamian dollars, but the Bahamian dollar is pegged to the US dollar, so 1 BSD = 1 USD.)
    But during the same period, total issued Tethers increased by almost $5.4 billion — going from $4.6B to $10B!
    The implication was shocking: there weren’t nearly enough dollars in all the domestic banks in the Bahamas to back the Tethers that were floating around in the crypto market.
    So this was crypto’s big short: Tether Ltd. was short of US dollars — to the tune of about $25 billion.

    [...]

    This explains how Tether has been able to maintain its $1 USD peg on the unbanked offshore exchanges. For a given amount of Bitcoin, a crypto trader gains effective access to far more Tethers than the public exchange rate would justify. The exchanges then book those extra Tethers as “leverage” and “promotions”, allowing them to maintain the fiction that those “free” Tethers aren’t being traded for Bitcoin at all — even though they are part of the package Bob receives for the Bitcoin he sells.
    Viewed from this angle, the fact that the offshore exchanges don’t support USD is a feature, not a bug: preventing USD and Tether from meeting on a transparent market is crucial for ensuring that the true price of Tether stays opaque — making it hard for an outsider to dispute its $1 peg.

    [...]

    My guess is that maintaining the Tether peg on Kraken represents the single biggest ongoing capital expense of this entire fraud. If the crooks can’t scrape together enough USD to prop up the Tether peg on Kraken, then it’s game over, and the whole shambles collapses. And that makes it the fraud’s weak point.
    To be crystal clear: every time you sell Tethers on Kraken, you are forcing Tether Ltd. to pay you in US dollars. If you can manage to sell enough Tethers for USD on Kraken, then Tether Ltd. will run out of dollars and this whole machine — which currently undergirds 70% of all crypto trading flows — will fall apart.

    Looking at Kraken, it appears the peg is still holding for now.

    4 votes
  2. [3]
    onyxleopard
    Link
    Thanks for posting this. I’m really worried about adversarial attacks on traditional, fiat currencies via these sorts of unregulated exchanges. Just so I understand this, from the Stablecoin...

    Thanks for posting this. I’m really worried about adversarial attacks on traditional, fiat currencies via these sorts of unregulated exchanges.

    Just so I understand this, from the Stablecoin Wikipedia article:

    Advantages of asset backed cryptocurrencies are that coins are stabilized by assets that fluctuate outside of the cryptocurrency space, that is, the underlying asset is not correlated, reducing financial risk. Bitcoin and altcoins are highly correlated, so that cryptocurrency holders cannot escape widespread price falls without exiting the market or taking refuge in asset backed stablecoins. Furthermore, such coins, assuming they are managed in good faith, and have a mechanism for redeeming the asset/s backing them, are unlikely to drop below the value of the underlying physical asset, due to arbitrage.

    Tether is avoiding arbitrage, so far, by largely offering Tethers on exchanges where they can’t be exchanged directly for USD? And the author is making a plea for some well-capitalized entity to essentially test this theory and attempt to buy lots of Tether where the Tether issuer will be forced to buy an underlying stable asset (USD) to maintain the illusion that Tether is worth something?

    I’m somewhat indirectly exposed to BTC since I own stock in Square, Inc. (SQ) which now holds a bunch of BTC. Not very exposed, but exposed. While I would like if algorithmic cryptocoins were more stable, using stablecoins that are issued in this shady way seems like the opposite of the way to reach legitimacy in the long term. If Tether’s apparent fraud is generally recognized, what will the effect be? It seems like this would tank BTC and other coins? Would this bolster USD and other traditional, fiat currencies? How can someone like the “Bob” in the article be encouraged to use legitimate exchanges like Coinbase instead of Bybit? AFAICT, “Bob” is essentially an unwitting criminal who is defrauding everyone with stake in USD, but is impossible to go after from the US, legally, without outlawing VPNs. This all just seems like a huge powder keg waiting to go off.

    3 votes
    1. [2]
      skybrian
      (edited )
      Link Parent
      They are suggesting that someone could try to break the peg by selling lots of Tether for USD. Basically it would be like a bank run. But for that to work, they would need to get a lot of Tether...

      They are suggesting that someone could try to break the peg by selling lots of Tether for USD. Basically it would be like a bank run. But for that to work, they would need to get a lot of Tether to sell, perhaps via these promotional offers. It could happen in a more distributed way, though, as people who already own Tether try to get out.

      The overall effect is hard to predict. Obviously, Tether would lose value. Since lots of Tether is being used to buy Bitcoin, eventually this artificial demand would go away and it would lose value. How much is hard to say. But Bitcoin could go up temporarily as people try to exit Tether for anything else. The question is how far the panic spreads. It seems like Coinbase’s stablecoin would hold value since I doubt they’re a fraud, but Coinbase tends to have technical problems when volume gets very high. For other cryptocurrency, there is no inherent value so it all depends on market psychology. Eventually some true believers will start buying again, but at what price?

      I haven’t checked but I don’t think there is enough money involved in cryptocurrency as a whole to affect demand for traditional currencies, especially not the US dollar market.

      Edit: another approach would be to borrow Tether to sell short, but there would need to be a large enough market where Tether holders can lend out their holdings to short-sellers.

      3 votes
      1. onyxleopard
        Link Parent
        The long term trend that I’m expecting is that if cryptocurrencies proliferate and stabilize, fiat currencies will lose value, and vice versa. Ultimately I don’t think the overall amount being...

        I haven’t checked but I don’t think there is enough money involved in cryptocurrency as a whole to affect demand for traditional currencies, especially not the US dollar market.

        The long term trend that I’m expecting is that if cryptocurrencies proliferate and stabilize, fiat currencies will lose value, and vice versa. Ultimately I don’t think the overall amount being exchanged is what matters, it’s the perceived value. Stability is a huge factor in general perception for most people (investors and fraudsters excluded). A currency that is advertised as stable, but really is not, seems dangerous to everyone because it defrauds people of value in any number of currencies that were exchanged for it, and reduces confidence in cryptocurrency even for those who don’t own any.

        2 votes