Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout(wsj.com)
wsj.com
Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout
https://www.wsj.com/articles/battered-crypto-hedge-fund-three-arrows-capital-considers-asset-sales-bailout-11655469932
130 comments
Paywall: https://web.archive.org/web/20220617125537/https://www.wsj.c...
The crypto community continues to speed run the history of traditional finance.
This weeks lesson is that in an up market its leverage that makes you money and in a down market its the unwinding of leverage that kills you.
They are also learning that interconnectedness will hurt more in a downturn. You can be perfectly delta hedged( don't care which way the market moves) and its the counter party risk that will sink you.
Now as these firms start to unwind they spill over to the next one. The collateral taht you lent to the failed firm is now gone and your once well hedge d and collateralized position is now in shambles because someone else can't pay you.
TradFi normally solves this by having a firm have oversite on everyones positions and have everyone pay money into a pot to help bail out failed counterparties so they don't spill over to other firms.
Crypto has tried to solve this by strict liquidation rules that tend to make things worse by turning firms into forced sellers when they may have been able to ride things out, thereby forcing markets down even more. To the point where its a profitable trading strategy to intentionally force the market down to liquidate leveraged longs.
As more crypto firms fail, they'll end up selling their best collateral first(BTC and ETH) forcing down the price even more.
$5,000 BTC and $200 ETH are in site if Tether starts to fail. Tehter has lent money to almost all these firms but doesn't mark down its positions from what it originally held them at.
If tether holds we may get out of this with $10-15,000 BTC but if Binance/FTX walk away from Tether then we'll be down another 80% from here I bet.
TL/DR its going to get alot uglier than it currently is due to the interconnected nature of the crypto markets. We'll find out that pretty much everyone was linked to everyone else as there are only so many ways to make money in crypto and everyone piled into them.
Defi is about to find out how hard it is to make money when no one wants to stake.
This weeks lesson is that in an up market its leverage that makes you money and in a down market its the unwinding of leverage that kills you.
They are also learning that interconnectedness will hurt more in a downturn. You can be perfectly delta hedged( don't care which way the market moves) and its the counter party risk that will sink you.
Now as these firms start to unwind they spill over to the next one. The collateral taht you lent to the failed firm is now gone and your once well hedge d and collateralized position is now in shambles because someone else can't pay you.
TradFi normally solves this by having a firm have oversite on everyones positions and have everyone pay money into a pot to help bail out failed counterparties so they don't spill over to other firms.
Crypto has tried to solve this by strict liquidation rules that tend to make things worse by turning firms into forced sellers when they may have been able to ride things out, thereby forcing markets down even more. To the point where its a profitable trading strategy to intentionally force the market down to liquidate leveraged longs.
As more crypto firms fail, they'll end up selling their best collateral first(BTC and ETH) forcing down the price even more.
$5,000 BTC and $200 ETH are in site if Tether starts to fail. Tehter has lent money to almost all these firms but doesn't mark down its positions from what it originally held them at.
If tether holds we may get out of this with $10-15,000 BTC but if Binance/FTX walk away from Tether then we'll be down another 80% from here I bet.
TL/DR its going to get alot uglier than it currently is due to the interconnected nature of the crypto markets. We'll find out that pretty much everyone was linked to everyone else as there are only so many ways to make money in crypto and everyone piled into them.
Defi is about to find out how hard it is to make money when no one wants to stake.
> Crypto has tried to solve this by strict liquidation rules that tend to make things worse by turning firms into forced sellers
This is literally how traditional finance works as well. If you have a leveraged position at a futures or options exchange, you absolutely will be liquidated as soon as your position gets close to being in the red. I 100% guarantee you that the CME or Goldman will not let you "ride things out".
You don't have to take my word for this. Look up the history of what happened to the energy hedge fund Amaranth.
This is literally how traditional finance works as well. If you have a leveraged position at a futures or options exchange, you absolutely will be liquidated as soon as your position gets close to being in the red. I 100% guarantee you that the CME or Goldman will not let you "ride things out".
You don't have to take my word for this. Look up the history of what happened to the energy hedge fund Amaranth.
Individual investors tend to get liquidated, but for hedge funds larger investors the story is more complex. See <https://www.bloomberg.com/opinion/articles/2021-07-29/archeg...>:
> In the traditional financial system, very few things work like this. One thing that mostly does is a margin account at a retail stock brokerage: If your stock declines, you will get a margin call, and if you don’t post margin within a defined and fairly tight time frame your broker will sell the stock, and this really might all be done by a computer in a pretty formulaic way. But if you have a big enough account — if you are a big hedge fund or family office — it doesn’t work that way. When Credit Suisse Group AG decided that Archegos Capital Management did not have enough collateral in its margin account, a Credit Suisse representative called Archegos and asked it to post more collateral, and Archegos said, sorry, we are really busy this week, let’s discuss next week. In theory Credit Suisse could have liquidated Archegos’s positions, but in practice that would have been rude, so it didn’t. Credit Suisse did not extend credit to Archegos based on some defined formulaic function of the value of its collateral; Credit Suisse extended credit to Archegos based on some fuzzy holistic relationship-based function of how much business it hoped to do with Archegos, how much the Credit Suisse people liked the Archegos people, how its traders felt about the collateral, when its risk committees had meetings, stuff like that.
> In the traditional financial system, very few things work like this. One thing that mostly does is a margin account at a retail stock brokerage: If your stock declines, you will get a margin call, and if you don’t post margin within a defined and fairly tight time frame your broker will sell the stock, and this really might all be done by a computer in a pretty formulaic way. But if you have a big enough account — if you are a big hedge fund or family office — it doesn’t work that way. When Credit Suisse Group AG decided that Archegos Capital Management did not have enough collateral in its margin account, a Credit Suisse representative called Archegos and asked it to post more collateral, and Archegos said, sorry, we are really busy this week, let’s discuss next week. In theory Credit Suisse could have liquidated Archegos’s positions, but in practice that would have been rude, so it didn’t. Credit Suisse did not extend credit to Archegos based on some defined formulaic function of the value of its collateral; Credit Suisse extended credit to Archegos based on some fuzzy holistic relationship-based function of how much business it hoped to do with Archegos, how much the Credit Suisse people liked the Archegos people, how its traders felt about the collateral, when its risk committees had meetings, stuff like that.
Credit Suisse may thought it was rude, may have been thinking about maintaining the relationship long term or may have suspected liquidating the assets would net it less than what was owed with no recourse for the other part.
In the meantime, Goldman went ahead and liquidated Archego's position.
That old saw is evergreen: If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.
Not really true, collateral is decided at the end of the day and not mid day.
You aren't liquidated immediately the moment your needs more liquidity.
We wait till the end of the day short of absolute emergencies.
I know Amaranth well being in Canada and Calgary specifically at the time:)
And for tradfi a typical hedge fund gets a call and is told to post more collateral and they make real efforts to allow the fund to post collateral. There is almost never an immediate liquidation as this tends to cause more trouble than it fixes, even on the CME or CBOE:)
You aren't liquidated immediately the moment your needs more liquidity.
We wait till the end of the day short of absolute emergencies.
I know Amaranth well being in Canada and Calgary specifically at the time:)
And for tradfi a typical hedge fund gets a call and is told to post more collateral and they make real efforts to allow the fund to post collateral. There is almost never an immediate liquidation as this tends to cause more trouble than it fixes, even on the CME or CBOE:)
>Not really true, collateral is decided at the end of the day and not mid day.
Ho ho ho - no it's decided as soon as your lender things that it needs to liquidate you, and if it does it will know that you're not going to be able to go to court to fight afterwards.
A lot of nasty scenes start with someone on a phone shouting "you can't do that for another 2 hours".
Yup. Yup we can.
Ho ho ho - no it's decided as soon as your lender things that it needs to liquidate you, and if it does it will know that you're not going to be able to go to court to fight afterwards.
A lot of nasty scenes start with someone on a phone shouting "you can't do that for another 2 hours".
Yup. Yup we can.
You write this comment as if you regularly liquidate people. Is this something you've done a lot?
Someone responded and deleted a comment that this isn't how it works. I guess I'll never know.
Especially when one of the main reasons for needing to post more collateral isn't necessarily that your position is underwater but rather volatility has picked up and risk needs to be brought down. This happens because futures especially trade with very high leverage.
Also generally the amount of collateral that needs to be posted is in the millions of USD so people tend to understand that isn't instant, especially if those funds are currently in money market funds or bonds held elsewhere.
Also generally the amount of collateral that needs to be posted is in the millions of USD so people tend to understand that isn't instant, especially if those funds are currently in money market funds or bonds held elsewhere.
>> Not really true, collateral is decided at the end of the day and not mid day.
Depends on your CSA (Credit Service Annex/Agreement) and what the joint agreement was. Also depends on the type of position (daily settled via exchange vs contractual)
Depends on your CSA (Credit Service Annex/Agreement) and what the joint agreement was. Also depends on the type of position (daily settled via exchange vs contractual)
> You don't have to take my word for this. Look up the history of what happened to the energy hedge fund Amaranth.
Amaranths positions were sold to Citadel and JP to wind down gently. That's pretty different from forced liquidation at the exchange.
Amaranths positions were sold to Citadel and JP to wind down gently. That's pretty different from forced liquidation at the exchange.
CME, the exchange, is not the one closing on you.
Your prime brokerage is.
https://www.investopedia.com/terms/p/primebrokerage.asp
Your prime brokerage is.
https://www.investopedia.com/terms/p/primebrokerage.asp
Of course, crypto didn't invent margin trading. I think the OP was referring to central counterparty clearing, which typically provides an additional layer of insurance against defaults.
As per Matt Levine:
...The way the traditional system works is that if you have a margin loan, and the value of your collateral declines, your broker calls you up and says “hey we need more collateral,” and you either post more collateral and it’s fine, or you don’t post more collateral and your broker liquidates your position. Or sometimes you say something like “hang on I’ve got another call, I’ll call you back after lunch,” or “sorry I don’t have the money right now but I am a good customer and you know I’m good for it,” or “I don’t have the money right now but I’m pretty sure prices can only recover from here so why don’t you let it ride for a day or two,” or whatever, and you don’t post more collateral but your broker doesn’t liquidate your position because you’re a human and your broker is a human and everyone is embedded in a repeated social game with fuzzy rules
...The way the traditional system works is that if you have a margin loan, and the value of your collateral declines, your broker calls you up and says “hey we need more collateral,” and you either post more collateral and it’s fine, or you don’t post more collateral and your broker liquidates your position. Or sometimes you say something like “hang on I’ve got another call, I’ll call you back after lunch,” or “sorry I don’t have the money right now but I am a good customer and you know I’m good for it,” or “I don’t have the money right now but I’m pretty sure prices can only recover from here so why don’t you let it ride for a day or two,” or whatever, and you don’t post more collateral but your broker doesn’t liquidate your position because you’re a human and your broker is a human and everyone is embedded in a repeated social game with fuzzy rules
For every seller, there must be a buyer. With a defi "code is law" approach, if every contract automatically tries to execute a sell at the same time, the price will fall until there are enough matching buyers, and if there still aren't enough buyers when BTC hits $0.0000001 then the sell orders will just not execute. Smart contracts do not eliminate the problem of liquidity risk, they merely assume it away.
Yes. It seems not appreciated by some that price need not move continuously, but it can jump, and it can also go to zero (or if it cannot: no buyer can be found at the smallest possible positive price).
>> This is literally how traditional finance works as well.
Most recent case is that Archegos guy over-leveraged at Credit Suisse not to mention the LME or GME fiasco. The "traditional" market is rigged/bended by various individuals ALL THE TIME.
https://www.reuters.com/markets/commodities/elliott-associat...
Most recent case is that Archegos guy over-leveraged at Credit Suisse not to mention the LME or GME fiasco. The "traditional" market is rigged/bended by various individuals ALL THE TIME.
https://www.reuters.com/markets/commodities/elliott-associat...
>> I 100% guarantee you that the CME or Goldman will not let you "ride things out".
That is indeed generally the case. There are, however, monthly collateral agreements in some cases where you can ride it out for a month before getting margin called. Also, there are sometimes credit-rating based collateral calls. The most famous would be AIG's -- they eventually had margin calls of over $100B when their credit rating fell and the housing market also fell and liquidity dried up.
Funny thing in such cases -- when the borrower owes banks those sums of money, it ceases to be the borrower's issue and becomes the bank's issue
That is indeed generally the case. There are, however, monthly collateral agreements in some cases where you can ride it out for a month before getting margin called. Also, there are sometimes credit-rating based collateral calls. The most famous would be AIG's -- they eventually had margin calls of over $100B when their credit rating fell and the housing market also fell and liquidity dried up.
Funny thing in such cases -- when the borrower owes banks those sums of money, it ceases to be the borrower's issue and becomes the bank's issue
[deleted]
What follows is loose speculation, but I do not think the equilibrium price of a single bitcoin after a crash is any more likely to be $100 than $1. This is due to the anatomy of a bubble.
A belief in the long term value of cryptocurrency is very tightly correlated with ones current cryptocurrency position. The demand curve, then, for cryptocurrency, is extremely steep, and the "buy pressure" for cryptocurrency will not increase tremendously with falling prices, since the people who would generally be willing to buy at these reduced prices, have just lost their life savings.
Likewise, even the poeple who think that crypto is valuable long term know that you can't pay your taxes in it. If people don't believe that it's worth anything, then it isn't. They all know that the price falling could indicate that right this second is the most your cryptocurrency will ever be worth. The more the price drops, the more likely this is to be the case, and the more likely I am to sell. If the sell pressure is greater than the buy presssure at some price, then it is very likely to be the case at every lower price, resulting in catastrophic collapse.
This inversion event is more likely the longer the asset has remained in bubble status, since the optimism proportion of the inflated asset is strictly increasing with price.
A belief in the long term value of cryptocurrency is very tightly correlated with ones current cryptocurrency position. The demand curve, then, for cryptocurrency, is extremely steep, and the "buy pressure" for cryptocurrency will not increase tremendously with falling prices, since the people who would generally be willing to buy at these reduced prices, have just lost their life savings.
Likewise, even the poeple who think that crypto is valuable long term know that you can't pay your taxes in it. If people don't believe that it's worth anything, then it isn't. They all know that the price falling could indicate that right this second is the most your cryptocurrency will ever be worth. The more the price drops, the more likely this is to be the case, and the more likely I am to sell. If the sell pressure is greater than the buy presssure at some price, then it is very likely to be the case at every lower price, resulting in catastrophic collapse.
This inversion event is more likely the longer the asset has remained in bubble status, since the optimism proportion of the inflated asset is strictly increasing with price.
Guess that’s the difference between a bubble and spike?
But this IS traditional finance, in a very key sense: the money loaned to 3AC was NOT done using defi. When I have collateral I loan out using actual-defi the liquidation rules are transparent and the holdings are transparent and if something starts crashing I get to cause the liquidation before all of my money just disappears into a black hole of people lying to me. That 3AC then took their traditionally-loaned money and did something dumb with it involving crypto is not an argument that defi is broken but that people shouldn't be using tradfi: what is stupid here was people trusting 3AC instead of using their own tooling (a problem that I fully admit is so endemic in the cryptocurrency industry that I have to CONSTANTLY complain to my own business partners that our using Coinbase Custody to hold any of our currency is flat out embarrassing).
>$5,000 BTC and $200 ETH are in site if Tether starts to fail.
IMO, pre-2017 prices for BTC (<$1000) returning is inevitable. If Tether fails, then pre-2014 prices (<$100) are more likely. BTC was at $5K a little over 2 years ago, anyone who thinks the bottom is at that level is deluding themselves.
IMO, pre-2017 prices for BTC (<$1000) returning is inevitable. If Tether fails, then pre-2014 prices (<$100) are more likely. BTC was at $5K a little over 2 years ago, anyone who thinks the bottom is at that level is deluding themselves.
You could be a millionaire if you are right.
You can be right and still go broke shorting something. "The market can stay irrational longer than you can stay solvent." And shorting crypto has additional challenges beyond shorting traditional securities.
I'll take that bet. I say BTC doesn't breach $5,000 in the next 18 months.
What do you want to bet?
What do you want to bet?
Take increasing risks in search for higher yield? Check
Leveraged trading to ratchet up profits? Check
Margin called when the risky bet doesn't pay off? Check
Counter party risk? Check
Contagion + domino effect? Check
Fire sale of decent quality assets putting down pressure on its prices thus hurting the whole ecosystem? CheckWhat's the counterparty risk?
A bunch of crypto fintechs had lent to 3AC are in a spot of bother.
https://www.ft.com/content/126d8b02-f06a-4fd9-a57b-9f4ceab3d...
https://www.ft.com/content/126d8b02-f06a-4fd9-a57b-9f4ceab3d...
And 3AC led bunch of crypto seed rounds. They then offered them 8-10% APR to hold their treasuries. Now, I believe they've been ghosted.
It's interesting to watch Tether's market cap decrease in this downturn - presumably as more and more Tether is redeemed by major holders. The question is: how much liquidity does Tether have to fund these redemptions? Is it 20B? 50B? Maybe it is fully-backed?
>> TradFi normally solves this by having a firm have oversite on everyones positions and have everyone pay money into a pot to help bail out failed counterparties so they don't spill over to other firms.
I'm curious -- in traditional finance, there are often daily collateral settlements which force both parties to change collateral based on valuations shifts by way of the exchange. is there such a concept in crypto? Wouldnt this resolve a lot of the issues you're speaking about?
I'm curious -- in traditional finance, there are often daily collateral settlements which force both parties to change collateral based on valuations shifts by way of the exchange. is there such a concept in crypto? Wouldnt this resolve a lot of the issues you're speaking about?
> tend to make things worse by turning firms into forced sellers when they may have been able to ride things out
What do you mean, may have been able to ride things out? They owe money they don't have...
Oh, you mean, if you wait long enough crypto might come back up and they're solvent again? Right, after they lost more than they had on the first bet, you wanna let them bet again that it might come back up?
What do you mean, may have been able to ride things out? They owe money they don't have...
Oh, you mean, if you wait long enough crypto might come back up and they're solvent again? Right, after they lost more than they had on the first bet, you wanna let them bet again that it might come back up?
There are plenty of firms that run full reserve and are not subject to this contagion.
Good to know,
Who are these fully capitalized crypto firms?
Who are these fully capitalized crypto firms?
Good question. Finding that out would take a lot of on-chain analysis.
I have no love for these firms so I really don't care if they are solvent. For those that took major risks with leverage and mismatched their risk on duration, let them fail. Some in this thread seem to be saying that having humans involved in liquidations is preferable because it prevents contagion. To me, that sounds like letting someone get away with bad decision-making and safe-guarding them against the previously defined consequences. Sounds like the same kind of philosophy that makes some firms in traditional finance "too big to fail." This kind of thinking kicks the can down the road instead of addressing the problem and feeling the pain now.
I say liquidate them. Maybe that's easy for me to say because my only exposure has been through defi protocols that I interact with directly and with risks that I've considered. These Cefi companies take retail money, use it to take risky positions in defi, then take a large cut of the profits. Works great until a market downturn and people start asking for the their Eth back and, whoops, we don't have access to it until 6M+ post-merge (Celcius). That's called piss-poor risk management and I don't want these kinds of actors in the market long-term. I feel bad for the retail that is getting screwed in all this but in the end, we need regulators / DOJ to come down very hard on these companies. If we clean house now, the space will be stronger in the future. Yes it will be painful in the short term.
I have no love for these firms so I really don't care if they are solvent. For those that took major risks with leverage and mismatched their risk on duration, let them fail. Some in this thread seem to be saying that having humans involved in liquidations is preferable because it prevents contagion. To me, that sounds like letting someone get away with bad decision-making and safe-guarding them against the previously defined consequences. Sounds like the same kind of philosophy that makes some firms in traditional finance "too big to fail." This kind of thinking kicks the can down the road instead of addressing the problem and feeling the pain now.
I say liquidate them. Maybe that's easy for me to say because my only exposure has been through defi protocols that I interact with directly and with risks that I've considered. These Cefi companies take retail money, use it to take risky positions in defi, then take a large cut of the profits. Works great until a market downturn and people start asking for the their Eth back and, whoops, we don't have access to it until 6M+ post-merge (Celcius). That's called piss-poor risk management and I don't want these kinds of actors in the market long-term. I feel bad for the retail that is getting screwed in all this but in the end, we need regulators / DOJ to come down very hard on these companies. If we clean house now, the space will be stronger in the future. Yes it will be painful in the short term.
> Tehter has lent money to almost all these firms
Do you have a source for this?
Do you have a source for this?
Yep the Tether Papers from Protos. [1] On-chain analysis which accounts for 70% of all Tether issuances.
[1] https://protos.com/tether-papers-crypto-stablecoin-usdt-inve...
[1] https://protos.com/tether-papers-crypto-stablecoin-usdt-inve...
https://assets.ctfassets.net/vyse88cgwfbl/1np5dpcwuHrWJ4AgUg...
The points you're looking for:
> Secured Loans (none to affiliated entities) $3,149,732,368
> Other Investments (including digital tokens) $4,959,634,446
The points you're looking for:
> Secured Loans (none to affiliated entities) $3,149,732,368
> Other Investments (including digital tokens) $4,959,634,446
Your link is to an attestation, not an audit, and it was performed by a company in the Cayman Islands that changed its name and is still under investigation by the United Kingdom government
https://www.coindesk.com/markets/2022/01/26/tethers-new-acco...
https://www.coindesk.com/markets/2022/01/26/tethers-new-acco...
It is, but it still shows that tether invested multiple billions in digital assets and other bullcrap. I hope those were not margin loans for leveraged positions.
Hopefully you can link to Tether's audit?
???
???
There is no audit. That's why they produced that bullshit attestation.
Tether has been saying they would produce an audit since July 2021, that's a year ago!
https://www.cnbc.com/2022/05/17/tether-usdt-redemptions-fuel...
This is long but fascinating. Tether is a scam, it just hasn't fallen apart yet.
https://crypto-anonymous-2021.medium.com/the-bit-short-insid...
Tether has been saying they would produce an audit since July 2021, that's a year ago!
https://www.cnbc.com/2022/05/17/tether-usdt-redemptions-fuel...
This is long but fascinating. Tether is a scam, it just hasn't fallen apart yet.
https://crypto-anonymous-2021.medium.com/the-bit-short-insid...
They have never been audited. They only ever published attentions.
> Defi is about to find out how hard it is to make money when no one wants to stake.
I have often described DeFi as Decentralized 2008.
I have often described DeFi as Decentralized 2008.
Can you explain what you mean by crypto's forced liquidation rules? Not familiar with how that works at all.
As the other comment says, liquidation in tradfi has manual intervention - the loans will say things like "IF the collateral mark-to-market value drops below $X, the lender MAY call the loan and force sale of the collateral" - the key being the IF.
In a case where there's contagion [549] the banks or even the government can work to negotiate what's happening, and slow down the collapse (or even prevent it) - an example being the subprime mortgage backed securities which got to the point that nobody knew how to value them, so the government bought them all (and eventually actually "made" money by riding it out).
DEFI has algorithms that lock up the capital and will automatically liquidate it if certain parameters are met - which others can use to "attack" it - if the oracle sees bitcoin fall below $20k in a flash crash, it triggers the selling of ten thousand coins, say, which floods the price down further, you snap them up, the crash is over, you slowly sell at $25k or whatever. Bitcoin itself is pretty resistant to this, but the other coins, not so much, especially the side coins.
As a side note, most US home loans do NOT have a "call" clause and the bank can only initiate liquidation after you've missed payments and gone delinquent for a certain number of days; this was instituted in the US after calling mortgages contributed to the Great Depression. Some business loans can be called after a period of time for any reason (usually, interest rates have gone up).
[549]: https://en.wikipedia.org/wiki/Financial_contagion
In a case where there's contagion [549] the banks or even the government can work to negotiate what's happening, and slow down the collapse (or even prevent it) - an example being the subprime mortgage backed securities which got to the point that nobody knew how to value them, so the government bought them all (and eventually actually "made" money by riding it out).
DEFI has algorithms that lock up the capital and will automatically liquidate it if certain parameters are met - which others can use to "attack" it - if the oracle sees bitcoin fall below $20k in a flash crash, it triggers the selling of ten thousand coins, say, which floods the price down further, you snap them up, the crash is over, you slowly sell at $25k or whatever. Bitcoin itself is pretty resistant to this, but the other coins, not so much, especially the side coins.
As a side note, most US home loans do NOT have a "call" clause and the bank can only initiate liquidation after you've missed payments and gone delinquent for a certain number of days; this was instituted in the US after calling mortgages contributed to the Great Depression. Some business loans can be called after a period of time for any reason (usually, interest rates have gone up).
[549]: https://en.wikipedia.org/wiki/Financial_contagion
When you get margin called in traditional/centralized finance, humans intervene and liquidation is not immediate (except Interactive Brokers, who are closer to how crypto manages margin, and will liquidate you without a margin call). Maybe you put up more collateral, maybe you borrow from a line of credit, there is a buffer. As an individual, you work with your broker. As a larger participant, you work with the clearinghouse (of meme stock fame).
In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable. This is why traditional finance doesn’t take seriously the idea of immediate settlement, and why end of day settlement is as good as it’ll get.
In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable. This is why traditional finance doesn’t take seriously the idea of immediate settlement, and why end of day settlement is as good as it’ll get.
> In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable.
Is auto-liquidation a bad thing? It leads to more volatility in the short-term, but it seems that there might be long-term benefits of ensuring that players with unresponsible business practices will be forced out of the market.
"Traditional" crypto holders will be affected too (the value of their investment goes down while people are forced to sell), but this looks more like a temporary impact. As long as they don't trade on margin they won't be forced to sell and as long as they hold their own keys they are unaffected if exchanges are crashing.
From a "price" perspective the current events might be bad for the crypto ecosystem, but from a "health" perspective I think that they could be positive, as only the responsible players with healthy business practices are going to survive.
Is auto-liquidation a bad thing? It leads to more volatility in the short-term, but it seems that there might be long-term benefits of ensuring that players with unresponsible business practices will be forced out of the market.
"Traditional" crypto holders will be affected too (the value of their investment goes down while people are forced to sell), but this looks more like a temporary impact. As long as they don't trade on margin they won't be forced to sell and as long as they hold their own keys they are unaffected if exchanges are crashing.
From a "price" perspective the current events might be bad for the crypto ecosystem, but from a "health" perspective I think that they could be positive, as only the responsible players with healthy business practices are going to survive.
The concern is propagation. If margin calls blow up individual organizations or institutions, that's bad but not a fundamental threat. The issue is that things are connected.
But it's only an issues for other connected entities when they are using risky business practices themselves.
A stablecoin that backs its assets in the currency that the stablecoin issues (for example a USD-based stablecoin that is backed by US treasuries) won't be affected by any disruption in the market. An exchange that is fully backed and does not allow margin trading won't be affected either. Regular holders who hold their own coins or use responsible exchanges also aren't affected.
Yes - there's quite a bit of propagation. But all entities affected by that propagation didn't seem to have proper risk management and used business practices that work well when the market does well, but that fall apart in case of high volatility. Maybe I'm just biased because I'm not a fan of margin trading (and similar practices), but I don't consider it a disadvantage if an ecosystem is hostile to those types of business practices.
A stablecoin that backs its assets in the currency that the stablecoin issues (for example a USD-based stablecoin that is backed by US treasuries) won't be affected by any disruption in the market. An exchange that is fully backed and does not allow margin trading won't be affected either. Regular holders who hold their own coins or use responsible exchanges also aren't affected.
Yes - there's quite a bit of propagation. But all entities affected by that propagation didn't seem to have proper risk management and used business practices that work well when the market does well, but that fall apart in case of high volatility. Maybe I'm just biased because I'm not a fan of margin trading (and similar practices), but I don't consider it a disadvantage if an ecosystem is hostile to those types of business practices.
The process by which you create a bubble is when you create mechanisms to ship risk as far away from the people who are knowledgeable about it as possible.
The core might all be completely self-deluded or intentional scammers, but the second-degree people who invested/loaned to them intended to some degree to take a bit less risk than being directly involved in the scam, the third-degree people who rely on the second-degree people thought they were allowing a little innovation instead of missing out by playing it too safe, the fourth-degree people aren't even aware that they're invested in the core scam or delusion at all, and make fun of it online. There's a fifth-degree of people who have no idea that whether they eat depends on the scam (because the fourth-degree was a municipal bond issue, the city is now drowning in liabilities, so they had to cut food banks.)
edit: The most recent crypto peak was largely fueled by a ton of normies who put their retirements into something that has gone down somewhere between 40% and 70% in value since they bought it. Other people depend on those people.
The core might all be completely self-deluded or intentional scammers, but the second-degree people who invested/loaned to them intended to some degree to take a bit less risk than being directly involved in the scam, the third-degree people who rely on the second-degree people thought they were allowing a little innovation instead of missing out by playing it too safe, the fourth-degree people aren't even aware that they're invested in the core scam or delusion at all, and make fun of it online. There's a fifth-degree of people who have no idea that whether they eat depends on the scam (because the fourth-degree was a municipal bond issue, the city is now drowning in liabilities, so they had to cut food banks.)
edit: The most recent crypto peak was largely fueled by a ton of normies who put their retirements into something that has gone down somewhere between 40% and 70% in value since they bought it. Other people depend on those people.
>But it's only an issues for other connected entities when they are using risky business practices themselves.
I think that's the thrust of the argument. We're about to find out how many DeFi companies are utilizing bad business practices.
I think that's the thrust of the argument. We're about to find out how many DeFi companies are utilizing bad business practices.
[deleted]
> Is auto-liquidation a bad thing?
Not if you pretend everyone is an island and economies aren't interconnected.
Not if you pretend everyone is an island and economies aren't interconnected.
Say you have 100 USD, but want to make a bigger bet on crypto than that. You borrow another 900 USD from a crypto lender and invest the 1000 USD in some cryptocurrency. If the currency you invested in goes down by 10%, your original position of 1000 USD will be worth 900 USD, and you will still owe the lender 900 USD so your original 100 USD stake has been lost completely. The lender will then protect their loan by forcing you to sell the 900 USD in crypto that you still have and repaying the loan. This is in itself not unique to crypto (google the term "margin call" if you want to know more), but crypto is usually more automated about it and exchanges will sell positions without manual intervention. This sell pressure can push the coin even lower, leading to a chain reaction of liquidated positions.
Often, the lender is also the exchange through which people hold their crypto so they don't even have to contact the holder before they sell their holdings.
Often, the lender is also the exchange through which people hold their crypto so they don't even have to contact the holder before they sell their holdings.
Two things to add:
1. The price of an asset need not be a nice continuous line. It can jump.
2. That's why liquidation occurs not at -10%, but at some point before that, to manage this gap risk. Might be at -7%, or whatever. This reduces, but does not eliminate gap risk. For that, the crypto exchanges have insurance funds.
1. The price of an asset need not be a nice continuous line. It can jump.
2. That's why liquidation occurs not at -10%, but at some point before that, to manage this gap risk. Might be at -7%, or whatever. This reduces, but does not eliminate gap risk. For that, the crypto exchanges have insurance funds.
Here's a concrete example. AAVE is a protocol that allows lenders to lend money to borrowers in a decentralized manner.
So as a borrower, today, if you were to borrower 8000 USDC and deposit 10 ETH as collateral, the AAVE protocol would automatically sell your collateral if the ETH price went to 941$. So your position is "auto liquidated". https://aavecalculator.com/
AAVE currently has ~$9.9B in assets locked into its protocol.
So as a borrower, today, if you were to borrower 8000 USDC and deposit 10 ETH as collateral, the AAVE protocol would automatically sell your collateral if the ETH price went to 941$. So your position is "auto liquidated". https://aavecalculator.com/
AAVE currently has ~$9.9B in assets locked into its protocol.
That no different from any margin loan
It is no different at all. However, in traditional finance that is called a "margin loan" in defi it is called a "crypto interest account paying 20% with 0 chance of losing all your money"
Who in their right mind would say that a collateralized borrow has 0 chance of losing money? That's the whole point of requiring collateral
Somewhat, look at toomuchtodo's comment. In tradfi, there are humans involved and you might be able to avert liquidation.
To be clear, there are humans involved if the amounts are large enough - if you're playing with stocks and margin in your brokerage account it'll probably liquidate automatically, but even when I got a "margin call" by accident they gave me three days to resolve it before liquidation would happen.
Part of it depends on what the margin is used for - margin for VTX is going to be handled differently than forex margin.
Part of it depends on what the margin is used for - margin for VTX is going to be handled differently than forex margin.
Yes it is. In traditional finance, especially at the big players, the bank will call the person about to be margin called to tell them they need to post more collateral, or if it looks like the market is being manipulated they’ll let the loan be undercollateralized for a short time. Defi auto liquidation makes it much easier to spiral due to unwinding after small losses.
Not sure if that's what parent is about, but the reference may be to on-chain lending solutions that use price oracles to determine liquidation prices based on amount of collateral deployed.
There are 9-digit lending positions in $ of crypto collateral that will be forcefully sold into the market if BTC/ETH keep dropping. Unless more collateral will be deployed, which lowers the forced liquidation price.
There are 9-digit lending positions in $ of crypto collateral that will be forcefully sold into the market if BTC/ETH keep dropping. Unless more collateral will be deployed, which lowers the forced liquidation price.
DeFi - Contracts are code.
TradFi - Your word is your bond.
TradFi - Your word is your bond.
This !
The "idea" of Defi was that w wouldn't need "regulations and rules" since we could 'just' look at the actual deployed code(eth contract for example) to see if you going to get screwed.
Of course few ppl actually look at the code, or sometimes the code is just bad and you get bad actors willing to exploit this.
That being said: In practice and real life there are a bunch of dodgy companies and badly written eth-contracts(code).
Of course few ppl actually look at the code, or sometimes the code is just bad and you get bad actors willing to exploit this.
That being said: In practice and real life there are a bunch of dodgy companies and badly written eth-contracts(code).
I suspect most experienced software engineers would find that all rather obvious. Bugs are a fact of life. Even formal verification can't save you from this. Good software is built to be resilient to our own bugs, because they are simply inevitable. It's not about good or bad programming, every one has the ability to make a simple mistake resulting in huge consequences. It's basically a rite of passage to have crashed a service with a code push.
I was more pointing to the fact/class of bugs we don't even know are bugs yet, like "re-entrant" bugs for eth.(logic bugs ?) The cost of having a bug in an eth contract is many many times higher than say a wordpress site getting hacked ! Or having a bug in your online-design tool.
I've seen many a times, "business ppl" just go with lowest cost when wanting some software done. Try going for the "lowest cost bidder" when getting a web3 contract coded !
You right, bugs do and always will exists and we are all but human, but some bugs have a much higher cost than other - even if they are simpler.
I've seen many a times, "business ppl" just go with lowest cost when wanting some software done. Try going for the "lowest cost bidder" when getting a web3 contract coded !
You right, bugs do and always will exists and we are all but human, but some bugs have a much higher cost than other - even if they are simpler.
Congratulations you are the 1 millionth person on Hacker News to say "speed run the history of traditional finance"
Congratulations! You are the seventh person on HN to say the words "speed run" and "finance" in the same comment :o )
https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
Umm, thanks?
Would love to see a citation on this.
I don't understand why everything needs a citation on every comment on the internet. Imagine you're at lunch with a coworker and they say this.
We go, "Wow, that's pretty interesting. Hope it doesn't happen" and we continue to eat our soup.
I enjoy reading stuff like this without the need for them to publish a study.
We go, "Wow, that's pretty interesting. Hope it doesn't happen" and we continue to eat our soup.
I enjoy reading stuff like this without the need for them to publish a study.
Sure, on what specifically?
A nice narrative that falls apart when you remember LTCM, Archegos, etc. I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe.
LTCM was bailed out with government (Fed) coordination. Archegos was only survivable because it was in a huge bull market and the losses were just a few billions dollars which was possible to be absorbed by the big banks.
> I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe.
Because they don't. Because it's a wild west. TradFi has it's failures as well - but that's "whataboutism".
DeFi is collapsing in real time and we'll probably see oversight and regulation around this in the near future.
Because they don't. Because it's a wild west. TradFi has it's failures as well - but that's "whataboutism".
DeFi is collapsing in real time and we'll probably see oversight and regulation around this in the near future.
>DeFi is collapsing in real time and we'll probably see oversight and regulation around this in the near future.
From the perspective of people who support the mission of DeFi and aren't just in it for the money, this is a feature, not a bug. We want these dodgy, extractive institutions to go under and not have to bail them out.
From the perspective of people who support the mission of DeFi and aren't just in it for the money, this is a feature, not a bug. We want these dodgy, extractive institutions to go under and not have to bail them out.
Unfortunately, large defi institutions have been advertising to retail investors. Many of whom have not just had a haircut, but their whole head shaved.
Government regulation of retail finance is a feature, not a bug.
Government regulation of retail finance is a feature, not a bug.
>Government regulation of retail finance is a feature, not a bug.
It's not a bug unless you believe adults should be treated like children and not be able to take the risks they desire or face the consequences of those risks. Anyone investing in DeFi should absolutely have known the risks; it doesn't justify giving the government even more power over people's finances.
It's not a bug unless you believe adults should be treated like children and not be able to take the risks they desire or face the consequences of those risks. Anyone investing in DeFi should absolutely have known the risks; it doesn't justify giving the government even more power over people's finances.
Without regulation, financial systems follow a predictable boom/bust cycle, and in the "bust" phase, there's not much that any individual can do to avoid getting wiped out by cascades of counterparty default.
So, the only reasonable move for an individual is, simply don't participate in the system in the first place, keep your money in the mattress. (Crypto equivalent: hold your own coins).
The problem is, credit actually creates real economic growth. A society that encourages credit via regulation will outcompete a society that leaves it to an unregulated marketplace (and thus disincentivizes individuals from participating).
So, the only reasonable move for an individual is, simply don't participate in the system in the first place, keep your money in the mattress. (Crypto equivalent: hold your own coins).
The problem is, credit actually creates real economic growth. A society that encourages credit via regulation will outcompete a society that leaves it to an unregulated marketplace (and thus disincentivizes individuals from participating).
Go on reddit and you will see a lot of people who invested thousands or even hundreds of thousands of dollars in terra/luna, celsius, and various other crypto companies. There have been suicide help lines posted at the top of many of these forums.
Are these people adults? Yeah. Should they know better? Yeah.
The question is should we do anything about it? The Super Bowl is the most watched television event every year and there were lots of crypto ads this year. Do people need to be protected from themselves?
We have regulate the traditional financial industry. We put warnings labels on cigarettes. My view is that we need even more regulation of the traditional finance industry and apply those same regulations to crypto.
Are these people adults? Yeah. Should they know better? Yeah.
The question is should we do anything about it? The Super Bowl is the most watched television event every year and there were lots of crypto ads this year. Do people need to be protected from themselves?
We have regulate the traditional financial industry. We put warnings labels on cigarettes. My view is that we need even more regulation of the traditional finance industry and apply those same regulations to crypto.
[deleted]
I definitely see where you're coming from regarding allowing adults to make their own mistakes, but that's the point of regulation. This isn't an entirely free market.
I've met enough people to be confident that adults should sometimes be treated like children.
In the end you both only get one vote.
What about driving licenses? Are you against those too? Is there any regulation at all that can't be criticised under the grounds that adults should not be treated like children?
Is this mostly caused by people coming to grips with the fact that "crypto" is entirely speculative with no actual value?
"TradFi" at least has a real floor because "real" money (as in: currency that can be exchanged for goods and services) and "real" investments (as in: shares of companies that provide goods/services) do actually exist. Even if significant portions of the market are driven by speculation.
Are we reaching the point where people trading crypto get bored and just... stop?
"TradFi" at least has a real floor because "real" money (as in: currency that can be exchanged for goods and services) and "real" investments (as in: shares of companies that provide goods/services) do actually exist. Even if significant portions of the market are driven by speculation.
Are we reaching the point where people trading crypto get bored and just... stop?
The physicality of an underlying asset isn’t what makes people trade stocks, commodities, options or anything else. If you’re day trading soybean futures, it’s not the ideal of soybeans that wakes you up in the morning. It’s the money you could make. Bitcoin is a unique speculative asset because it’s value is based entirely on human interest, nothing else. I think crypto is here to stay as a speculative asset class. Where it’s long term price goes, I have no idea.
The physicality of the underlying asset does matter though. Soybeans in and of themselves have some fundamental value (food, feed) the same way oil does (fuel, plastics, etc).
There is no underlying value in having answers to a random cryptographic problem attested to you.
There is no underlying value in having answers to a random cryptographic problem attested to you.
Soybeans (and most other assets) have inherent value which gives them a price minimum, but not necessarily a price maximum. Crypto has no price minimum (0 I guess, at which point returns are incalculable) and no price maximum because it has no inherent value.
My entire point is that crypto is a unique asset class, so I think it’s here to stay as long as there are people willing to speculate.
My entire point is that crypto is a unique asset class, so I think it’s here to stay as long as there are people willing to speculate.
Soybeans exist and people consume them. Obviously you can speculate on whether the price of soy beans will go up or down but they will always (excluding, of course, obviously unreasonable scenarios) have some value because the soybeans themselves have some value.
The producers and consumers of soybeans are extremely likely to continue producing and consuming soybeans even if no one speculates on the value of soybeans. This is the "physicality" or "human interest" in soybeans.
Why would crypto be "here to stay" when there is zero use for it besides speculation?
The producers and consumers of soybeans are extremely likely to continue producing and consuming soybeans even if no one speculates on the value of soybeans. This is the "physicality" or "human interest" in soybeans.
Why would crypto be "here to stay" when there is zero use for it besides speculation?
Any service can provide value, and Bitcoin does provide value: secure peer to peer transfer of money without a third party, nearly instantly. Why do you say there is zero use case? But like any service, its users decide what it's worth and sometimes that means network effects impact the value. I'm not making an argument for how much value this is or should have, but please stop saying the value is zero. It simply isn't true.
On paper, sure. But that just is not the case in reality and probably never will be.
All kinds of speculative assets exist solely to hedge and make money on. The algorithmic traders on Wall Street aren’t trading soybeans futures because they can eat them. They’re making money. If people see price fluctuations in anything, and I mean literally anything, there will be people trying to capture those alphas.
I should also point out I’m not bullish on crypto. I just acknowledge it’s unique asset class, and I don’t think it’ll just disappear.
I should also point out I’m not bullish on crypto. I just acknowledge it’s unique asset class, and I don’t think it’ll just disappear.
I understand that speculative trading exists.
I'm saying people will continue to speculate on soybeans because they will always have some value.
With a purely speculative asset, the market will eventually run out of "bigger fools". At that point, any speculative trader will look at the asset and say "Why would I pay more for this than the 0 dollars it is worth?"
I'm saying people will continue to speculate on soybeans because they will always have some value.
With a purely speculative asset, the market will eventually run out of "bigger fools". At that point, any speculative trader will look at the asset and say "Why would I pay more for this than the 0 dollars it is worth?"
Those "shares in companies" or stock makes you part owner. As part owner you may get a share of the profits in the form of dividends and voting rights.
When you buy stock in a company whether is in during an IPO or new issue of stock that money is used to hire employees or build a new factory and make even more profit. That can increase your dividend and make the stock go higher. The same thing can happen when you buy the stock on the open market but the connection isn't as direct. Companies with good stock performance are able to attract better employees which will increase their profits which benefits the stock holder.
None of this happens when you buy bitcoin or ethereum. Some crypto exchanges make up their own crypto currency and offer high interest rates on those but as we are seeing most of those are turning out to be scams.
When you buy stock in a company whether is in during an IPO or new issue of stock that money is used to hire employees or build a new factory and make even more profit. That can increase your dividend and make the stock go higher. The same thing can happen when you buy the stock on the open market but the connection isn't as direct. Companies with good stock performance are able to attract better employees which will increase their profits which benefits the stock holder.
None of this happens when you buy bitcoin or ethereum. Some crypto exchanges make up their own crypto currency and offer high interest rates on those but as we are seeing most of those are turning out to be scams.
As long as people have a way to potentially get rich with little to no 'real work', they won't stop.
Sure. Speculation certainly will continue and real money will continue to change hands.
But are we at least done pretending that crypto currency (at least, as it exists now) will ever have any practical purpose beyond being a fungible entity upon which gamblers speculate?
But are we at least done pretending that crypto currency (at least, as it exists now) will ever have any practical purpose beyond being a fungible entity upon which gamblers speculate?
> But are we at least done pretending that crypto currency (at least, as it exists now) will ever have any practical purpose beyond being a fungible entity upon which gamblers speculate?
No, I don't think that's happened yet. I still know tons of people excited to build for "web3".
I don't think we need "rich" websites with javascript, "smart" phones in everyone's pocket, or "social media" at all.
But those all happened, and it seems to be a lot of the same vibe for "web3" builders right now.
No, I don't think that's happened yet. I still know tons of people excited to build for "web3".
I don't think we need "rich" websites with javascript, "smart" phones in everyone's pocket, or "social media" at all.
But those all happened, and it seems to be a lot of the same vibe for "web3" builders right now.
It's difficult to get a clear picture of what exactly people think "web3" is. My general experience is that people who are caught up in web3 hype seem to actually just want simpler self-hosted/distributed resource redundancy.
To me it seems that way. With the bond market being so low, it seemed as though there was a lot of cash looking for some sort of outlet. All that was necessary was misleading hype and marketing.
"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"
In case the relevance isn't clear, this is a headline that was inserted into the Bitcoin origin block, presumably to prove that it hadn't been mined before that date. However, the specific headline chosen is often interpreted as an implicit jab at conventional finance by Satoshi Nakamoto.
I wonder what Satoshi would think of Tether, or crypto-firms like Blockstream.
And now, we see the biggest irony in thinking this was bad
It was not a bailout for banks, it was for their account holders.
It was not a bailout for banks, it was for their account holders.
The private sector will have to arrange any acquisition of distressed assets or they will fail and people will get hurt. Lenders will harden and be better equipped for the future. This IMO is a good thing - there is no one to save anyone and the market will deal with the consequences. I don't care about the impact on prices. Drive the weak players out and let the strong survive.
I think you'll change your tune on this when too many firms fail at once and this becomes a systemic issue.
what firms are going to survive this, seems like everyone is being hit hard
Plenty of firms and trading shops will survive. Not everyone was a total YOLO degen with billions of dollars.
Most trading firms will survive this atleast. Many are pretty prudent, especially the ones that are only managing their own money (prop shops).
FTX, KuCoin, Coinbase, more.
Haven't met a single person who liked or respected 3ac and the founders (Su Zhu and Kyle Davies). Not only was their investment strategy incredibly irresponsible, but their business conduct was consistently shady.
Good riddance.
PS: don't really think 3ac behavior is representative of crypto trading firms as a whole (Wintermute, Jump etc). A lot of them are highly professional and responsible operations who have weathered the storm just fine and in many cases, have generated nice pnl during this event.
Good riddance.
PS: don't really think 3ac behavior is representative of crypto trading firms as a whole (Wintermute, Jump etc). A lot of them are highly professional and responsible operations who have weathered the storm just fine and in many cases, have generated nice pnl during this event.
I remember when they invested in Axie Infinity when it was still sub $5. they must have made bank when it shot up to $150. The token is now back at $13.
>Firm’s founders say they still believe in the future of cryptocurrencies.
How the fuck is this the subtitle? The firm's founders saying they believe this is evidence of nothing. A responsible journalist would not include it at all. It is journalistic malpractice to make it the subtitle.
How the fuck is this the subtitle? The firm's founders saying they believe this is evidence of nothing. A responsible journalist would not include it at all. It is journalistic malpractice to make it the subtitle.