[HN Gopher] Battered Crypto Hedge Fund Three Arrows Capital Cons...
___________________________________________________________________
Battered Crypto Hedge Fund Three Arrows Capital Considers Asset
Sales, Bailout
Author : uptown
Score : 119 points
Date : 2022-06-17 12:59 UTC (10 hours ago)
(HTM) web link (www.wsj.com)
(TXT) w3m dump (www.wsj.com)
| brink wrote:
| 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.
| kgwgk wrote:
| > TradFi normally solves this by having a firm have oversite
|
| > $5,000 BTC and $200 ETH are in site
|
| I think you meant to write oversight and sight.
| chollida1 wrote:
| Yikes, I did. Talk about coasting on autocomplete/correct:)
| seibelj wrote:
| 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.
| woeirua wrote:
| I think you'll change your tune on this when too many firms
| fail at once and this becomes a systemic issue.
| ausbah wrote:
| what firms are going to survive this, seems like everyone is
| being hit hard
| smabie wrote:
| Most trading firms will survive this atleast. Many are pretty
| prudent, especially the ones that are only managing their own
| money (prop shops).
| aaaaaaaaata wrote:
| FTX, KuCoin, Coinbase, more.
| seibelj wrote:
| Plenty of firms and trading shops will survive. Not everyone
| was a total YOLO degen with billions of dollars.
| carrja99 wrote:
| "The Times 03/Jan/2009 Chancellor on brink of second bailout for
| banks"
| aaaaaaaaaaab wrote:
| Ironic, isn't it?
| aaaaaaaaata wrote:
| That selfish people are drawn to money markets?
| raverbashing wrote:
| 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.
| 0xcde4c3db wrote:
| 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.
| optimalsolver wrote:
| I wonder what Satoshi would think of Tether, or crypto-firms
| like Blockstream.
| ouid wrote:
| >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.
| ipnon wrote:
| A journalist's job is to report the facts. The fact is Davies
| said he still believes. Seems like good journalism to me!
| midislack wrote:
| smabie wrote:
| 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.
| tjbiddle wrote:
| Paywall:
| https://web.archive.org/web/20220617125537/https://www.wsj.c...
| shuntress wrote:
| 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?
| lizknope wrote:
| 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.
| clpm4j wrote:
| As long as people have a way to potentially get rich with
| little to no 'real work', they won't stop.
| shuntress wrote:
| 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?
| yata69420 wrote:
| > 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.
| shuntress wrote:
| 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.
| mirntyfirty wrote:
| 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.
| CapmCrackaWaka wrote:
| 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.
| vorpalhex wrote:
| 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.
| CapmCrackaWaka wrote:
| 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.
| shuntress wrote:
| 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?
| CapmCrackaWaka wrote:
| 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.
| shuntress wrote:
| 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?"
| chollida1 wrote:
| 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.
| DebtDeflation wrote:
| >$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.
| code4life wrote:
| You could be a millionaire if you are right.
| DebtDeflation wrote:
| 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.
| saurik wrote:
| 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).
| leishman wrote:
| There are plenty of firms that run full reserve and are not
| subject to this contagion.
| chollida1 wrote:
| Good to know,
|
| Who are these fully capitalized crypto firms?
| hanklazard wrote:
| 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.
| vishnugupta wrote:
| 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? Check
| drexlspivey wrote:
| What's the counterparty risk?
| vishnugupta wrote:
| A bunch of crypto fintechs had lent to 3AC are in a spot of
| bother.
|
| https://www.ft.com/content/126d8b02-f06a-4fd9-a57b-9f4ceab3
| d...
| arcticbull wrote:
| 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.
| AlexandrB wrote:
| 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?
| TuringNYC wrote:
| >> 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?
| ouid wrote:
| 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.
| dcolkitt wrote:
| > 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.
| chollida1 wrote:
| 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:)
| jpgvm wrote:
| 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.
| TuringNYC wrote:
| >> 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)
| sgt101 wrote:
| >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.
| Judgmentality wrote:
| You write this comment as if you regularly liquidate
| people. Is this something you've done a lot?
| Judgmentality wrote:
| Someone responded and deleted a comment that this isn't
| how it works. I guess I'll never know.
| joosters wrote:
| 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_
| DebtDeflation wrote:
| 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.
| FabHK wrote:
| 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).
| airza wrote:
| 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._
| HWR_14 wrote:
| 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.
| FabHK wrote:
| In the meantime, Goldman went ahead and liquidated
| Archego's position.
| [deleted]
| lottin wrote:
| 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.
| TuringNYC wrote:
| >> 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
| worc3131 wrote:
| > 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.
| theplumber wrote:
| >> 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...
| oogali wrote:
| CME, the exchange, is not the one closing on you.
|
| Your prime brokerage is.
|
| https://www.investopedia.com/terms/p/primebrokerage.asp
| abiro wrote:
| > Tehter has lent money to almost all these firms
|
| Do you have a source for this?
| mccorrinall wrote:
| 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
| lizknope wrote:
| 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...
| sgt101 wrote:
| Hopefully you can link to Tether's audit?
|
| ???
| lizknope wrote:
| 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...
| 908087 wrote:
| dgellow wrote:
| They have never been audited. They only ever published
| attentions.
| mccorrinall wrote:
| 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.
| arcticbull wrote:
| 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...
| peyton wrote:
| 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.
| charles_kaw wrote:
| > 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.
| logicchains wrote:
| >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.
| charles_kaw wrote:
| 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.
| logicchains wrote:
| >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.
| lottin wrote:
| 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?
| lizknope wrote:
| 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.
| [deleted]
| s17n wrote:
| 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).
| xeromal wrote:
| 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.
| colinmhayes wrote:
| I've met enough people to be confident that adults should
| sometimes be treated like children.
| ipaddr wrote:
| In the end you both only get one vote.
| rr888 wrote:
| 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.
| arcticbull wrote:
| > 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.
| ryan93 wrote:
| Congratulations you are the 1 millionth person on Hacker News
| to say "speed run the history of traditional finance"
| chollida1 wrote:
| Umm, thanks?
| abathur wrote:
| 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.
| ..
| polynomial wrote:
| Can you explain what you mean by crypto's forced liquidation
| rules? Not familiar with how that works at all.
| toomuchtodo wrote:
| 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.
| gst wrote:
| > 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.
| ikiris wrote:
| > Is auto-liquidation a bad thing?
|
| Not if you pretend everyone is an island and economies
| aren't interconnected.
| UncleMeat wrote:
| 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.
| [deleted]
| gst wrote:
| 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.
| pessimizer wrote:
| 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.
| xeromal wrote:
| >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.
| pawelduda wrote:
| 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.
| bombcar wrote:
| 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
| WJW wrote:
| 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.
| FabHK wrote:
| 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.
| blitzar wrote:
| DeFi - Contracts are code.
|
| TradFi - Your word is your bond.
| rawoke083600 wrote:
| 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).
| ShamelessC wrote:
| 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.
| rawoke083600 wrote:
| 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.
| archerabi wrote:
| 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.
| djbebs wrote:
| That no different from any margin loan
| archerabi wrote:
| Somewhat, look at toomuchtodo's comment. In tradfi, there
| are humans involved and you might be able to avert
| liquidation.
| bombcar wrote:
| 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.
| blitzar wrote:
| 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"
| pcthrowaway wrote:
| 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
| colinmhayes wrote:
| 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.
| martinko wrote:
| Would _love_ to see a citation on this.
| chollida1 wrote:
| Sure, on what specifically?
| xeromal wrote:
| 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.
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