The big short inside cryptos doomsday machine

As long time Bitcoiners, we are not shocked by the ongoing confusion around the nature of the bitcoin market. The reality is that, unlike other public markets, the bitcoin market has significantly more noise. There is noise around price valuation, noise around use cases, noise around data and noise from skeptics. It is very difficult for a new person to enter into the bitcoin market and cut directly to the signal.

This confusion has been manifested once again in a misguided article circulating the web: “The Bit Short: Inside Crypto’s Doomsday Machine.”

It seems that the author of the now-viral Medium article has, like many others, slipped into some pretty big newbie pitfalls around bitcoin exchange data, bitcoin’s nature as black market money and, of course, fear, uncertainty and doubt (FUD) around a prominent grey market dollar solution called tether.

The big short inside crypto doomsday machine

Large amounts of money can be made that way, but the risk is colossal: if the shares rise instead of falling, or the pound increases in value against the dollar instead of devaluing, your losses can be immense. In fact, they are unlimited.

As it happens there was no mechanism to borrow mortgage-backed bonds in the years leading up to 2007.
What there was, however, was a way of insuring against them defaulting. The so-called credit default swap (CDS) meant paying a quarterly premium, against the insurer paying out the full value of any default on the bond – if the bond became worthless, the insurer paid out the face value at which it had been sold.

One can imagine that this was initially a legitimate form of insurance (though it wasn’t regulated as ordinary insurance is).

The big short inside cryptos doomsday machine reddit

I know this isn’t exactly WallStreetBets on HN but it is hack and crypto related so I wanted to run this strategy by yall. Just don’t call me DeepValue.

I rarely share investment advice unless I am 95% sure of a strategy’s EV, and in this case I would like to get your input.

It APPEARS here there is almost no risk of a serious downside, and a chance for a huge upside.

But it requires doing a bit of research to find the best exchange to trade USDT via DAI with 100x leverage, like HitBTC maybe.

The Backstory

So basically, the one big landmine that’s unexploded in the crypto space is Tether.
Tether represents the on- and off-ramp for crypto around the world outside the USA. In the USA, it’s not used due to regulations.

Their claims that tether is 70 percent of bitcoin’s legitimate trading volume is far from reality — at most, it represents between 25 percent to 35 percent of real bitcoin trading volume in a given 24-hour period.

Debunking Point Three: “Tether Issuance Must Be Fraudulent Because Of How It Is Issued”

Tether Limited, the organization behind the oldest stablecoin, only issues new tokens to partners. It makes sense that large OTC trading desks receive tether and use tether in large blocks.

This is discussed in detail in this excellent podcast with Dan Matuszewski of CMS Holding and Nic Carter of Castle Island Ventures back in 2019.

Paulo Arduino, the CTO of Tether Limited, explained the different business models used by Coinbase/Circle and Tether in issuing stablecoins in this 2019 podcast.

USDC from Coinbase has a different model than Tether Limited.

The big short inside cryptos doomsday machine-doll

Crypto was on my mind, so I asked Bob about it.

The conversation went something like this:

Me: You don’t own any crypto do you? I’m concerned some of the exchanges in the ecosystem might be fraudulent.

Bob: I actually have a whole bunch of crypto on this exchange called Bybit. Do you know if that’s one of the risky ones?

Me: I’m not sure.

Does it let you trade in USD?

Bob: No, but a lot of other exchanges don’t either.

The big short inside cryptos doomsday machined

My state of belief was something like: “Of the 70% of Tether flows into Bitcoin, some fraction is real; some fraction is real-but-illicit (e.g., buying drugs); and some fraction is pure fiction. I have no clue what the respective fractions of each are, but I do know that my personal risk threshold has been exceeded.”

I was still a bit concerned that I’d miscalculated.
Tether might yet be largely real — and if it turned out it was, I’d have missed the boat.

And then, by pure luck, I had a conversation that blew my mind.

The epiphany

I was catching up with my friend Bob (pseudonym) over video chat. I’d just sold my Bitcoin position and was nervously awaiting confirmation from my bank that my USD wire transfer out of the exchange had cleared.

The big short inside cryptos doomsday machines

Saylor a décidé d’investir en Août 2020, une grande partie de sa trésorerie dans le Bitcoin.

C’est une stratégie périlleuse, qui pourrait bien se retourner contre lui, comme l’a montré cet article de Trolly McTrollFace intitulé : Comment acheter du Bitcoin à 66 700 Dollars.

Un autre problème est le « potentiel intérêt » de BlackRock pour le Bitcoin, que les fans de la cryptosphère ont interprétés comme très prometteurs pour leurs investissements.

Dans les faits, ce serait plutôt le contraire. Je n’ai pas trop le temps d’élaborer. Je vous renvoie sur l’explication donnée sur le compte Twitter de CryptoWhale.

Bitcoin et un certain nombre de cryptomonnaies procèdent certainement d’une noble intention à l’origine.

If Tether was on the level, there’d be no reason for them to forego the fees on that trading pair — unless their risk and compliance departments had deemed the token too much of a liability to carry.The deep dive

By now, I was concerned that my Bitcoin position might be too risky to hold. But I still needed more evidence before I unwound such a big trade.

I had to get more context on Tether — context that was as free of marketing distortion as possible.

I found what I was looking for in the case docket for the New York OAG’s ongoing investigation of Tether Ltd.

If you’ve lent $100m to someone whose credit you believe is good, you might nonetheless want to take out some insurance against his being unable to pay you back; if someone is prepared to insure the full value for, say, two or three hundred thousand a year then the chances are that you will only be out of pocket by a small percentage of the interest you make on the loan, and usually the insurer will not have to pay out anything (just as in insurance generally: most houses don’t burn down, so the insurers turn the premiums into pure profit). You’ll have made a small reduction in your profit for peace of mind.

Until nearly the end, the Wall Street firms were so convinced of the solidity of the sub-prime mortgage market, that they were more than happy to issue large quantities of CDSs.

They were happy to insure the bonds.

Yet these systems are legal…

We would argue that this final point is the ultimate tell that the author of “The Bit Short” does not understand bitcoin from first principles. Early bitcoin investor Tyler Winklevoss synthesized Bitcoin’s value proposition quite nicely in this famous quote:

“We have elected to put our money and faith in a mathematical framework that is free of politics and human error.”

The famous Latin phrase vires in numeris, “strength in numbers” in English, is another great way to understand the Bitcoin world view.
Bitcoin was never about authority, it was always about opt-in, permissionless systems enabled by math and cryptography. For the people, by the people, the people’s money. To call for regulation means that you do not understand the Bitcoin paradigm shift.

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