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Bitcoin

Can a Cryptocurrency Break the Buck? (bloomberg.com) 99

Posted by BeauHD from the something-to-consider dept.
An anonymous reader shares an opinion piece from Bloomberg, written by Timothy Massad: On Sept. 16, 2008, the day after Lehman Brothers filed for bankruptcy, the Reserve Primary Fund "broke the buck": Its net asset value fell below $1 per share. The fund -- often called the first money-market fund -- held $785 million of Lehman commercial paper that was suddenly worthless. Although the paper represented only 1.2% of the fund's total assets of $64.8 billion, demands for withdrawals escalated, and the fund lost two-thirds of its assets within 24 hours. This triggered a general run on money-market funds that stopped only when the U.S. Treasury issued an extraordinary guarantee of essentially all money-market fund liabilities. The episode underscored how important that $1 net asset value is to investors.

Certain cryptocurrencies known as stablecoins are today's economic equivalent of money-market funds, and in some cases their practices should have us worried that they could break the buck, creating significant damage in the broader crypto market. One such stablecoin is Tether. With a market capitalization close to $60 billion, it is almost as big as the Reserve Fund was in 2008. Each Tether token is pegged to be equivalent to $1. But, as with the Reserve Primary Fund, the true value of those tokens depends on the market value of Tether's reserves -- the portfolio of investments made with the fiat currency it receives.

Tether recently disclosed that as of March 31, only 8% of its assets were in cash, Treasury bills and "reverse repo notes." Almost 50% was in commercial paper, but no detail was provided about its quality. "Fiduciary deposits" represented 18%. Even more troubling: 10% of total assets were in "corporate bonds, funds & precious metals," almost 13% were in "secured loans (none to affiliated entities)," and the remainder in "other," which includes digital tokens. Tether separately provided a report from the accounting firm Moore Cayman stating that Tether's assets exceed "the amount required to redeem" outstanding tokens. But that report provided no description of assets. It appeared to be based solely on management's accounting, noting that Tether's policy is to use "historic cost," and that "the realizable value of these assets ... could be materially different." These facts should put holders of Tether -- and other stablecoins -- on notice that they may have trouble getting back $1 for each token. "If some of Tether's investments were to become worthless or decline in value, it would suffer the equivalent fate of breaking the buck," says Massad. "And if, for any reason, a wave of Tether holders suddenly tried to convert their tokens to cash, we do not know whether Tether could liquidate sufficient investments quickly to satisfy the demand."
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Can a Cryptocurrency Break the Buck? More

Can a Cryptocurrency Break the Buck?

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  • Basically new market with little to no controls. What could possibly happen?

  • Long answer: Nope because basically nothing in crypto right now is actually backed by anything of value and I doubt the Reserve would bother honoring the $1 system

    • Re:Short answer: no (Score:4, Informative)

      by Entrope ( 68843 ) on Tuesday June 01, 2021 @06:11PM (#61444916) Homepage

      That's not what "break the buck" means. To break the buck, an asset must have a nominal target price -- usually $1. When it breaks the buck, that means that the asset's actual market value drops below the target. It has nothing to do with the Federal Reserve or any external guarantor, only the underlying assets that back the "fixed-value" asset.

      • Re:Short answer: no (Score:5, Insightful)

        by redmid17 ( 1217076 ) on Tuesday June 01, 2021 @06:16PM (#61444948)
        Ok then. The real answer is who gives a fuck. Crypto has been 99% pump and dump scam since day one. If you're dumb enough to keep significant stakes of money in something so volatile and without an actual use, they can deal with it.
        • And this is what Tether was supposed to bring to the table... a crypto-currency that was backed by real assets and has stability... keeping money in Tether is supposed to be similar to a money market fund... and it is... except for all of the good things about money market funds.
          • Right so this was just another pump and dump scam that people bought into. Apparently the NY AG from 2019, "Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie." Cannot say this shocks me one bit
            • There's no pump and dump because Tether trades for $1 and can be redeemed for $1. Tether is a form of scrip. It's similar to buying a gift card but without the fees. Some places accept Tether for payment the same way they would a gift card. Tether can also be redeemed for cash (gift cards usually can't) so in that way, it's better. But just like a gift card, if the issuer goes bankrupt, the holder has no recourse. I don't know why Tether wouldn't make sure their currency is backed by US dollars. If s
              • It's a pump and dump because they were equal to $1 and now they are not. So people who pumped it up made out before the suckers got standing there holding the bag. That's pretty much the definition standard scenario of pump and dump.
                • Tether is worth $1. It has never sold for any other price. The total price change is zero. There's neither a pump nor a dump so it's definitely not a pump and dump. Tether (the company) continues to state that they can (and will) redeem Tether cash at the rate of $1 per Tether. What they *seem* to have done is lent out the money to affiliate companies. If those companies pay their loans, Tether Limited will make a profit and be able to redeem. If not, the owners of Tether may get nothing. Tether Limi

    • nothing in crypto right now is actually backed by anything of value

      That's not true. Any contract based by crypto is backed by whatever the contract says it's backed by. If it's an NFT then it's usually a copyright license. That intellectual property has value.

      There are also stable coins like USDC which are backed by cash deposits held in regulated banks. So every time a coin is deposited in someone's wallet, a dollar is placed in a reserve account.

      I think Bitcoin is stupid. But I do think that smart contracts based on block chain are pretty neat. Of course you need a

      • USDC no longer claims to be backed by real cash. They removed that from their web site last week. USDC is exactly like Tether now, a counterfeit money printing operation.

        • It will be interesting to see the attestation for April/May, the one for March still had all the money in FDIC insured banks. Maybe they got hacked and need to earn back the money lost?

          BUSD seems the only one now promising full dollar backing.

  • puh-leeze (Score:2, Informative)

    by sdinfoserv ( 1793266 )
    the answer is no. it won't. stop propagating these nonsense articles. Crypto has zero intrinsic value... unlike currency which is backed by Governments.

    • Re: (Score:1, Informative)

      by pbry4n ( 7208566 )
      Crypto has a shared illusion of value, just like fiat currencies and precious metals.
      • The fiat currency known as the dollar is backed by the largest military force on the planet.

        All cryptocurrencies will forever stand in the shadow of that.
        • USD has crashed before. BTC not so much.

        • The other factor besides the full faith, force and credit of the US government is the money supply of crypto and its liquidity vs the money supply of the dollar and the liquidity it provides.

          US M1 is about 19 trillion dollars these days, I think all coins combined are valued at under $1 trillion and most of that is just illusion, as any dive in the price of crypto, especially bitcoin, is likely to result in a collapse in crypto value as people dump coins for the safety of real currency. There's no real liq

      • Re: (Score:3, Informative)

        by Luthair ( 847766 )
        Currencies are the only thing required to be accepted for debt & taxes. Precious metals while overvalued are useful for their chemical properties and making shiny objects. Both of these things have value, cryptocurrencies have no inherent value or use aside from the beliefs of their cult members.
    • And Tether is *supposed* to be backed by currency... which is backed by governments... similar to how you know how things like banks work.... except that Tether isn't a bank, isn't regulated like a bank, and you might lose your money. So it's kind of like the Paypal of crypto-currency but Tether is popular because it's easy to exchange between Tether and US$ at a stable rate which makes it a reasonable way to facilitate transactions.... except of course that Tether could take your money and run.

  • A run on Tether... (Score:3, Interesting)

    by pbry4n ( 7208566 ) on Tuesday June 01, 2021 @06:14PM (#61444936)
    I think A run on Tether (or any other fractionally-reserved stablecoin) would be like a run on a bank, except stablecoins are not FDIC/CDIC insured, so I would expect its value to plummet as it fails to liquidate its assets to pay out. I have doubts government would intervene, as stepping in to stablize a cryptocurrency would not have the appearance a central bank would want to project.

    • Re: (Score:2, Informative)

      by Train0987 ( 1059246 )

      When the collapse happens it will happen quickly. Exchanges that deal in cash do not have enough of it to for everyone who wants out so they'll just go dark. The non-cash exchanges that use "stablecoins" will just freeze as BTC priced in real dollars collapses and BTC priced in UDT jumps to infinity. When the dust settles BTC will be in the $1k-$2k range, most exchanges will no longer exist and many many people will have lost everything..

    • A run on a solvent but illiquid bank can be problematic... which is why we have things (in the US) like the FDIC (and international counterparts). A run on a non-solvent bank is an entirely different problem. In the former case, the bank often takes losses in order to meet redemptions and becomes insolvent. In the latter case, the bank was already insolvent. This is why banking regulations help (even though banks that enjoy those protections whine about it). If a bank is insolvent, the government winds
  • and the first picture I get is a groups of people at the Federal Reserve and Treasury sitting around assuring themselves they can get the tooth paste back in the tube.

  • So? (Score:3)

    by Areyoukiddingme ( 1289470 ) on Tuesday June 01, 2021 @06:26PM (#61444986)

    "If some of Tether's investments were to become worthless or decline in value, it would suffer the equivalent fate of breaking the buck," says Massad. "And if, for any reason, a wave of Tether holders suddenly tried to convert their tokens to cash, we do not know whether Tether could liquidate sufficient investments quickly to satisfy the demand."

    Yes, obviously. Just like literally every other depository institution in the modern financial system. There are laws which are approaching 100 years old which allow depository institutions to stop honoring withdrawal requests for limited periods of time, specifically to deal with the fact that people are dumb, panicky animals. If there were to be a run on Tether, it would be handled exactly as runs on banks are handled today. They would stop honoring requests for fiat for some period of time, and absolutely no one should be surprised by that. Why do you think emergency stash advice includes keeping some cash? It's not because credit cards might stop working. The advice is much older than that, going back to a time when consumer credit cards were basically non-existent, and it's to deal with the possibility that your bank would close and refuse to allow withdrawals.

    Gold bugs would solve this problem by keeping their life savings in a sock, and not have banks at all. Sane people realize that, for all its faults, the modern financial system enables commerce like no other system we, as a species, have tried. Yes it requires a few extra rules to keep it stable. It's worth it.

    • Re: (Score:2)

      by pbry4n ( 7208566 )
      Agree. I guess the question is how can a government regulate a decentralized network pretending to be a depository bank? Without regulation, without depository insurance, stablecoins seem incredibly risky propositions, possibly downright toxic. They might be incredibly useful at providing liquidity in trading markets, right up until the point they fail.

    • Re: (Score:2)

      by clovis ( 4684 )

      What Areyoukiddingme makes sense, but ... Tether is not a depository institution and makes it plain they are not.
      It's just another corporation that tells you upfront that there are risks and that's on you.
      If Wall Street decide to gang up on Tether and strip it for assets, the government is very unlikely to help. That's just business.

      Regardin liquidity and runs.
      From their web site's legalese: https://tether.to/legal/ [tether.to]
      "Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such del

  • They wish they were (Score:1)

    by Anonymous Coward
    "Certain cryptocurrencies known as stablecoins are today's economic equivalent of money-market funds" No, they're not, but wouldn't it be swell if they were? For them, I mean. When they go down, the printing presses spool up and take their stupid risks away? Profit on the way up and on the way down! The only question is, who would be corrupt enough to "believe" this charade. I fucking hate this zombie economy which only stays upright because it's propped up with more imaginary money every time it starts tum

  • Seems like USDC solves this by just having 100% of their dollar backed crypto in an FDIC insured account. And they have an auditor verify that.

    e.g. https://www.centre.io/hubfs/pd... [centre.io]

    Pretty tough to break the buck on a crypto currency when it's all in cash.

    • Re: (Score:2)

      by cfalcon ( 779563 )

      No according to the article, because tether might be sketchy, this "...put(s) holders of Tether -- and other stablecoins -- on notice..."

      So because tether might be worrisome, you should carry over exactly that concern over to USDC, which has an audited account, and Dai, which is based on smart contracts.

      Similar to the envirofudsters doing the Everything Is Bitcoin, here we have a case where stablecoin fudsters are doing Everything Is Tether.

    • Re:Or just use a 1:1 cash based coin like USDC (Score:5, Informative)

      by Train0987 ( 1059246 ) on Tuesday June 01, 2021 @07:20PM (#61445138)

      USDC admitted last week they they are not backed by real cash either. They're the same as Tether. All "stablecoins" are.

      • Re: (Score:2)

        by cfalcon ( 779563 )

        A couple months ago, I remember reading something that implied that some USDC may be backed by something besides cash, but at the time none seemed to be. They do these audits every few months.

        Meanwhile, VERY recently, there was an article that talked about an audit that was running late:
        https://news.bitcoin.com/usdc-... [bitcoin.com]

        But none of this means that USDC isn't backed by dollars. Coin base says as much right here:
        https://help.coinbase.com/en/c... [coinbase.com]
        "Each USDC is 100% collateralized by a corresponding USD held in

        • Yes, they removed the "Backed by X Cash" line from that "audit" that isn't really an audit:

          https://twitter.com/Bitfinexed... [twitter.com]

          • Re: (Score:2)

            by cfalcon ( 779563 )

            They removed the attestation of USD in accounts, but they did not remove the attestation that "the US Dollars held in custody accounts are at least equal to or greater than the USDC tokens outstanding".

            If you were going off what this document and organization state, then USDC is very different from USDT, as USDC is attested to have a 1:1 dollar backing. Based on the document, literally directly below the red arrow on the twitter graphic.

            • "Attestations" are worthless. All it means is that a 3rd-party is repeating what they were told by their client. Tether has been been flat-out lying about this for the past 4 years so why wouldn't USDC, especially if it means the whole system collapses if people truly understood the truth that they're all just printing counterfeit dollars at will? USDT and USDC have printed upwards of $100 BILLION dollars out of thin air and immediately bought crypto with it, the majority in the last few months. Over 80

              • Re: (Score:2)

                by cfalcon ( 779563 )

                > "Attestations" are worthless

                The post you got modded at +5 with didn't imply that. It stated that "USDC admitted last week they they are not backed by real cash either"

                You've now changed it to (paraphrase)'I believe that USDC doesn't have the dollars that they claim to have either'(/paraphrase).

                Do you believe such a statement would have been modded to +5? The actually true version of what you said up there isn't nearly so strong a statement- that you personally believe that USDC isn't backed by dollar

                • Wouldn't it just be easier to show verifiable proof that Tether, USDC or any other stablecoin is backed by real reserves than make excuses for them? Nothing should be simpler for a true stablecoin. They wouldn't need to go out of their way to obfuscate and hide the truth, they would just show their bank accounts with X amount of dollars to match their X amount of issued stablecoin. So why don't they? Why do they instead just do the hand-wave "Trust Us!"

  • Break the what now? (Score:3)

    by Frogg ( 27033 ) on Tuesday June 01, 2021 @06:48PM (#61445060)

    Tether is only backed by ~8% cash, but there are reports that the ~50% 'commercial paper' is in fact Bitcoin. So if there's a rush to pull from Tether, would it break the buck, or would it actually put Bitcoin into a further dive? — FWIW, Tether are still under investigation by the NY Attorney General. I'm sure that will be quite revealing when it comes to a head.

    • I think a lot of the questions revolved around this and similar posts:
      https://crypto-anonymous-2021.... [medium.com]

      the tldr; is that there is a strong circular flow of funds between Tether and BTC.
      I don't know anything about anything, but reading a bit about Tether the firm really makes it seem like the future is clear. Not an if, but a when.

      • There are a lot of Tether/Bitcoin transactions because Tether is easier to convert to real money. Most investments and liquidations in BTC are done by first buying tether and then converting it to BTC. Because BTC is so volatile, nobody is going to let a purchaser have any "float" (i.e. purchases made with non-collected funds) since the asset might become worthless. Therefore, anybody who is facilitating BTC purchase and sale wants paid instantly in Tether or similar "stablecoins." I think the whole ide

  • no, but huge debts will (Score:3, Insightful)

    by WindBourne ( 631190 ) on Tuesday June 01, 2021 @08:36PM (#61445332) Journal
    It was bad enough that we suffered through reagan, 3 years of Poppa Bush, all of W's, 2 of Os, and all of trumps, massive deficit/debt increases. Now, biden is joining the GD progressive in looking like a drunken GOPer in the office. The reason why ppl TRUST(ed) the $ is that we backed it up. WIth this massive debt, our ability to back it up continues to decrease when we have to suffer the extremists wild spending.

  • No one should be bailing out a crypto currency regardless of which institutions have bought into this BS.

    Of course the dollars behind the value of these currencies evaporate as they get spent by the issuers of the coins.

  • Anyone else? (Score:4, Insightful)

    by DaFallus ( 805248 ) on Tuesday June 01, 2021 @10:37PM (#61445588)
    Is anyone else sick and tired of fucking crypto currencies? Every day there are like 20 different stories across different news media about how one of the over 10,000 different currencies went up, one went down, will this one challenge the dollar, etc. Who gives a fuck? A few people got lucky and cashed out while the rest of us have to listen to the suckers at the bottom of the pyramid scheme drone on and on about it. Enough already!

    • The only thing that's truly interesting is how much it reinforces that economies and currency are made up, and people think that they can avoid one type of economy by inventing another one. It's all just bits floating around in the ether now. And even if it used to be pieces of paper or bits of metal before, their value was based on what was agreed upon, not what the matter was actually worth. It's all an illusion, and now that we have powerful computers to work for us, we can create even grander, more comp

  • this story (Score:3)

    by argStyopa ( 232550 ) on Wednesday June 02, 2021 @07:34AM (#61446532) Journal

    ...is essentially someone begging the rest of the world to see cryptocurrency as needing protection.

    No.
    I think the idea of the Treasury insuring Lehman paper was fucking irresponsible in the first place, tbh.

  • "It's not controlled by government, it's controlled by the developers and the community!" Sounds like that guy on Futurama telling the professor "You can't OWN property, maaaan!"

    Not controlled by the government for now. Remember the US government controlled the sale of gold, too. The nerve they'd control something you'd find on god's green earth and try to sell for a profit. The idea that crypto will go on evading regulation and government control is a pipe dream and anyone believing it is about to roll

  • The dumbest part is tying the value to the dollar. The Federal Reserve manipulates interest rates to track a Consumer Price Index (CPI) target. Therefore, these "stablecoins" are one control system removed from the true target, the CPI. A true stablecoin should track a CPI target. If it tracks the target better than the USD, it is more valuable as a currency than the dollar, and therefore should be successful.

    The value versus fiat currency is irrelevant. It's purchasing power people want.

  • Cryptocurrency is on track to attain mainstream acceptance. Sadly it's on the same track as flying cars.

  • These scam coins are getting ridiculous.

    There's even one that the slashdot community loves.

    -There are 27 trillion in circulation
    -Unlimited supply cap
    -Only one node
    -25% of the supply was minted in the past 6 months
    -1% of holders own 30% of the supply

    jk, that's the US dollar

  • The cryptocurrency may grow higher every day, but until it gets officially widespread, there is no point in talking about it. My biggest concern is that while I sit and see [accubanker.com] my money being counted in the counting machine, someone is increasing the amount of money out of thin air without counting it...

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