> A cryptocurrency lender backed by Peter Thiel and Coinbase Global Inc. suspended withdrawals, trading and deposits on its platform, citing volatile market conditions and financial difficulties facing key business partners.
> The platform, Vauld, said Monday that it froze the operations after users pulled almost $200 million over the last three weeks. A sharp decline in cryptocurrency prices that began with the collapse of two cryptocurrencies in May has spooked traders and caused knock-on effects in the digital asset world.
It's called "a bank run":
> A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. ...
Except this bank has no FDIC insurance, no backstop, nothing.
Oddly enough, I think US tax policy may play a factor here in motivating people to ignore the repeated and loud warnings about how this was a really, really bad idea. When you're facing massive capital gains taxes, and have an inkling that those gains will turn to losses, the idea of lending out the asset, spending the cash without incurring tax, then getting the asset back starts to look attractive.
Of course, the real problem was that those warnings got ignored. I mean, who reads something like this without alarm bells going off all over the place?
> Our interest rates and trading fees are among the best in the industry. You can earn interest of up to 11.57% (APY) on your cryptocurrencies, and borrow tokens with our spread being as low as 1%. We don't charge deposit or withdrawal fees, or fix a cap on your daily withdrawals. You can check all our fees and rates here.
> this bank has no FDIC insurance, no backstop, nothing
This was partly true in the S&L crisis [1]. And for depositors in e.g. Cyprus or Iceland in '08. The difference, however, was depositors in S&Ls and Cypriot and Icelandic banks were legally depositors. The banks' assets were insufficiently liquid to accommodate them en masse. But those assets had value. And that value went, almost first and foremost, to the depositors.
In crypto, there is no such protection. It is likely creditors, employees, tax authorities and secured lenders get paid ahead of users, who are at the end of the day simply unsecured creditors. (And bad ones at that.) Night and day. (Given Coinbase's debt trades comparably to Russia's [2], the smart money is betting users will get nothing in a failure.)
Aside: There is another way to look at it. Users' assets at these firms are CoCos [3]. After the crisis, regulators pushed these bonds which convert into equity when the borrower is distressed. Vauld is distressed. It has to make its loan payments, those lenders can shut it down if it defaults. But it doesn't have to pay users, or even let them withdraw their funds. So their funds "convert," in effect, into equity. Money Vauld can play with to buy time until their assets rally or right the ship with a lighter burn.
>(Given Coinbase's debt trades comparably to Russia's [2], the smart money is betting users will get nothing in a failure.)
The intention of your comment is to paint coinbase debt as worthless, but after doing some research I came to a different conclusion: that russian debt isn't as worthless as I thought. Right now 10 year russian bond yields are at 9.15%[1], which is only a little over 6 percentage points above the "risk free" rate of 2.96%[2] for US treasuries. For reference that's about the rate for B rated US corporate bonds[3].
> intention of your comment is to paint coinbase debt as worthless
That was not my intention. Coinbase's debt is viewed as risky. That has implications for the risk junior creditors (e.g. users) are taking.
Furthermore, the bonds' 10% yield is comparable to the 13% Vauld was offering [1]. Except the Coinbase debt is senior to its users claims. Assuming Vauld and Coinbase are comparable, which I think is generous to Vauld, that gives you a sense for how misplaced the risk/reward was for Vauld users.
> 10 year russian bond yields are at 9.15%
Russian debt is trading weirdly. There are various domestic and offshore quotes, since the reason it's trading down is because of sanctions, not Russia's creditworthiness. Still: risky.
When an asset class increases in value for a long enough period of time there is no shortage of explanations for why it's different this time. Real estate, commodities, tech companies, it makes no difference, It's always the same.
> Real estate is an outlier in your examples due to there being limited supply and people need shelter
People need lots of things. The principal constraints on real estate are political. (The entire concept of real estate is a social construct.) Not physical space.
Just because something is a social construct does not mean it's arbitrary and meaningless.
Social constructs have developed over time under evolutionary pressure. Useless or damaging constructs eventually disappear since they contribute negatively towards survival.
The constructs that remain have demonstrated a certain level of fitness towards the environment.
...but it's important not to assume that just because a particular social construct is still in use today, it's "fit" to remain for the foreseeable future.
The longer one exists, the longer it can be expected to continue to exist.
Old constructs have proven their fitness simply by persisting over a long period time.
I think it's easier to make the mistake the other way around, to wrongly assume that a relatively new social construct will remain "fit" far into the future.
The non-obvious point is that the value of real estate hinges on this social construct. Even the exact implementation details of it. It's not as simple as vecinu implied, that people need shelter therefore my investments will moon. And this isn't just a theoretical exercise, it's rather something that affects the market.
Right, I just tried to simplify the thought experiment to counter the argument that tech and commodities are as important to the consumer as housing is.
> People need lots of things. The principal constraints on real estate are political. (The entire concept of real estate is a social construct.) Not physical space.
Even if (the amount of) physical space isn't one of the main constraints on real estate, any particular location may be more desirable relative to others, e.g. a gorgeous view, away from factories or highways.
> any particular location may be more desirable relative to others, e.g. a gorgeous view, away from factories or highways
It's politics, usually, keeping the factories and highways away. More fundamentally, the notion that a piece of paper (the deed) gives you certain rights (but not others) over some land is totally made up.
Totally agree! Most social constructs are! That’s why we keep them. Something being a social construct isn’t a diminishment of it. Governments, laws, families and religions are all social constructs and all highly useful.
This is true. It’s also true that “your body” is just a social construct. The rabbit hole of “property is just an idea” doesn’t end well for humans who seek agency.
"Your body" is a hierarchy of cells, cellular processes, and organs, all of which consume energy. And in increasingly many cases, "your body" has prosthetic augmentations or very difficult to produce medicine, without which you will cease to survive. If you can argue that those things are "human rights", then I can easily argue that "human rights" include shelter, peace of mind, a basketball court, ad infinitum. Perhaps more accurately: property is simply an extension of humanity that is granted by other humans. Again, taking away "property" won't end well for humans who wish to control their destiny, as parts of "your body" could gradually be deemed "property" and now you're at risk of life and liberty.
That "property" is just a series of laws and agreements that we can change arbitrarily is neither a tricky concept nor a slippery slope. A body is not a series of laws and agreements that we can change arbitrarily, it's a hunk of meat. "Your body" can be a social construct if you want it to be, but that probably means that you're having a disassociative episode.
Chattel slavery underlines the point. What is and isn’t property is decided, arbitrarily, by people. Because property is a social construct.
What is and isn’t someone’s body does not depend on others accepting it has meaning. How it’s treated does. But my body has inherent value to me independent of others’ perceptions of it. This is, at its core, the problem with slavery.
If we reject property being a social construct we reject the fact that the government, a social construct itself, could have legalised and then outlawed slavery. Because if property is inherently meaningful, how can the government poof it away?
Nah, it's social constructs all the way down. A location might have gorgeous views, but if it's in a rural area and urbanization intensifies (think pre-pandemic), it will left in the dust as jobs and businesses dry up. Same goes if it's in downtown and it gets hollowed out (eg. white flight).
> they have dens and territory that they use to survive as well
A bear's den isn't its property any more than a park bench slept on becomes the slumberer's own.
Property, specifically, the system that relates a person to some land via a bundle of use rights, is a deep human construct. It likely goes back to the dawn of agriculture and civilization [1].
> A bear's den isn't its property any more than a park bench slept on becomes the slumberer's own.
A bear, however, will use (and indeed seek to monopolize) violence to defend its den. That makes it property, at least until the bear relinquishes its claim (or something - or someone - else challenges its monopoly on violence).
> bear, however, will use (and indeed seek to monopolize) violence to defend its den. That makes it property
That makes it territory. The simplest definition of property might be use rights one doesn’t need to use violence to defend. (Countries don’t have property.)
> The simplest definition of property might be use rights one doesn’t need to use violence to defend.
For something to be property entails all of:
- usus: the right to use it;
- fructus: the right to profit or otherwise benefit from it; and
- abusus: the right to destroy it, alter it, or otherwise exclude others from it
Abusus is in and of itself violence (specifically, theft) unless consented to by all other members of society. By "use rights" you might be thinking of something like usufruct, which is distinct from property and (as you correctly assess) does not necessarily entail violence or the monopolization thereof.
> Countries don’t have property.
Of course they do: their sovereign territory. It is indeed that property, enforced via a country's / nation-state's monopoly on violence - from which all land ownership derives (hence: that piece of paper called a "deed" that would be useful only as kindling or sanitary napkins if not for the state enforcing it).
Most bubbles start based on some fundamental value rationale. For real estate, the ebb and flow of supply and demand are what sparks the initial price increase.
A bubble occurs when speculators pile into that investment vehicle and drive up demand even further. This becomes a reinforcing phenomenon until the number of new speculators dries up and it suddenly whipsaws the other way.
Nothing is immune from a bubble, but housing is particularly prone to it based on the lag between demand and available supply. It also means the hangover is often decades long while it clears the backlog.
Yes, people need houses. But people don't need 4 or 5 houses as speculative investment vehicles that "pay for themselves" by renting out while they hold it for a couple years before flipping. That's the demand that crashes hard when markets turn.
Some markets were less impacted than others, San Diego for example went down a mere 20% at the trough. Over a longer timeline, housing has appreciated by hundreds of percentage points in SD.
Matt Levine always likes to say that cryptocurrencies are relearning hundreds of years of financial lessons in just a few short years. He describes the current crypto crisis as a repeat of the 2008 financial crisis.
Every single problem that cryptocurrencies face are extremely well known and studied phenomena in traditional economics. It is all very predictable.
It's like crypto enthusiasts honestly believe that the problem with the financial system is that the buildings have the word "Bank" on them. Then they turn around and offer to take your money promising absurdly high interest rates. Surprise! The only way to do that is to invest in risky assets, except this time there is no FDIC insurance, no capital requirements, no regulations whatsoever to protect your money.
Or, it's like they're incentizied to believe and promote what they're doing and new and different because it's a way to short circuit the current financial system and make money without having to have all the same connections and rules required to make that work in the current system.
Some are lying about it being different, some are willfully ignorant, and some are just clueless, but they were all excited to start something up in this new and exciting industry where people were literally throwing money at them.
Crypto enthusiasts will be doing fine having bought in many years ago. The trouble is for the randos who just jumped on the bandwagon and use all the weird risky add-on services.
Wrong. What “crypto enthusiasts” refer as the problem is the trust on a third party, banking or watherver. Therefore people who got burned trusting centralized lending castle of cards cannot be referred as crypto enthusiasts.
If that's the definition we want to use, 'crypto enthusiasts' are practically extinct. There's a tiny handful of them, and they don't have any pull, political, economic, or otherwise in this space.
"Enthusiast" just means someone excited about crypto. Whether we like it or not, they far outnumber the small group that still preaches the original philosophy of decentralization and trustless finance. The reason is because that original philosophy failed: crypto did not really invent anything new, so they have been recreating the same structures that have existed in the finance industry for decades.
"The panic might have deepened if not for the intervention of financier J. P. Morgan, who pledged large sums of his own money and convinced other New York bankers to do the same to shore up the banking system. That highlighted the limitations of the US Independent Treasury system, which managed the nation's money supply but was unable to inject sufficient liquidity back into the market."
This led to the creation of the Federal Reserve System.
This doesn’t make a lot of sense. Bitcoin and ethereum are still up and processing blocks with little regard to what is happening in the financial system.
Those lending companies closing down are basically centralized platforms very much like the legacy financial system. This take is the same type of uneducated comment that someone does while attributing actions done by say Coinbase to crypto as a system.
>Bitcoin and ethereum are still up and processing blocks with little regard to what is happening in the financial system.
Those are internal database tasks. I'm sure the IT staff at Lehman Brothers could have run defrag jobs and swapped backup tapes until the Sun went out. That wasn't the problem at Lehman.
The bitcoin network can process blocks when a bitcoin is worth $10,000 or $1 or $0.00001. The problem is that in the last two cases, economically, nobody would care if bitcoin is still processing blocks.
When BTC was trading at 1USD, there was an alive and vibrant community making it all work. Your point is sound almost regardless of fiat price. Here's a 2011 @ 6USD interview
https://youtu.be/Ta73DofiT7o
Well, the treasury kept printing money and stores still took dollar bills during the 2008 financial crisis, too. I am not saying the whole system fell over. I am saying the ‘banks’ became over leveraged with risky assets whose risks were correlated in surprising ways.
A comment that finally explains HN's sentiment on cryptocurrencies. I take it then that crypto is the financial equivalent of a fax machine (as Krugman described the early internet)? Well then, let's see how it all works out...
If that's true, at that rate crypto will blaze past traditional finance in only a few years, and be hundreds of years ahead of traditional finance in a couple decades. Sounds pretty good to me.
The logic applied by OP was that crypto will become trad-fi in a couple years and was basically rapidly moving in that direction. The extension of the logic was that at the same pace, it will quickly outpace traditional finance in innovation.
You are unwittingly making the argument that traditional finance, or the future thereof, is (/ "should be") tulip bulbs. Perhaps not the worst of arguments, but probably not your intention to advocate as you have that traditional finance become tulip bulbs.
But if we really take the analogy to heart, not much has changed fundamentally with finance since 2008. There are now more regulations, which is the exact same thing that will happen to crypto after all of this has settled. Maybe it zooms past traditional finance in a couple decades...but it needs to survive the next few years first.
> Oddly enough, I think US tax policy may play a factor here in motivating people to ignore the repeated and loud warnings about how this was a really, really bad idea. When you're facing massive capital gains taxes, and have an inkling that those gains will turn to losses, the idea of lending out the asset, spending the cash without incurring tax, then getting the asset back starts to look attractive.
Yeah, my Roth, and other domestic tax exempt entities trade much better with crypto. My Puerto Rico tax-free colleagues also make more holistic decisions, but are generally much better connected to begin with than normal crypto traders.
My taxable accounts definitely trade differently, I want to make long-term capital gains but I never can hold that long, except by accident. Definitely more temptation to try to use the assets as collateral to hold longer, but then you have to pay back the collateral when it gets liquidated and you still have to report the capital tax treatment on the forced sell (gain or loss). But I do like tax-loss harvesting, and before this year there was no wash-sale rule applicable for crypto, so any random panic dip you could sell and get right back in the position and keep holding, locking in an offset for things you did sell at a profit too soon.
There have absolutely been things that I didn't sell because I didn't want the tax yet. Things I couldn't use as collateral. I resorted to donating things in profit to my tax exempt entities, even if I didn't get a fair-market-value deduction (still got a cost-basis deduction, same deduction as just donating the initial cash instead of buying an investment to begin with), I was still fine letting the tax-exempt entity sell tax free and just have more cash, because there is still a massive delta between the purchase price and current price and the government doesn't get a cut (I don't get the impression that any of their security and infrastructure and courts helped in these trades, something I do factor in since I have more legal choices in which action generates a tax/revenue event for them). But I personally still missed out on simply having more money to spend. For me that's okay, slightly miss the idea of some more play money or pushing that into a dope house after paying the governments a tax, but mostly just an observation while on the topic.
>When you're facing massive capital gains taxes, and have an inkling that those gains will turn to losses, the idea of lending out the asset, spending the cash without incurring tax, then getting the asset back starts to look attractive.
The better strategy (and the one used by the super rich) would be to borrow against the asset, as the loan isn't taxed. And if the lender's only recourse is your collateral, then you're insured against the cryptocurrency's collapse.
With the strategy you've described, you're still keeping a long position in the cryptocurrency, and have increased its volatility.
The second there is a shiny new asset increasing in value, businesses will sprout up with models that absolutely require this asset to continue skyrocketing in value forever.
I've been in and out of crypto since 2014 or so but I've never been more bearish than 2021. When the majority of my Twitter feed became visionaries predicting web3 it all seemed destined for pain.
There are billions of reasons to embrace the idea of a platform shift but when everyone can see it coming a mile away they're probably either wrong or a deep trough of sorrow away from it working out.
I don't know why number of people working on an idea has bearing on the quality of the idea. An insane number of people were working on things that didn't pan out during the dotcom bust too.
It's more indicative of the amount of money in the system imo and the reason there's money in the system is because some powerful VCs really would like the transition of power from classical finance to their newly minted financial system. Then the rest hopped on the bandwagon.
People working in this doesn't necessarily translate to future progress. You can confusing lead and lag indicators. Some people enthusiastically using a product and ready to pay money for it, is a lead indicator. A lot of people working on solution for a problem that does not exist is no indicator at all.
I'm a crypto enthusiast and I don't share the common view here that blockchain is useless, however ... how do you offer 12% interest on a stable coin? Where is that money even supposed to be coming from?
token farming from tokens that are given as incentives for using different dApps. These incentive tokens have value because of the speculative nature of the human brain.
"On Wednesday, Voyager issued a notice of default to crypto hedge fund Three Arrows Capital after it failed to repay a loan of 15,250 bitcoin and $350 million in USD Coin, a stablecoin whose value is pegged to the dollar. The loan is equivalent to about $646 million based on bitcoin’s current price."
The weird thing about crypto is that it can become a $20T asset class without it ever truly affecting the "real" world, as long as the money stays circulating within the crypto ecosystem.
Crypto marketcap topped $3T this run. It was likely much higher given that this $3T figure comes from CoinGecko and it doesn't track NFTs and unlisted tokens.
Yet the real world impact of this market crashing wasn't really as big as it would have been if a "real" $3T market was to drop by 2/3rd.
I suspect that in the absenece of real world growth and quickly depleting real world assets, more and more businesses will pile into web3/meta/crypto. In the metaverse, you can theoretically have infinite growth as long as that money stays within the metaverse ecosystem.
This does have real world consequences for all those small players who were suckered into buying cryptocurrencies at the peak by the likes of Saylor, Thiel and Musk at the peak. Many lost their savings and many more will.
Re the market caps, these are a fantasy propped up by unaudited exchanges currencies like tether. So it’s unsurprising all that perceived wealth melts into air - it never existed.
Interesting that you think web3/meta/crypto are tied together and have a future when nobody wants to use them. They were simply vehicles for speculation in a very large asset bubble, now that the bubble has started to pop nobody wants these speculative assets but we haven’t seen capitulation in markets yet nor the end of fed rate hikes, so the pain will continue.
Re infinite growth and business interest in these three areas, I see no evidence of that.
This might be true, but it's not that interesting imo. It's not a closed ecosystem people cash out of crypto to interact with the real world and buy their lambos. When there are major shocks in the real world - war & inflation this time - the facade disappears.
Cashing out is actively discouraged by the dominant "HODL" culture. Sure, people do cash out a lot. But its a fraction of the paper wealth circulating through the crypto ecosystem.
I can’t believe that all the crypto yield Cefi companies Al just gave their money to 3AC. There’s literally hundreds of high yield strategies out there. Many of them well hedged but nobody went that route (at scale).
A British Virgin Islands court ordered the liquidation of Three Arrows Capital Ltd. after creditors sued the cryptocurrency hedge fund for failure to repay debts. Nichol Yeo, a partner at law firm Solitaire LLP, said Three Arrows Capital is considering its options and seeking legal advice in the British Virgin Islands.
Assuming their assets are in crypto, this sounds like they (and Celsius and the rest) are hoping Bitcoin rallies before anyone notices they're insolvent.
Thiel is a smart investor but even smart investors lose money on some investments. "backed" can have many meanings. I would imagine he has some kind of stop-loss on his exposure to risk here. And indeed, its "Valar Ventures" which has invested, an indirect vehicle.
Note: I dislike the guys politics, but that has nothing to do with an objective assessment of his financial investment chops. Same with Andreessen, he doesn't figure in my 'friends of carlotta' list but he obviously knows a good investment when he sees one.
My personal belief is that Thiel is too smart to have believed any of the bullshit about coins and NFT, and was in this as risk play for the upside. I am sure he made heaps doing this elsewhere in the crypto bubble, he can wear this (small, in his terms) downside outcome.
Thiel is not too smart. He’s smart. As smart as Steve Bannon? In fact I cannot differentiate who’s talking if you play their podcast interviews.
Thiel has a sputtering of good ideas, and he was in the right place to invest in some successful ventures, but he’s not some once in a life time visionary.
As of now, it looks like he’s nothing but a hypocritical selfish vindictive rich asshole with a blood boy (every adjective here being something you can substantiate with actual facts).
From what I read elsewhere, he was judged as very very smart at uni, and his motivations in part stem from what I would call bullying: he was not only unloved at school, he was really put down. He decided to show people the inner steel. By now you think he'd have decided "goal achieved" but apparently, he's still on track.
Referenced in Silicon Valley(the show), a blood boy would be someone that was young, whose blood would be transfused to one of these older tech billionaires in an effort to help them stay younger.
What's the externally visible difference between being in the right place at the right time and being a visionary? He's about the 500th richest person in the world, so he's certainly not insignificant.
I think you're confusing your personal dislike of him (asshole) with his abilities (not a visionary). There's no reason those qualities should be aligned.
I think the discrete conclusion to draw from this story is that it’s completely unsurprising that someone of his moral caliber was invested heavily in what turned out to be a complete veneer (and that’s putting in nicely)
Scoring first in an annual state wide math contest is not genius level, certainly not once in a lifetime visionary. There are literally thousands of people who would satisfy that condition, including me.
yes. I realize this. Do you think he's poor? If you want stupid, I wouldn't put Thiel at the head of the pack, the room of stupid rich people is pretty full right now. The really stupid ones put everything into cryptos. I don't think he did this.
Yes, but his position overall is still high-net-worth surely? I'd be delighted if the wunderkid of the libertarian right lost his shirt, but I suspect he's still ahead of where he was 10 years ago, and in the long run is going to continue to make a shedload of money.
Clarium lost bigtime. No disagree. He has about 5 other vehicles as I see it. His roth IRA alone is going to be fantastic.
I wouldn't use him as my financial investment agent, personally. I'm not tracking his investments, I let my superannuation fund make it's own mind up.
I generally don't think he is playing the same game as someone looking to invest some money for retirement. He is clearly going for strategic moonshots and probably isn't checking his bank account daily to see if its all gone.
If I had his cojones and his money this would be my goal too. We all dream about ending world hunger, but I am callow enough to concede I might actually not. callow: I'm 5 years older than Young Thiel. I think by now, I know its not my problem.
I don’t think these investments were necessarily stupid. A lot of people in crypto found bagholders and Thiel was probably hoping he could find his own.
