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in retrospect it was smart to advertise on umpires. baseball crowds _love_ the umpires!
― Karl Malone, Saturday, November 12, 2022 12:13 PM (thirty minutes ago) bookmarkflaglink
lmao yeah odd decision
― lag∞n, Saturday, 12 November 2022 17:44 (one year ago) link
good stuff from Matt Levine
Bloomberg
Binance bailout fund
Has there ever been a pure liquidity problem at a crypto firm? Like what I have in mind is this:
A crypto firm owes $100 (in crypto I guess) to somebody (customers, lenders) who can demand their money back on short notice.
The firm has $200 worth of stuff (crypto assets I guess).
The customers or lenders demand their $100 back all at once.
The firm’s $200 worth of stuff is not immediately accessible for some reason: It is in long-term crypto-denominated mortgages, say. Or it is in locked crypto tokens. Or it is in crypto tokens and there is, for some reason, a temporary lack of liquidity in the market for those tokens. Or it is a large quantity of some crypto token that could be sold for $200 over the course of a week or two, but if you sell it in an hour or two — to give people their money back all at once — that will crash the price.
The firm cannot raise $100 to pay back its customers or lenders, and implodes.
But it had $200 worth of stuff! Very unfair.
This, to be clear, is the standard story of bank runs in traditional banking. It is the Diamond-Dybvig model that won a Nobel Memorial Prize this year. The standard problem is “the assets are good but long-term, and the customers want their money now.” It is the problem that central banks are set up to solve. The solution is fairly straightforward: You have a central bank with lots of money (ideally, in modern central banking, the ability to print money). If a bank with good assets is facing a liquidity crunch, it can go to the central bank and say “we have $200 of assets but we can’t get $100 of cash, help,” and the central bank will help. It will help by “lending freely, against good collateral, at a penalty rate,” as Bagehot’s famous formula goes: The central bank will lend the bank $100 to pay its depositors, but first it will make sure that the bank really has $200 of good stuff. (And it will charge interest.) If a bank shows up at the Federal Reserve and says “hi we owe depositors $100 but don’t have it, we lost it all on roulette,” the Fed will not help.[1]
Meanwhile in crypto I just don’t hear a lot of stories like that? I am not saying it is impossible, or even that unlikely; I am just saying that I’ve never really heard of it happening. Oh I mean I have heard many many stories, in crypto, that have the same rough shape, “run on the bank” stories. But the ones I have heard are all subtly different. They go like this:
A crypto firm owes $100 to customers or lenders.
The firm’s balance sheet shows $200 worth of stuff.
Somebody notices that the $200 worth of stuff is just a piece of paper with the words “this is worth $200” scrawled on it in crayon, and points that out online.
The customers or lenders read this and, sensibly, demand their $100 back all at once.
The firm tries to shop its scrawled piece of paper to raise the $100, and gets bids for it of zero dollars.
The firm cannot raise $100 to pay back its customers or lenders, and implodes.
But it had $0 worth of stuff, so this seems like a pretty reasonable result, though of course bad for customers.
In other words, every crypto liquidity crisis story that I have heard is obviously a solvency crisis. The problem is not that the firm has good assets but cannot, for some reason, convert them quickly into ready money. The problem is that the firm has bad assets and people notice and demand their money back and the money isn’t there. The reasons the money isn’t there will vary. Sometimes the firm just lost money on risky trades. Sometimes the money all went into magic beans and the magic bean market collapsed. (This is the story of TerraUSD and Luna.) Sometimes the money was stolen by hackers, or by the firm’s executives, or both.
But the story is never “this crypto firm took demand deposits and used them to fund 30-year mortgages, and while those mortgages are still paying and are likely to be money-good, the firm doesn’t have the cash right now.” Because that is, uh, not really how crypto works? Compared to banks, crypto firms probably have a bit more carelessness and fraud, but they definitely have a lot more magic beans. Crypto firms tend to have assets that do not have cash flows, and that are highly correlated to confidence in crypto — often highly correlated to confidence in that firm itself — and so when they lose confidence they also tend to lose their assets.