The reality doesn't matter, what does is what people agree on. As long as people are willing to exchange them for $1 it can continue indefinitely. The incentive is clear: why would people invested in crypto actively nuke their investment? As long as their investment grow, reality and rationality really doesn't matter. I think it's a good lesson because that behavior is not unique to crypto.

As with all classic Ponzi schemes it will collapse when some external event causes a bunch of people to demand convertibility at once, and they can't meet their overvalued rate.

This is, after all, how Bernie Madoff got caught, how bank runs generally start, and how most currency crises occur.

> As with all classic Ponzi schemes it will collapse when some external event causes a bunch of people to demand convertibility at once, and they can't meet their overvalued rate.

But why is everyone keeping their USD in USDT? For ponzis it makes sense because you're promised a rate of return, but for USDT you're essentially losing money every day due to inflation.

I mean, I don't think it's being used for this purpose, but something convertible to dollars is handy if the US specifically doesn't want you to trade in dollars. Although that then potentially makes Tether itself a target of the US government.

You can loan out USDT for absurd interest rates.

If you look at the classic definition of a ponzi scheme, bitcoin doesn't fit, though central bank fiat currencies do. See macro economist Lyn Alden's excellent article for the full explanation: https://www.lynalden.com/bitcoin-ponzi-scheme/

I see a key difference: we choose to participate in a Ponzi scheme, whereas the central bank fiat system is one we are forced to participate in, just by means of being born in a particular country. There’s no choice involved, being backed by the full force and legal monopoly of the state. That’s a key difference many tend to gloss over when pursuing this characterization.

The details may be different but the active ingredient is fraud.

>The incentive is clear: why would people invested in crypto actively nuke their investment?

That doesn't really make any sense. Holders of USDT are people who sold their crypto, ie. people who aren't invested. Moreover, it's unclear how switching to a more reputable stablecoin would nuke their investment. At best it's a prisoners dilemma and I'm skeptical that everyone chose the "cooperate" option rather than the "defect" option.

If they are holders of USDT they have not sold their crypto. The risk is on the USDT/USD pair, and the game will continue while people (like you said) think they have exited to USD by holding USDT.

>If they are holders of USDT they have not sold their crypto

Technically USDT is a cryptocurrency but I can't think of a real reason why someone who cashed out of BTC would keep it in USDT rather than cashing out for real USD (the FDIC insured and in a licensed bank kind). If you're only cashing out for a short period of time and are planning to buy back, then you're not really "out", and I doubt that all the tether that's out there is coming from people who wants out for only a week or two.

Because the ecosystem has been offerint 8-20% interest to hold USDT and put it in a savings account or defi contract.

It was seeing these rates that made me believe the market was a ponzi. Somehow the system has created a strong incentive to hold USDT rather than USD in the form of divergent interest rates. And 12% is crazy high: Madoff claimed returns of 10%.

There could be a benign explanation but my bet would be that various market actors are propping up the system short run with unsustainable interest payoffs to stave off withdrawal attempts to maintain the Tether peg. Huge house of cards.

> Because the ecosystem has been offerint 8-20% interest to hold USDT and put it in a savings account or defi contract.

1. do the defi contracts not accept other stablecoins? Does USDT have a disproportionately higher interest rate than more reputable stablecoins?

2. This situation (large amount of USD being parked in USDT, people warning that it's a fraud) has existed since the last run-up (2017-2018), before defi got popular. So while there might be people parking their money in USDT to earn absurdly high interest rates, I don't think that's the whole story. It'll also be interesting to see how much USDT is locked in defi contracts vs that's issued.

The first is a solid point. I’m not sure USDT has a higher interest rate than, say, USDC.

The second actually isn’t compelling though. If you have a fraud with, say, 10% daily interest in will unwind in months. But a fraud with 10-20% annual interest will take years. Madoff kept his scheme going 20+ years.

You might want to keep it on-chain, which a stablecoin would allow you to do.

I can't think of a good reason to keep it in USDT that sits on a centralized exchange, but maybe someone has one.

USDT isn't actually crypto, right?

It's just an asset that a lot of crypto exchanges use, because it's more convenient to do so than usual (regulated) financial alternatives.

Tether will probably just evaporate in the face of alternative stablecoin competition, before volume decreases to a point that a sudden devaluation kills it off.

It is an ERC-20 token on the Ethereum blockchain, so yes it is a cryptocurrency.

There is good stablecoin competition in USDC, or, my favourite, DAI. Unfortunately I think exchanges like Binance are somewhat in kahoots with USDT which is why they will not move off it.

Thanks for the correction! :)

Re: kahoots, it feels like the answer to "What's the easiest way to generate returns?" has one obvious answer: increase leverage.

And what prevents leverage? Regulation.

So wouldn't it be great if you could create an unregulated instrument via which you could balloon the amount of funds you had to play with?

I think you're living in a media bubble.

There are a plenty of rebuttals to the Tether criticism, but on sites like Hacker News no one bothers anymore. It's not worth dealing with the vitriol and downvotes to even try.

That being said I also have concerns about Tether, but I think they are way overblown.

This is the correct answer. This post by Dan held really explains the “it’s not that big of a deal” with tether.

https://danheld.substack.com/p/dont-fear-tether

"I want to note that I feel weird defending Tether and Bitfinex. I don’t particularly like either company, as they’ve done a ton of shady things over the years. I am not vouching for the long term durability of either company."

"So we know that Tether is at least partially backed and has functioning wires in and out of the bank they use, Deltec."

Lol okay, nothing to see here, your money is definitely safe.

The same way the Albanian government collapsed due to a Ponzi scheme: everyone knew it was a ponzi scheme, but everyone thought they were smarter than most and would get out on the right side of the trade.

I think it's an obvious scam but it's a very useful scam, so there are many people with a vested interest in maintaining the illusion.

From people who want to pump up the price of other cryptocurrencies, to offshore exchanges that want to avoid KYC requirements dealing with real banks, to ordinary users who like being able to transfer USDT... there's many people incentivized to look the other way and pretend that water isn't wet.

It's anecdata, but none of the retail crypto speculators (five or six now) I've spoken to IRL have even heard of Tether.

Fair. Regarding my first paragraph, I just meant of the people who do know what it is, I think 80 - 90% would probably say it's likely a scam. (I'm sure a good percentage of investors know nothing at all besides the words Bitcoin, Ethereum, Dogecoin, and hodl.)

Is that because they're using non-tether exchanges (eg. robinhood or coinbase)? If you're using something like binance I find it hard to believe that they don't know about tether (or at least heard of the term) considering that "USDT" is plastered everywhere.

Coinbase added Tether in May: https://blog.coinbase.com/tether-usdt-is-now-available-on-co...

And then recently rolled out their own stablecoin in USDC: https://www.coinbase.com/usdc/

But by default (eg. someone buying BTC or DOGE) they're probably not touching USDT right?

There's a pretty rich history of exchanges suffering "hacks" or other losses and giving all of their customers a haircut on assets to make themselves whole. Coinbase is a little less sketchy than offshore, unregulated exchanges, but if they are holding a large amount of Tether when it goes bust, I wouldnt assume any balances held on Coinbase are necessarily safe.

>but if they are holding a large amount of Tether when it goes bust, I wouldnt assume any balances held on Coinbase are necessarily safe.

That's only an issue if they blend USDT and USD balances together, which to my knowledge they don't. If you sold a bunch of your bitcoins for USDT rather than USD (which seems unlikely, seeing that BTC-USD has 28x the volume of BTC-USDT), and USDT goes bankrupt, that's on you.

It’s hard to imagine someone invested in the crypto market who isn’t aware of stablecoins.

I'd be shocked if more than 10% of the people investing in crypto on Robinhood know what a stable coin is. I bet a fairly high percentage of total crypto investors (not by amount of crypto, but count of individuals investing) are on Robinhood. I'd expect that other casual-friendly trading platforms with crypto support are similarly skewed toward people who don't know much about the space, though probably not quite as much as Robinhood is.

Oh, the OP said “crypto speculators” which in my mind is a bit more involved than random dudes buying Doge on RH.

buying doge on RH is the most obvious accessible kind of speculation.

You'd be very, very surprised, then. I would wager probably at least 60% wouldn't even be able to make heads or tails of the term "stablecoin", and possibly up to 80% or 90%, even.

Sometimes crypto investors do their investing through means that can be several times detached from the nitty and gritty (e.g. would buying COIN or MSTR stock be considered crypto investing? Some say it would) so it doesn't surprise me that much. I don't think it's too healthy, but hey.

There is a rumor going around the meme stock circles that financial institutions were using crypto to manage their liquidity/collateral issues. I'm in no way well-versed in this, but I'll try to convey my understanding. Essentially, banks are carrying too much cash from QE and the emergency infusion due to the COVID crash last year. They don't want to pay the interest on it, but they still need it for their other operations (the conspiracy theory is "manipulating meme stocks and preparing to cover should they fail a margin call"), so they'd been buying up crypto assets, hiding that cash in something that they could pump and dump almost at will. A month-ish ago, some regulation changed where they could no longer hold crypto as an interest-free asset, and coincidentally, we saw the bottom fall out of Bitcoin and the Fed's overnight reverse repo program (where the Fed does a short term swap of US treasuries for cash) begin to expand around the same time.

Suffice it to say that everyone figures that SOMEONE big is manipulating the crypto market to their own ends. With Tether serving as the lubricant greasing the wheels of the rest of the market, it has finance's prized "too big to fail" distinction.

Edit: I found one of the posts that explained the theory. I probably misunderstood it. https://www.reddit.com/r/Superstonk/comments/nz0fsz/i_found_...

I know, I know... I present it mostly for you to consider as you may.

Crypto isn't nearly a sufficient alternative to the money market, in traditional finance its use is highly regulated, the whole reason for the current situation is that since 2008 banks are extremely limited in holding any kind of risk assets. The theory is obviously nonsense, because there are much lower risk instruments a bank could invest in to receive an interest-like return, were it permitted. The issue is not that banks are secretly conspiring to destroy your favourite shitcoin, it's that by law they're extremely restricted in investing excess capital in anything remotely resembling a shitcoin, never mind a stock index.

Please stop reading or linking to that sub, it's probably the single greatest free improvement you can make to your life right now.

Hm. Well, I don't disagree that the crypto market is probably something of a giant Ponzi scheme. I don't have a favorite shitcoin, and I hold a minimal amount of the largest coins, mostly to try out dApps freely. (I can't resist asking you how the market cap of the crypto market has reached some multiple trillions, if not without the assistance of traditional finance.)

I think that's a wholly separate issue from that of the specter of bank malfeasance. Which is to say that you're completely off the mark in that regard; it's clear that finance is abusing its position and running right up to the line - if not over it - in spite of the lessons it should have learned after 2008. And the argument here isn't that banks are conspiring to destroy crypto; it's that they are (were?) using crypto as a tool to avoid insolvency due to the fallout from inadvisable activity over the past year or so. Even those not swept up in the cultish thrall of crypto and meme stocks are looking at that behavior with a wary eye; Archegos et al., after all.

That said.

>Please stop reading or linking to that sub, it's probably the single greatest free improvement you can make to your life right now.

No. :) Someone asked a question and I answered with what I thought was a likely explanation. You can disagree, or even be offended by my stupidity, but I presented it respectfully and in good faith, so here it will be. Silliness aside, I do find the core holding of the GME crowd compelling, and likewise, occasionally, their analysis of what is an unfortunately murky subject. If you disagree, the spirit of HN's standard of discourse is to explain the manner in which "obvious nonsense" is such, and not just to simply state so in an offensive and patronizing manner.

> A month-ish ago, some regulation changed where they could no longer hold crypto as an interest-free asset

What does it mean to be an interest-free asset?

This is Time Cube but for money.

A high percentage of finance in general is kind of Time Cube for money.

Well yeah, but even by that standard, I mean.

It's just a Ponzi scheme where everyone is invested in the scheme because they hold crypto of some kind.

Then one day someone will wake up, decide they don't want that kind of exposure, and the whole thing collapses.

You're correct, except that the waking up with be those holding dollars loosing confidence, not bitcoiners.

If you look at the classic definition of a ponzi scheme, bitcoin doesn't fit, though central bank fiat currencies do. See macro economist Lyn Alden's excellent article for the full explanation: https://www.lynalden.com/bitcoin-ponzi-scheme/