A Bitcoin exchange has issued a product which they characterize as a Tether credit default swap. https://www.coinex.com/announcement/detail?id=26 … It will not surprise you that it is not actually a CDS, nor fit for the purpose you would want to use a CDS for, on *either side* of the bet.
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A CDS is, conceptually, insurance on a debtor defaulting. You can, for example, buy a bond from Bank of America and then purchase a CDS which says "If BoA defaults on $COMPLICATED_DETAIL_HERE, this contract pays
$X." for some number wildly lower than$X. (14 bps per year)1 reply 2 retweets 6 likesShow this thread -
Since Bitcoiners are skeptical of contracts (unless they come with embedded bug bounties), the "CDS" is fully-collateralized, sorta. To write a $100k CDS on Tether you first give the exchange $100k and then they keep it until settlement. Wall Street chortles at wisdom of this.
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In the event a credit event happens to Tether, the Bitcoin exchange is going to vanish in a nuclear fireball, along with your $100k. Except it wasn't $100k, it was Bitcoin-denominated, because of course you wanted Bitcoin exposure when you tried to hedge your Tether exposure.
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But remember that complicated legal code which would define a default in the grown-up world of a CDS? Since Bitcoiners don't trust complicated English, they went with simple math: settlement is against a weighted average of the Tether price on a particular exchange.
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This seems to be based on the intuition that Tether prices would go lower than their $1 face value if Tether had a credit event. That is highly non-obvious to me. Consider, for example, the case where Tether is known to have the funds available to satisfy 20% of all claims.
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Replying to @patio11
If Tether only had 20% of funds available and that was proven, you don’t think that would cause panic and a “run on the bank” that would cause it to drop in price?
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Replying to @rishab_hegde @patio11
I should clarify that I mean massive sell offs on all exchanges Tether is traded on
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Very not obvious! Price of any asset on the exfiltration-of-value pathway goes up, even if that asset is Tether!
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Replying to @patio11
Huh interesting, I should really learn more Econ, this is super fascinating
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