Ask HN: What sort of systemic risk to crypto is Paul Graham referring to?

[pdog]

There does not seem to be much exposition for the recent tweets from @paulg. Based on the tweets, however, we can assemble the following facts:

1) He's known his friend since at least 2012.

2) He (@paulg) didn't write that.

3) He is trustworthy.

4) He is convinced the "cryptocurrency economy" will shortly experience a "systemic risk."

How should we interpret these tweets from @paulg?

[pdog]

Not sure how to interpret these tweets:

> A person I have known for more than ten years, who I consider trustworthy, is convinced the cryptocurrency economy will shortly experience a systemic risk. I don’t know anything concrete, but if I were exposed, I would be concerned.

https://twitter.com/paulg/status/1594446009010212865

> I didn't write that. He did. Since I don't know any details, I didn't feel I should edit it. And because I don't know any details, it's no use asking me what he means. If you've read the preceding tweet, you know as much as I do.

https://twitter.com/paulg/status/1594447689961377795

[zeven7]

What's the point of even tweeting that? If someone is exposed and following PG, are they just supposed to panic sell now?

[dzamo_norton]

Presumably he hoped to warn his network that they should lower their risk profiles and get into a defensive position. Without specifics no one knows if that means withdraw from exchanges or trade into fiat but people do have some general idea of where safety is and isn't.

[bookaway]

As I mentioned in my previous post [0] (now flagged), pg seems to be going out of his way to contribute to the ongoing negative signal of the crypto crash, despite him, YC, and his some in his network having a vested interest in a entity that may continue to be significatly affected (coinbase).

I mean,the out-of-context mainstream media headline writes itself:

“Early Coinbase investor says Crypto ecosystem facing systemic risk.”

As someone who would want to do right by the founders that he invested in, I can’t imagine he didn’t run this tweet by Brian Armstrong, the CEO of Coinbase.

[0] https://news.ycombinator.com/item?id=33693012

[mikequinlan]

All we know is that some anonymous person told Paul Graham "the cryptocurrency economy will shortly experience a systemic risk" and Paul decided to echo that statement without any explanation.

[roflyear]

PG not that smart need to me.

[randomopining]

I regret wasting money in crypto. Prob lost tens of thousands. All of that stress and there's literally no use-case and there never was besides some fringe stuff. And I knew it the whole time, but listened to the twitter crowd.

As liquidity tightens, it's just simply that there's not enough in the cryptoverse and all the centralized entities like Tether etc are gonna implode.

[wmf]

Many people are discussing the possible collapse of Grayscale (GBTC) and/or Tether. PG is not really adding anything to the discussion.

[binarynate]

Coinbase was part of the YC Summer '12 batch. What are the odds he's referring to Brian Armstrong? It may be a long shot, but that would at least explain why the concern from his friend is noteworthy.

[Kukumber]

Considering the recent insider trading issue at Coinbase [1,2], i wouldn't be surprised if he leaked an insider information, some work for the SEC ;)

[1] - https://news.ycombinator.com/item?id=31012462

[2] - https://www.justice.gov/usao-sdny/pr/three-charged-first-eve...

[zeven7]

Brian Armstrong is just as much of a public figure as Paul Graham, probably more so. Wouldn't it be odd for Brian Armstrong to send a tweet like this through Paul Graham's twitter?

[slaw]

Why US government stopped Facebook from releasing blockckchain currency? Also Signal and Telegram were blocked. At the same time all these crypto exchange Ponzi schemes are allowed to function.

[Kukumber]

"Libra", i always thought that would be a name the EU would pick for their digital EURO, it fits perfectly

[shrimpx]

Related:

"A friend of mine who is basically never wrong about financial questions converted 80% of his Bitcoin into Ethereum."

- Paul Graham tweet from Aug 13, 2021

https://twitter.com/paulg/status/1426254478278287367

[NotYourLawyer]

Tether crash is my wild ass guess.

[reducesuffering]

He's likely referring to patio11's warnings about impending Tether/USDT implosion, which will have huge knock-on effects to the rest of cryptocurrencies.

[robocat]

patio11 has updated his opinion, although it isn’t “systemic”:

https://threadreaderapp.com/thread/1594778237967560705.html

[jleyank]

Perhaps PG’s buddy is concerned what will step in to stop a run on crypto? There are no state actors that I’m aware of like central banks for currency.

[f0e4c2f7]

My guess would be something regulatory. Perhaps a bill to make some types of cryptocurrency illegal.

[Keyframe]

With all the recent calls for transparency and public auditing, I'd guess USDT; My guess is as worth as any though. USDT run would be a mother of all systemic risks barring one of the majors (BTC/ETH/ADA) technical stumbling or second coming of Satoshi (dormant wallets resurrection event).

[zeven7]

But if it was UDST, what new information could PG's friend even have. "They're not solvent" isn't news. A run can't exactly be predicted by an insider more than anyone else. It's hard to imagine what information about USDT leads to that tweet.

[Keyframe]

More guessing than even a conjecture, but on a USDT train of thought new information would be the timing of the incoming event as imminent. It's all wild speculation, who knows. For all things considered, if PG's "friend" couldn't reveal more details than a warning (which is tied to timing), it's all FUD.

[dificilis]

Silly question: if the "second coming" is a risk, then could bitcoin itself be amended to deem sufficiently old wallets no longer valid?

Of course if it was seriously proposed, then the holder of said wallets might rush to cash some of them in.

[danielvf]

As someone who has worked for years in crypto, the tweet reads as very late to catching up with things.

After the repeated huge insolvencies of the last few months, everyone in crypto knows there's massive systemic risk, and new risk from ill thought out new regulation. Everyone has their own list of which companies they guess will be next.

It's very hard to take the tweet seriously. It's like walking around in the California hills predicting a forest fire, during a super dry summer, while orange glows from nearby hills light up the smoke that is choking the air, and ash rains down.

[weare138]

It's very hard to take the tweet seriously. It's like walking around in the California hills predicting a forest fire, during a super dry summer, while orange glows from nearby hills light up the smoke that is choking the air, and ash rains down.

So you're saying it's not something that's going to happen in the future but instead happening right now? Well that's reassuring.

[danielvf]

Oh, the tweet is certainly true. There is systematic risk.

I think the humor comes from the tweet being phrased as secret insider knowledge, when it's something that has already been happening, and obvious to anyone watching.

(I tend to enjoy both PG's writing and tweets, but this one is a bit of an outlier.)

[hayst4ck]

What are the main purposes of money:

  1. To pay rent
  2. To buy food

What are the main purposes of crypto?

  1. Facilitating illicit transactions (crime)
  2. Exfiltrating money out of China (crime)
  3. Ponzi scheme substrate (investment tool, but also kind of crime)
  4. Alternative to corrupted local currency (not quite crime, but crime-y)

Money's purpose is to facilitate business/trade, while crypto's de facto purpose is to circumvent existing power structures, legitimate and not.

It's important to ask how money enters and exits into the crypto-sphere.

I buy crypto -> I exchange crypto for goods -> the person that sold the goods sells their crypto to someone else in exchange for USD.

I buy crypto -> I hope to make money -> I get scared and sell it when it starts to dive to realize my gains in USD.

A Chinese person wants to exfiltrate money -> They buy lots of miners -> they mine coins which are turned into USD.

So crypto itself doesn't have much intrinsic value because there is no anchor to its value. The US government anchors USD to specific values, and at least as long as we are not run by morons, that optimizes for stability.

Crypto is seen much more as an investment (will it go up or down) than as a currency. This is most directly reflected by how crypto is talked about. People talk about the price going up and down, not about crypto inflation or crypto deflation. Because its measure of value is volatile it is not a very good currency.

Systemically if people stop buying crypto, the price will go down. If people stop exchanging goods for crypto it will be harder to sell the currency. If people can't exchange their crypto for something they can pay rent with, then they won't want to accept crypto.

So what's the systemic risk? Every person who is around crypto wants it to be used because then their potential net worth will increase. This creates a rejection of negative news and hype around positive news. People will more willingly accept a reality that 10x's their worth.

Unfortunately, as soon as this reality is pierced and people start to sell, it will create absolute free fall (error correction) to it's "real" value which is roughly the sum of illicit transactions and potentially transactions for those countries who's currencies are failing (although why you would choose crypto and not USD, outside of a high risk high reward bet, I'm not sure).

So now let's say you are a crypto bank. There are two options.

1. A person initiates a trade of `x BTC` for `y USD`. The bank takes ownership of the BTC and directly exchanges for USD based on current value immediately, and then sells the BTC when it wants. (good for the bank when price is going up).

2. A person initiates a sell of `x BTC for USD`. The bank takes ownership of the BTC and sells it on the customers behalf for the best deal that the bank can find. (protects the bank during free-fall/runs on the bank).

So we are in a situation where as long as crypto sentiment is positive everyone benefits, banks, holders, miners, etc, but if crypto sentiment turns negative, it can free fall, and in the processs, destroy the "banking" institutions that are the foundation of non directly criminal crypto uses.

In summary, crypto seems very much like a Ponzi scheme to me.

If I were to guess, I would estimate the "real" value of crypto to be `sum(total_criminal_activity) / num_BTC`. If drugs can be bought through BTC, but not USD, then that creates demand for BTC proportional to drug trade. Where else would direct demand for BTC come from assuming nobody saw it as an investment tool?

Now some of that is likely exaggerated and might seem bad faith, but the above is more or less my good faith understanding. I would be happy to be corrected by someone who knows more or has a good argument on why I should be more bullish on crypto.

[dsq]

If crypto is used mainly for criminal or other illicit activities, isn't the crash of crypto a basically good thing, by destroying the monetary resources of criminals? Similarly to how the issuing of new banknotes makes older banknotes less valuable and therefore harming mainly those who transact with a lot of physical cash such as cartels.

[hayst4ck]

Not if you're invested in it. Not if you want to see blockchain technology used to replace the DTCC. Not if you think there are potentially extreme differences between crime (laws enforced by power) and justice (what is ethically right or wrong).

The people who invest in crypto are rent-seeking parasites hoping to extract value while incidentally providing liquidity to the Chinese miners blowing non trivial amounts of co2 in the air. The people who transact in crypto are actually building it and working towards the crypto dream of alternative currency.

It's important to understand that when a company sells a stock, they get money that they can then use to grow themselves. So there is generally some of the principal "retained" in a unit of stock, particularly because the unit of stock also creates a legal relationship with the company.

By definition all crypto starts from a miner, so when you buy a unit of crypto, you are transferring money directly to the miner. So the unit of crypto retains none of the principal investment.

That is an absolute terrifying property.

I am not quite sure what I think of ETH yet, since it's a little different, but BTC is straight bad for the environment.

There are also arguments to be made that alternative currencies not controlled by a centralized government are an important endeavor. If governments have a monopoly on management of currency, then it can be expected that they abuse monopoly power. The distance between policy and reality can be measured in suffering. The idea of a non centralized currency is that there is just the market and the reality of the market. Systemically enforced reality is an appealing property.

The government inflates a currency to (regressively) tax idle money while simultaneously de-valuing debt. That's not necessarily a good thing. It allows for unsustainable largess and directly creates boom and bust cycles. Here's some good fun from the last recession: https://www.youtube.com/watch?v=d0nERTFo-Sk Here's a pretty unsettling video about inflation and geopolitics: https://www.youtube.com/watch?v=xguam0TKMw8

Just as a disclaimer, I am a complete layman when it comes to finance and economics.

[dsq]

Okay, I understand the advantage of having a currency which is completely independent from the government. I suppose like everything there's always some good and some bad.

[Kukumber]

The FED concluded their digital currency experiment with bitcoin and ETH, they are ready to dispose them, and are ready to push for the digital EURODOLLAR

"systemic" and crypto is not something one mix together, another evidence of it being a FED project

That's my theory

Oh and i'm pretty sure he meant YC is done with crypto projects, they were crypto advocators, recently made a statement that they wanted to keep push for crypto projects, but with the current events that might have altered their plan