Although the prices of major cryptocurrencies are well off the highs from this spring, the industry continues to power ahead, with new investments and new corporate announcements being made seemingly every day. Recently the crypto derivatives exchange FTX announced a massive $900 million Series B fundraising round, which values the company at around $18 billion. On this episode, we spoke with FTX founder and CEO Sam Bankman-Fried (a recent Odd Lots guest) as well as Bloomberg Opinion's very own Matt Levine for a deep dive into crypto market structure.
Tracy Alloway:
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal:
And I'm Joe Weisenthal.
Tracy:
So Joe it's been kind of a tough couple weeks for crypto. We had the price of Bitcoin go down below $30,000 at one point, but it's shot up since then. I think it's closer to $40,000. But on the other hand, we had some interesting developments around the sort of crypto ecosystem, around the market structure aspect of crypto.
Joe:
Well, it's interesting because we did get this sort of bear market. And I don't know if it's still in one, cause as you mentioned, it's bounced back, but unlike say, you know, the sell off in 2018 or at the end of 2017, it doesn't feel like there's any slowdown at all in the pace of investment into this space. At the end of 2018 it was like, all right, well maybe this whole thing was a bubble or a fad this time. It feels like no one's thinking that it's like full steam ahead on various business plans and so forth, at least in these early months since the peak back in April or May.
Tracy:
Yes, indeed. And as a sign of that investment interest, we just had the crypto exchange FTX — which we've talked about on the show before — it completed, I think it was a series B fundraising of $900 million that valued the company at $18 billion. So to your point, I mean the crypto ecosystem itself is clearly being valued by investors as a future investment — $18 billion, pretty big.
Joe:
And of course FTX, the exchange, we talked to the founder. It was not that long ago. I think it was either maybe like March or April. And it feels like his star, his significance within crypto has only probably gone up like 10 times, since literally the last three or four months.
Tracy:
Yeah, I think that's fair. So we're going to be talking to the FTX founder, Sam Bankman-Fried again on this episode, but we wanted to do it a little bit differently this time. So we've also brought on a Bloomberg columnist Matt Levine, one of the best — probably the best — financial writer out there, if we're being honest. And he's going to join the conversation and we're just going to talk about what FTX has been doing and where it might go from here.
Joe:
Okay. let's do it.
Tracy:
Alright, Sam and Matt, thank you so much for coming on the show.
Sam Bankman-Fried:
Thanks for having us.
Matt Levine:
Yeah. Thanks for having me.
Tracy:
So Sam, $900 million is, you know, a lot of money. What are you going to be doing with that?
Sam:
Yeah, so it's...I think we're looking good on the yacht front. Don't need any more there. But, no, acquisitions is sort of the base answer and you know, I think especially as crypto starts to bleed into the rest of the financial ecosystem, there's more and more points of overlap and potential, you know, potential collaboration.
Joe:
Explain what you mean by that. So would you say crypto is going to bleed more into the rest of the financial system? How much of that is okay. We know that all of the big banks or traditional brokerages, they're like thinking about like, well, what is their crypto play? How are they going to get in on this action? How much of it is... are you talking about that? And every day there's some new announcement from a legacy institution about something they're doing in this space, as opposed to crypto itself, encroaching on areas of business, lines of business that we think of as traditional, where perhaps crypto has a potential to usurp some of that activity?
Sam:
It's primarily so far been the former and some of this is the, you know, sort of traditional, highly-regulated financial institutions starting to dip their toes in. Some of this is also FinTech, and so, you know, I mean, when people say FinTech there’s sort of an increasing chance that they're referring to, you know, a crypto company over time. But even outside of that, many of the “definitely not” crypto companies in FinTech, a very large fraction of those are reaching out to talk about — like imagine that you're some customer-facing FinTech business, right, and, you know, you don't offer Bitcoin right now. Like what do you think the most frequent request you get from your customers is like — it's definitely to add Bitcoin.
Tracy:
Matt, what's your understanding of what FTX actually does? Because, you know, Joe and I have spoken to Sam a few times before — now I think we have a decent idea, but what's your impression of it?
Joe:
I like this question.
Matt:
Exposing my ignorance. My understanding is that FTX is like one of the biggest crypto exchanges and that it's a particularly like derivatives and structured-product focus crypto exchange. Is that like about right?
Sam:
Yeah. That's pretty good. I mean, we're one of the newer, exchanges, certainly the newest of the big ones, started up a couple of years ago and more than half our volume historically has been derivatives. I think the big reason for that is basically like they're harder products to get right. And I think a lot of the exchanges had serious issues when we started up and those issues just became much more transparent and played a much more devastating role when they tried to manage, you know, margin and derivatives than with spot products, which are relatively simpler. Although we do have a pretty wide range of products on the site.
Joe:
So, I mean, I saw Sam, someone made a joke on Twitter the other day that like, you know, you weren't even like a real player or active in the industry in the last bull market. I mean, I don't think that's totally true because on the last episode you told us the story of the Japan premium, which is an incredible story and people should listen to it, but so much of your success really has come like in the last year or year and a half. And now FTX is this huge thing.
Why don't you explain, like, what was it, just sort of broadly, and then we'll get into the details. But you sort of mentioned some of the operational aspects of running a derivatives exchange versus just a pure spot exchange. You know, in the U.S. people really know Coinbase globally. People really know Binance, but what was it in your view that you had this thing, okay, we're going to create a product for traders. What was it that FTX had that really allowed it to just explode seemingly out of nowhere in the last year or so?
Sam:
Yeah. And I think a lot of these things where things you might even just assume was true of all exchanges in crypto, but that isn't. And so one example is when you look at margining, the norm in crypto was you isolate everything. And what that means is if you want to go trade ETH against USD futures, you have to go buy spot Ethereum and move it into your ETH- USD futures wallet, and use that as margin to trade your ETH futures. If you then want to trade, you know, Bitcoin against U.S. spot, you have to go move that ETH out, sell it for U.S. or Bitcoin move that into your U.S.-Bitcoin spot margin wallet, and use it as collateral there.
You end up managing literally hundreds of wallets on one venue, each of which basically only supports one product. And it's this massive mitigating demand, you can get liquidated on any one of them, independent of your collateral on others. You have no flexibility on margining, the liquidation engines are not up to the task. Like they're losing millions of dollars per day of customer assets, failing to liquidate in time. You know, there was just like match engines fell over whenever markets got volatile. And so it was just all over the place, that it was like not a great customer experience, in sort of like really significant ways.
Matt:
So this raises a question that I have. So you come from a sort of high-tech traditional finance background, you're at Jane Street. And like, one story you could tell here is like, this is about applying sort of best practices from traditional finance to like the wild west of crypto exchanges.
Sam:
Oh yeah.
Matt:
Well, portfolio margining is a totally well understood thing to portfolio margining for crypto products. But I'm curious, I always thought that a lot of the appeal of crypto is like all these people from my backgrounds like yours, who work in the coal mines of market structure and whatever, and have like a list of things or are like this traditional financial thing is stupid and I could do it better if I were designing the system from scratch.
And you kind of went and designed the system from scratch, right? You started like a big exchange in a product universe that is not really beholden to any traditional rules or customs. And I'm wondering are there places where you were like what we do here at Jane Street, what we do — and you know, the stock market is really dumb — like if I were doing it, I'd do it differently where you actually went and did that at FTX?
Sam:
Totally. And I do think the answer is really sort of, you look at each place and you're like, who's doing it right. You know, it's sort of like the crypto norm, correct. The crypto exchange norm, or like the traditional exchange norm, and sometimes it was one and sometimes it was the other — so some examples of places where I think crypto has like at least an argument for doing it right now. I personally think they probably are. One of these is moving funds around. This is obviously one of the first things that comes up with crypto, but I at least sort of just assumed it was easy to get your money wherever you wanted before I'd ever tried to do that. But as soon as I tried to ever move money around, I realized how difficult it was. Anyone who sent an insurer like an international wire transfers, immediately regrets having to do it.
And then you look at like ACH and credit card payments that take months to finalize. And so either there's all these limits, huge fees on them. There are so many roadblocks in the system because like there's two months of fraud risk there. And so just doing things like funding your account ... on traditional exchanges is like very messy and can take a while. Whereas on crypto, the goal is to make it as clean as possible when you're sending cryptocurrencies. And that's obviously like basically instant. On the wire transfer timescale, but even with, with fiat, the emphasis is like anyone, whether you have $200 to your name or you're the world's second biggest HFT firm, you can go to the website, submit KYC info, create an account directly with the exchange. And then there's like the deposit button. And it has like as many options as possible for how you can fund your account.
And so it's just like a massively easier process. And you know, when you're sort of in crypto, what you quickly realize is you never want to send fiat, that's like the hardest thing to do. And everything gets settled with stable coins, if you can get away with it. Another thing I'll bring up is the different nature of the product. So when you think of what is NYSE or CME or something, they're mostly matching engines — they sort of match bids and offers from like a few institutions against each other, but they don't do anything else in the trade process. Right? There's like separate companies that do like custody, clearing AML, KYC, customer onboarding, branding, advertising, mobile app, website, API, all of those are like different companies.
And you end up with like, you know, 10 companies stacked together. And first of all, it means you have 10 rounds of fees stacked together on trades. But second of all, it means you have this really fractured experience where, you know, access to the actual ultimate liquidity and order books is basically restricted to like a very, very small number of institutional trading firms going through some prime broker. And everyone else sort of has this like very abstracted-away experience going through, you know, two firms in a dark pool and a broker, you know, somewhere in the middle. In crypto, the exchanges are full stack products. And so everything I mentioned from reading an account, submitting AML, KYC information, depositing funds, using a mobile app, GUI website, submitting an order, all those go straight through the exchange. And so you have like small retail customers and giant HFT firms all having the same exact access to the ultimate, you know, order books and system. And I think that creates, in some cases, a much, much more streamlined and frankly, fair experience.
Tracy:
So can I ask just on the margining ideas, so one of the things you did, I think it was just in the past week or two, but you changed the amount of leverage that you allow on the platform. So I think the maximum people can do now is 20 times, which seems like a lot to me still, but it's a vast reduction from what it was. Walk us through the thought process on that. And would you consider changing the margin requirements as well
Sam:
Yeah. So I guess maybe on your last point, we talked about changing the margin requirements. And when we talk about margin and leverage, we usually think of them as basically the same thing. Like one is just one divided by the other one. And yes, there's like initial versus maintenance, like how big of a position you're allowed to put on versus at what point your account actually starts getting liquidated. But this sort of affected both of those. And so you have to post 5% margin now on all positions and at least, in many cases much more than that ... equivalent to saying 20 times leverage.
The thought process behind it — the first thing is that it's actually not that big of a change for the site, less than 1% of the volume was trading with leverage higher than that before. And the reason is that basically your margin requirements go up as your position size goes up. So if you want to put on a big position, you need to post way, way, way more than that collateral anyway. And you're only able to put on really tiny positions with very high leverage. And so that’s sort of by definition, not where most of the volume or open interest or users were coming from. And so it wasn't like a big part of the exchange. It wasn't super relevant to us or to most of our users or their experience. It's also not super economically like useful, frankly, like when you talk about hedging something or having on some spread or one of the many reasons that you might want to do a margin trade, if you get down to 1% collateral left, you can't really use that to have something basic.
You can get liquidated in like a print, in like 15 seconds, you know — markets could move enough that, you're out of margin. And so it certainly doesn't make sense for any long or even medium-term position that you're planning to hold for any reason. You're sort of almost definitely opening yourself up to serious liquidation risk if you get anywhere to that amount of leverage. And it's like, most of the things that I think like, frankly you could justify as like the more economically useful parts, like don't require high, like super high leverage anyway. And then the last piece of it is frankly, like it's something that a lot of people look on as it's like, you know, when he talk about, I mean, reporters, but regulators as well, not that they're like specific regulations around this in most jurisdictions, but like there probably will be eventually. And it's sort of clearly the direction the world's going in, and it's just sort of combining all those together. Like it wasn't an important part of the site. It wasn't a super healthy part of the site necessarily. It was like a part that was going to start receiving a lot of negative attention. And it just seemed like it was time to get rid of it.
Joe:
I want to talk a little bit more about the technical aspects of building a system in which there was, you know, as you're describing the one wallet where everything is cross margin. And so you don't have, okay, your Bitcoin futures, wallet, and your ETH futures wallet, and so forth. Two things. So like how hard is that to build? But also we know that with a lot of the legacy, or it's weird to talk about legacy — the legacy crypto exchanges — they tend to go down a lot during periods of high volatility, which is a source of frustration. And we see it, we've seen with Coinbase, for example, where everyone's starting to like slam into one thing and suddenly social media is lit up. You like to point out on Twitter, it's like, well, FTX another day of, you know, a hundred percent uptime or whatever it is, how much are those things connected? This sort of the difficult stress of legacy liquidation books versus just keeping the site going up.
Sam:
Yeah. So the thing that really causes a stress here, it's actually the interaction between two different effects. One of which is cross margining, one advantage of isolated margining, and one reason that some exchanges do this, is you can completely parallelize different products, right? You can just like completely separately say like, all right, there's our Bitcoin\/EOS market. Here's our ETH futures. They have nothing to do with each other. Like are none of our systems need to look at the other one, you have completely parallel margin checks, risk checks, order books, and it's easy to rent another server. Like if you could scale up your business just by buying a ton of servers, that is the easiest thing to do. And like we would do that in a second. The problem that you've run into is that doesn't increase like the clock speed of any one process.
And so whenever you have these bottle-necking things where everything needs to feed through one process, buying more computers doesn't help. Because there's just the one computer that's computing that one bottle-necking thing. And the worry with cross margining is if I send an order in a Bitcoin-EOS order book, that immediately affects the amount of margin that I have available for an Ethereum futures position. And so you can't treat them as completely separable from each other. And you sort of have in the end, this one process, which is keeping track of the master amount of margin and collateral that each account has available. And that thing has to like every single order on every order book, one has to feed through that process. And all of a sudden parallelization is way harder. And that means that you're at risk of that process falling over when things get busy.
And if that process gets bottlenecked, you can't accept orders in any order book, because you don't know if the person has enough margin for it. So that that's sort of like the fundamental tension that you get to quickly when you cross-margin and inherent is that… then you say, well, okay, how about traditional exchanges? Don't they cross margin? And the real answer is that -- this gets back to a previous point — in traditional finance, the exchanges aren't the primary risk check. These exchanges aren't like analyzing correlations between different assets in someone's portfolio. Generally the exchanges are processing the orders, and then you have things like prime brokers for the actual risk check engines. They're not doing it in real time, really, at least not like tick by tick or order by order. They don't have to be as high throughput. They're just sort of like periodically checking on people's portfolios.
And then you say, okay, well, why can't we take it out of this critical process and just check it every hour or something? And the reason is, well, what if they went bankrupt in that hour, right? Which you now get to serve this other piece, which is the fact that we allow everyone access to the site, including people who aren't like, you know, one of the five biggest trading firms in the world that you definitely have legal recourse over, and they have tons of assets outside of your exchange that you could claim if they went net negative. Like that's not how it works in crypto. In crypto, we have everyone. And so if any account goes net negative value, like realistically speaking, we might never be able to like reclaim that. And, you know, we just end up eating that. And so we have to be real-time monitoring the risk of all of the users. And that's sort of like one of the easier parts to accidentally get sort of bottlenecked on.
Matt:
Can you talk about that from like a perspective of your capital? So like, you know, exchanges are sort of notably thinly, in like the traditional finance role that exchanges are not like particularly capitalized because they're not particularly capital intensive. Clearing houses have like weird capital, you know, positions and drawing rights. And then prime brokers are giant banks who are like very heavily capitalised. Like for you, like, do you have billions and billions of dollars to cover customer losses? Or is it more your sort of technological situation where you’re confident you can blow people out fast enough that customer losses are not your problem. Or am I just thinking about it wrong?
Sam:
No. That you're thinking about exactly. Right. And a really good question to ask and different exchanges come to different answers to that question. So let me give you a little bit of a pallet of like how one could answer it. One answer, which used to be very popular is that's not our problem. That's our users’ problem. And you might say what do you mean, if user's negative, you can't get funds from them. You could say in response, sure, but that means some other user is positive. And maybe you can sort of see where that's going…
Matt:
Right, the positive user isn't actually positive.
Sam:
Right. Exactly. Clawbacks is sort of like the word that people used for that. And there were exchanges where like each week they say like, congrats, you did good trading, you get paid 86.2% of your PNL this week. You know, the other 13.8 went to bail people out.
And it just happened week after week after week, there's millions of per day of losses of customers to that, which is not how you want to end up. Right. That's sort of like breaking this like seemingly really inherent inviolable property of a future, which is that if you buy a Bitcoin future, like what or something, interest rates, something, something, but when all is said and done done in the end, you have a Bitcoin, right? If like Bitcoin goes up, you make, it typically goes up $10,000. You make $10,000. If you're like holding this to expiration or whatever. But all of a sudden, if you're only getting paid back, you know, 86% of your P&L you don't really quite have a Bitcoin, you have something that's kind of like a Bitcoin, but maybe it's only most of a Bitcoin. We'll see. So that's like not a good answer, but that is an answer.
And that is what some exchanges said. Other exchanges gave sort of the worst answer. That's not a good answer. If it's not the worst answer, the worst answer is going bankrupt. And that's not what you want to see. But you know, there have been some exchanges blowout in crypto and especially the smaller ones, which gets to your point of like how much capital is actually backing these exchanges. One of the most dangerous things about using a dinky exchange… There are two scary things. First of all, they probably don't have like very sophisticated attack. So like the hacking risk is way higher, but second of all, they probably don't have a billion dollars of capital. And so if there is a loss, like they don't have anything backing back, you know, like they they've, they had, you know, $2 million back in they've. If they lose $5 million, then customers lost three.
Okay. So, so that's sort of like another bad answer, but it's the answer you've seen on some of the smaller venues. And then you get to sort of like, how about the biggest venues and the answer to your question is really, yeah, they do have a lot of capital backing. Like if you look at the actual effective amount of capital backing the books on the largest exchanges, it is in the billions and you know obviously we just raised, you know, 900 or so, but, you know, we had a bunch of profits before that. And then on top of that, there's sort of, you know, effectively the equity value of the exchanges, which should be implicitly backing these, you know, for sort of a reputable exchange.
Matt:
Meaning that if you have a billion dollar loss, you can like go raise a billion dollars and people are like, well, you know, they have equity.
Sam:
Yeah. And so the answer is for the biggest exchanges. Yeah. There is effectively a lot backing it, but once you start going down in the pecking order to exchange where you don't trust that they would do that, that they kind of go do whatever it took to make their users whole, yeah. There's real risk there that, you know, if their liquidation engine isn’t up to task, uh, neither will their users be.
Matt:
And if you're like a big exchange with a lot of capital or like, empirically how good is the risk management? Like, do you guys regularly have blowouts where you're not made whole?
Sam:
It's a good question. ... We don't have big issues. Like we've never had a day, I think, where there where there's more money that we've lost in blow outs to revenue that we made just from trading fees. And on most days it's effectively $0 costs. So this is not like a big deal for us. I mean, it's a big deal to think about, but like economically, it hasn't been a big cost to us.
Matt:
So you're not doing like 125-to-one leverage on big positions?
Sam:
Right. And that's, that's why it gets down to exactly. Right. Like, are your, are your parameters good and reasonable? Is there a liquidation engine, like reasonable and real-time and stuff in some cases to answer that as just effectively been no. And, and, you know, we've tried pretty hard to keep it like pretty effective, but, you know, when you look at the biggest blow ups, historically, especially back in like 2018, like is the kind of thing you, like, you would just look at that and be like, that doesn't work. Right. Sam, and be like, yeah, you're right. That doesn't work. Like, do you use just like, you know, 50 to one leverage on a $300 million Bitcoin position. And you're just like, okay, that's interesting. Exactly. It's like, can you liquidate like $300 million of Bitcoin consistently with less than 2% impact plus slippage plus movement during the time it takes to do that? Like, no, you can't.
Matt:
Can I ask you about, I, I don't, I don't really know the phrase liquidation engine, but like my understanding is that like, there's like a stereotype in like the crypto world where, when people get thrown out of margin positions, they, it is done as like sloppily as can be imagined and like prices like move jerkily and mechanically in a way that like, you know, like, I'm just, I've been thinking about, you know, are you recording this on the day of the, the Archegos report coming out where like, you know, in traditional finance, like when a big position gets blown out, like they don't necessarily do a good job of it, but they sort of sit down and think, what is the way to liquidate this position with minimal impact to the bank? Whereas like, my understanding is that at, in crypto exchanges, it's all automated and often automated in a sort of like predictable and dangerous way.
Sam:
It's been getting a little bit better over time. It's not great. But it used to be terrible. Let me tell you some horror stories here, which are like to here's like one really bad example that we, we did see, you know, back in like 2018, when, when things were really messy, someone had, you know, a $200 million position in Bitcoin futures. First of all, it very, very thoroughly seemed like there's a human there clicking, and that human was sometimes asleep.
And so maybe markets move while that human was asleep and that the account was net negative by the time the human wake woke up. So that's like not a good start. And then, you know, you, you see this position as obviously underwater and what they would do, you know, it's like, let's say it's 2% underwater is, you know, they'd place an offer for $200 million of Bitcoin. Future is 2% behind the BBO, right. Energy sit there. And of course that was at the bankruptcy price, like hoping someone would lift through the book and buy 200 million to $200 million lit offer. Obviously that's not what happens. Right. What happens to every NCC offer and things just like crash more. Right. And it just gets like worse and worse, you know, that that's like an example of not a good liquidation engine, so to speak,
Matt:
Honestly, that's better. Like I sort of expected. It was like, if you hit some trigger, like some automated thing just puts in market orders to sell the entire position.
Sam:
Yes. So we have seen that as well, which is sort of the opposite extreme, any sort of like different exchanges that did different pieces of this. Like, yeah. I basically think like both those extremes are bad. Right. And the market order thing goes about as poorly as you would expect, you know? So where have things been moving over time? Like what sort of like the reasonable system? Well, I don't know, but it's sort of like, you think you would, like, if you just like had 10 minutes write down something like better than either of those, which is like kind of a decent proxy, um, which is basically like, you know, what do we do? So whatever, first of all, obviously we cut off opening your position. Then if you're a calculate gets further down in collateral, the first thing we do is we just start sending orders on behalf of your account to close down the position it's done in an automated way.
It's done like bit by bit, like basically he walks it and, you know, we keep it to like a relatively low fraction of, uh, of, of, of underlying volume of the asset. So like, we don't want to be in a position where like the location and just 75% of global volume, because then, then it's just like that, like the market doesn't have time to get liquidity for that. Um, and, and that's also sort of like one way to think of what happens if you send to market orders, like 75% volume for that two second period, you know, and that just overwhelms order books and Zooey. So you sort of like chip away with that. And, and, and hopefully that works, or it's just like mark has recovered or go down depending on which direction their position was in, you know, but before actually goes, their position has been liquidated.
Like we no longer have to liquidate it. And then we stop. If that doesn't work, like things just keep moving into position. And like the, the location engine is like going as fast as willing to go in terms of like fraction of volume and, and, and like the team closer and closer to bankruptcy, you have spells this backstop liquidity prior system where basically we just pass off their meeting positions, evaluate the account wholesale, like for Radek to a bunch of, uh, liquidity fighters who have agreed to 24 7, like basically forcibly take on liquidating accounts. Um, and so that's what happens when it looks like the, you know, first step the liquidation and she wouldn't get there in time. And the thought is, they're like, you know, these market makers have well collateralized well-capitalized accounts, and then they can figure out what they want to do with those positions. It's not like perfect, but it at least sort of like, you know, the goal is to sort of like, get rid of the unnecessary, right. And like, you're, you're going to have an impact whenever there's a forced sale, but like, at least you want to have that impact be like the cracked economic impact instead of like five times that, because it's done way too quickly or something.
Matt:
Can I ask about like order books and market makers? Like, what I'm interested in is an intuition for sort of how liquid these crypto products are. Right? So like you have like, sort of in US equity exchanges, you have the stereotype of like, there are, you know, high-frequency electronic market makers.
If you sell out of stock, the stock will go down by like a sort of predictable amount. And like, people are willing to step up to buy it at these declining prices, a certain amount, right? Like, there's, there's like a certain amount of capital in the, in the order, but there's a certain amount of like any time the market is open, someone is there to buy, uh, people complain that they're not as willing to sort of take risks as like the old school banks were. But like, there's, there's a sort of like predictable amount of liquidity, like in crypto markets in particularly because they're so fragmented and there's so many products, like if you want to sell a bunch, like, does the price go to zero?
Like, are there a lot of market makers with capital who are sort of like committing capital everywhere and kind of like trading quickly? Or is it a little bit more of a, like, you never know where you're going to get kind of thing.
Sam:
Yeah. If, well, first of all, it depends on the venue, yours. If you're using server at a dinky exchange, then like, it's sometimes like who the hell knows what's going to happen. Right. And you'll see completely wacky prints sometimes go up on illiquid vendors and remember if there's no Reg NMS here or anything like that.
Matt:
Can I say, like, in, in the US like, you know, every market maker is making more cars, then every exchange, but I guess there's no, there's no reason to expect that in crypto. Yeah.
Sam:
No and so like the different exchanges, like Bitcoin\/USD on one exchange is like a different product from Bitcoin USD on another exchange. I mean, obviously it's basically the same thing, but it takes like an hour to turn one into the other, through like transfers, if you're lucky and like a day, if you're unlucky and, and there's no, there's nothing forcibly keeping those in line with each other. Right. So, so that is one thing to note is you see divergences between different exchanges when markets are stressed and, and you usually, these are tiny because they're arbitragers, but like when they're a big moves, sometimes they're percents. So is that sort of like one caveat to making, and we talk about which exchanges you see, sort of these illiquid prints on it's maybe not exactly what you think like it's true search that the like DKI ones, it's also true of some of the better known ones and in particular, and this is like a huge, huge, huge factor.
Any exchange that doesn't allow any leverage or margin there's certain competing intuitions for what would happen there, but in general, it's less liquid. And the reason it's less liquid is like the liquidity fighters don't have any ability to margin there. And remember, this is like these, these deliverables, this isn't just looking at total value. You know, let's say that someone tries to sell a hundred million dollars a Bitcoin on it in a five minute period on a spot exchange with no, no margin capabilities. If the market makers didn't have a hundred million us dollars, basically cost studied on that particular exchange. At that particular time, they can't buy it, but you just run out of dollars to buy it. And they might have another $300 million in their bank account or on other exchanges that didn't help them buy that offer. And it might take a day to get the dollars over there if there's new margin names that, that also makes it way harder for market makers, right? Deep liquidity. Because again, just like it's not capital efficient for them to keep, you know, $17 billion of reserves of every plausible currency on every plausible exchange,
Matt:
Because in the U S you have to, in like us equities, you need to put orders on every exchange. But in, in crypto to do this, you need to like actually capitalize like your maximum order on the exchange.
Sam:
That's right. And this is the flip side. This is a drawback to the cryptosystem where I sort of described the miracle of it, you know, earlier of like one integrated product. And so you get so much efficiency out of like, you know, you just have your funds there and you can do anything you want on the exchange. And like, there are no intermediaries. Everyone can do it like this. There's no like stock loan business being completely like separate in a separate company on a separate timescale from like the trades you need to be doing, you know, you do get a ton of efficiency office, but the flip side is you don't have one central prime broker that's capitalizing, you know, simultaneously all exchanges for you with the same capital. Like you have to separately capitalize each one, which is super, super expensive, especially if they don't allow margin.
So is that sort of like one issue that you run into, which isn't an issue with overall crypto markets? Like if you're looking at sort of like the like blended average Bitcoin price, that's not a huge deal, but if you're looking at like blow outs of one particular venue, then you can get to like, okay, sure. But like, like ignoring that, like let's say just average Bitcoin prices across all major exchanges. So you're not worried so much about like, yeah, not sucks if there's like a little divergence, but like generally what's a Bitcoin worth. Like, you know, how much has that diverged? Yeah. You know, it's better than it was three years ago. Like the, the market makers are massively better capitalized than they were three years ago. Um, and so, you know, I think something you saw as like on this drop in may, from like 60 K to, to 30 K, it was like very, very orderly.
All things considered like is a 50% drop in crypto markets. It's like a one day period. But like, and there's, there's a lot of liquidations, but like there, there weren't massive illiquid, France markets remained liquid and, and orderly more or less, still like an impressive extent. Given the volatility, contrast that with a year ago in March, 2020, when crypto dropped from nine K to 4k and like a two day period, there were people freaking out there that like, there are going to be systematic failures in the crypto industry. And like, you know, think about it. Like it wasn't like our Keiko is people worried about it was 2008. It was a chain of liquidations of businesses started by a few. And they're like, people going around saying, we have no idea who's underwater here. Like it would be everyone, like in lots of businesses basically predicated their financing strategy on the notion that it was implausible, that they couldn't go below $5,000 for better or for worse, that, that was like empirically true.
So you lose a lot of mining firms. There were leveraged long Bitcoin with like a bankruptcy price of like, you know, $4,500. Like there's like huge, huge swaths of the crypto space that were like maybe in danger of being bankrupt at 4k. And of course, then you could have massive cascading effects and liquidity and markets was completely shot. None of the market makers had capital left to buy, even though there are obviously amazing purchases to do, if you happen to have a billion dollars lying around. And, and, and so it was just like, it was, it was a massive nightmare and like really dangerous for the industry in a way that like this year's crash was way more orderly. And I think partially the industry has grown a lot, partially, honestly, like, no one's business was predicated on Bitcoin, never getting down to 30 table again, like everyone sort of thought that might happen. Yes. I think that's like basically right. That the industry is less leveraged in percent terms. Now I think the dollars of leverage have gone up, but so is the market cap and the market cap has gone up faster.
Tracy:
This is what I was about to ask because it feels like you're describing the system as being less levered and the market makers and the exchanges being better at liquidating positions, being able to do it in a more orderly way. But I feel like at the same time, so everyone always struggles whenever there's a big move in Bitcoin. And I feel like over the past few months we've seen leverage come up again and again, as a sort of excuse or whenever the price is dropping, it's like, oh, levered positions are getting liquidated. Like, is there a disconnect there, like, is that narrative of the market wrong? And then if it is what is actually driving the price of Bitcoin, like if you were going to look at the past couple of months, what was the cause of the downdraft?
Sam:
It's a really good question. So first answer is there is some truth to it. Liquidations and leverage were a cause one of the causes of the drop from 68 to 30 K it was just at a level which is large in absolute terms compared to a year ago, but small relative to the capital in this space. And so, you know, there are $20 billion of long positions probably that got liquidated over a week long period, uh, during the base part of the drop in crypto. But the industry was able to absorb that you cause a decrease in price. It caused a significant decrease in price, but it was like a surprisingly orderly decrease in price in that like people weren't blowing out. They, they, you know, there are a lot of losses from some people, but they, you know, weren't generally going, you know, this is sort of like large players in this space were very well capitalized.
The systems knowledge he had improved. So exchange downtime was less bad. I don't want to say he's great. Like musi students had serious downtime this time, but way less than, you know, a year ago when most exchanges had 12 hours of downtime during the big crash. And so the, and the liquidity in this space held up much better under the liquidation. So they did a year ago, but there were real liquidations and it was one of the contributors to the crash. Now, one thing I think is worth noting, there is like, they're also one of the contributors to the run-up from 10 K to 60 K I think that's sort of like often people sort of like want to live in a fantasy land where like leverage can make markets go up, but not down as like, it's not really how it works, like for better or for worse. Like I strongly believe that the crypto ecosystem is in a stronger, healthier position today because of leverage than it would be if there was never any leverage.
Joe:
Sam, I don't know how much work if we're going to really talk about this, but I actually want to just ask a sort of question related to the defy ecosystem. And I know beyond FTX you're invested in that there is leverage exists in defy in different ways. So someone might post some, a stable coin to borrow more stable coins, or they might post Edith to borrow stable coins and then they might use that to invest in something else. And then they get another token. Are we going to have to like, how well do we have a handle on, I guess what I would say is leverage measures within defied feels like whether we're talking about an exchange, like FTX or a traditional, uh, uh, traditional trad five venue. Like we have these sort of like concepts of like how much open interest is there and how many like long futures are out there. Are we going to have to sort of like reconceptualize how we think about leverage in the defy space, where perhaps there isn't a perfect analog to some of this stuff. And do we have a good handle on sort of like overall vulnerability to disorderly liquidation?
Sam:
Yeah. So I don't think we need to fundamentally reconceptualize it. I think there are very clear parallels and I think it's like, not that hard in some sense to think about it. I think the big problem is that there isn't a guy who's in charge of it. When, when you sort of think about like, you know, how do you figure out, like who's in charge of like staying on top of the risks on FTS? Like there's an answer, right? It's like, it's me. Right. You know, and my team, I think when you look at defy there often isn't an answer for who's in charge of, of managing it, but also who's in charge of reporting it. And so I think it's just messy is the answer like, like, like no one needs to respond, take your responsibility. And it's not obvious who would. And so I think that there's just like a ton of untracked stuff and like, you know, what that means is like, yeah, there's just like, there's, uh, more capacity for like wacky bad things to happen because no one's in charge of making sure that when something wacky happens is the good kind of wacky,
Tracy:
You know, we were, um, we were talking about how it's been an eventful couple of weeks for crypto and one of the things that happened, um, which would probably fall in the sort of, um, negative camp was the new sec chair. Gary Gensler came out and started talking about, um, tokenized stocks or synthetic stocks and making some noises about potentially going after those. Um, so I'm wondering how worrying is that for you? Um, would you potentially consider delisting those? I saw a unit swap, um, took them off of, uh, well, at least the front end of unit swap. So you can still trade them on the actual unit swap code, but you just can't do it through the unit swap website. Um, is that something you think the industry is just gonna have to do going forward?
Sam:
So, right. So I think basically what against our side, which is frankly not that shocking is like, if you tokenize a stock answer is still sort of a stock and like, it's not like it loses all regulatory properties. Um, as soon as you tokenize it again, not, not to put words in his mouth, but I, I wouldn't be surprised if you're sort of looking at some parts of the industry and being like, that's your looks like an obviously unregistered security being offered with no AML KYC, registration, or terms or conditions to anyone in the world, including Americans and restricted jurisdictions. That's not generally how brokerages work. I think it's sort of like where, you know, roughly that was coming from. Um, and I don't think that was a super shocking announcement. I think like, I think when you contrast it with what we have on FTX, like it's a pretty different situation where we have, like, first of all, we AML KYC, everyone fully who is able to touch, you know, soften FTS at all.
Second of all, we restrict it such that Americans can't access them. Neither can a number of other jurisdictions. Um, we ensure that they're backed, we have an actual license from boffin to offer the products. Um, and as much more like just how like, you know, interactive brokers are introducing purpose to them operate. And so I think that like denser, wasn't saying like, if you tokenize a stock, it makes it evil. I think like his point was like, it's, it's kind of sell a stock. You know, if like you wouldn't have been able to offer stocks at all, like weary, whether you could offer tokenized stocks
Matt:
Is the longterm goal that you are offering tokenized stocks to Americans either by regulatory changes or when I registered as a us stock exchange, like, is this like a sort of crypto it's the financial system kind of player? Is this like, you're a crypto exchange and put, since boffin will let you do stocks
Sam:
To the stocks only the first thing you said? Um, like, yeah, very, very clearly that is like, uh, our, our goal here. And I think that like, like there's there a roadmap for this in the United States, at least sort of the tokenizing part I think is complicated in the United States. And I, I didn't even think that like, no one has quite issue cleared eye clarity on exactly what it in the U S regulatory context to have a tokenized stock, I think against, they're sort of saying like, well, it certainly isn't like irrelevant. Like, like it's still kind of a stock. Um, it's not like when you talk about tokenizing it, like, what does it mean for it to be tokenized as a free floating? How does that work? Who's the insured, like, there's a lot of sort of complicated questions there, but maybe just taking a step back, like how it stops in the first place, like just normal non tokenized docs. Um, I don't know. I mean, like we FTX US did recently get a broker dealer license, like sort of, you know, make of that, what you will.
Joe:
So in theory, one day, rather than maybe, you know, like I have a Schwab account where I have my like S and P 500 ETF and a couple other basic things you could, if there is a day in theory in which I could just have all, I might have all that on FTX dot U S
Sam:
That's right. And I think that there's like a lot of advantages that system, because like, it's sort of like never fun when you're like, oh boy, I want to go like, do this thing with my money, but wait, it's in the wrong pocket. Like, you know, I, I like wanted to go buy a banana, but it was in my brokerage account or like, I want to buy a Bitcoin, but it was in my bank account or like I wanted to go buy Tesla, but it was on my crypto account. And it takes like three days to transfer, you know, between those unlikely, like, it's not a good user experience, you know, you have to have decided days ahead of time, what you're most likely to want to use your funds for. Um, and so I do think that there's like real advantages to having a single platform where, you know, for all of the most common things you'd want to do with your funds, you can do them.
And, you know, we're moving in that direction. On the consumer side, in the U S like we have obviously crypto, we have lots of methods to get both crypto and Fiat on and off the exchange. If we have a debit card that you get tied to your FPX account, um, which we'll spend whatever you happen to have there, whether it's crypto or Fiat or whatever. Um, and, and so you can, you know, have your funds there, you can do your crypto trading and you can also go buy bread. And, you know, I have like broker-dealer license coming online. And, and so I think that is like, definitely a part of the vision in.
Joe:
The last time that we spoke to you. We talked a little bit about this, but basically every time someone who's sort of like crypto skeptic starts first thinking about the space on the first question they always ask is about Tether. And we talked about this and, uh, you're a, uh, you as a, um, I guess on the exchange, but also with your trading, you're a tether user. And you talked a little bit about some of the advantages of it last time, but can you talk a little bit further about the full experience of interacting with tether? Cause people, you know, like people have all kinds of conspiracies, like, oh, the money's out there. You never actually, no one has ever actually sold their tether and gotten us dollars back so forth. Can you just talk a little bit about your experience, I guess, as a tether user and customer of what happens when you use tether, when you want to redeem tether and et cetera, and how that works as an actual tether customer inside?
Sam:
Totally. I'm actually a little bit curious before I jumped into this Matt what's your takeaway from what the chatter is like, and also what sort of like your kind of like summary or like thoughts are on that, you know, based on that. And then I can sort of dive into what our experiences has been like.
Matt:
I want to be careful here. Like Tether has a strange public relations strategy, I guess. I mean, like they talk a lot about wanting to get an audit and then don't get an audit. They talk a lot about their like high quality commercial paper holdings, but don't disclose them because counterparty confidentiality is very important to them, which is not true of any other holder of commercial paper in the world. Um, like you can just look at like the, the complete holdings by CUSIP of every money market fund for tether. It's very important that they keep it secret. So if they were doing something shady, they'd sound like what they sound like, which doesn't prove that they're doing something shady, but it is like, it is confidence undermining, I think.
Sam:
Yeah, think that's a pretty reasonable way of putting it. I think like a pretty, pretty odd public relations strategy is, is not an unfair characterization. Um, and I, I think I'm generally sort of like often sort of thought of as, as a tether apologist or something, that's really how some people would, would phrase it. Um, I certainly wouldn't necessarily want to say that they've like historically always chosen the best PR strategy or, or anything that sounds vaguely like that serve a case where there's a lot of smoke, but I don't think there's really much fire, but, but I like D like there is smoke and like, I, you know, and I think that's sort of like, what's, what's going on. Well, for one thing is sort of like curious PR strategy, but putting that aside for a second, like, you know, how about creating or giving tether?
Like, can you do it? You can do it. We have done, we've done billions, it's a messy process. Like it works, but it's, you know, you serve looking freaking redeeming USDC, and it's like, all right, like they have their us dollars in a us bank account, just same bank that everyone else in crypto uses takes like 30 seconds to, you know, transfer even like, go create it, 30 seconds later, they're sending you the tokens. You can redeem it 30 seconds later. Like you see the funds in your account, no fees, a very, very kind of like straightforward and smooth process. And I think you look at Tether and it's like, well, it's a messy process. And I think like every piece of mess in the process, like makes it much harder for them to have what would look like is self-evidently reasonable process. Like it just sort of like, you know, makes it search like really heightened sense of like something weird going on.
I think that that sort of like, he's the answer though, is that like, it is messy, but, but like the, like the funds are there, like we see like real legitimate inflows into Tether from a lot of places, like massive ones that then lead to market makers, selling and creating and sending, you know, real billions of dollars to tethers bank account, you know, just to create it and like, you know, have have relationships with like Heather and the banks and, and everything else involved. And like everything sort of checks out in a, in a messy way. And then you can start to get to the question of like, are able what's their business model is probably getting yield on the dollars. How are they doing that? I dunno, you know, like some commercial paper, like stuff. And you know, I, I think it's like one of these things where like, if you want to try and argue about whether Tethers were like 99 cents or like a dollar and a penny, I think that's like a pretty reasonable argument
And like, I don't, I don't want to take a strong stance on that. Like, I, I certainly don't want to like strongly argue against any, any stance there, but, but I think that like, when the argument gets to like, is it worth like about a dollar or like about 30 cents? Like anything else there's about a dollar. And like, you know, the reason is that it is fundamentally like basically backed by like, you know, about the right number for a little bit more than the right number of like, kind of dollar like assets just in like a system, which is like a little bit messy in every possible place.
Matt:
So they might stretch for yield, but like, by buying like slightly dicier commercial paper where they might break the buck, but go to like 99?
Sam:
Rather than that's like, yeah, and so I say this without knowing like, exactly what their commercial papers like, this is sort of like that that's the twist on it, which I'm just sort of inferring the details of that last piece based on like all the other interactions that surf we've had with them.
Matt:
They could be putting it on to Bitcoin, but that would just be sort of a strange move on their part because like, they have like a good business putting [it in] commercial paper.
Sam:
Exactly. Like they've got lots of legitimate, profitable, good businesses. They don't need to do that. Also. It's unclear why they would do that. Like, it's, there's like incredibly risky. And I think the other thing is like, you get to know the people involved here. They're not like that they really, really aren't scammers. Like, it's really not like a calm way dealing with them. You're like, they're selling me steak oil. I'm like, they're just blatantly lie about everything. And like, I'm pretty sure that like, nothing is like, that's not at all sort of like the interactions that people have with them.
Yeah. They're a, is that the one with, uh, um, with the legal counsel? Yeah. I think they backed themselves into a lot of positions where like, they, they, they sort of like make probably basically correct claims, but ones in which they're not going to, as you said, like, they don't feel comfortable elaborating maybe for like, just sort of like, uh, you know, ethical reasons maybe because like the truth is like a little bit messier than they'd like to say. Um, and, but, but before a reason to like, make these claims and then like refuse to back them up and, and that's like never a good look, although I think it is not that like, there's no relationship between the claims in reality. I think he's just like one of those other cases.
Tracy:
This might be an unfair question, but I'd be interested in your answer. If the worst of the conspiracy theories were true about Tether, like, I don't know, say it's investing in commercial paper but it’s investing in like Chinese commercial paper and it all goes like bottom up — which is a rumor that's out there of course — and Tether collapses. What would that mean for Bitcoin and the wider crypto space?
Sam:
Yeah. So do you want me to take, like the fantastical version of that where Tether goes to zero? Or do you want me to try and take, like what I think is sort of the most proximate, like vaguely plausible version?
Tracy:
Let's do both. Can you do both?
Sam:
So maybe first I'll talk about the sort of plausible version. So like what if they took a third of the money that they had and put it in like sort of B tier commercial paper from China, like beach here for chunking commercial paper. And, and then, you know, there's sort of a run on the bank in China as looks like, you know, flat for that, that could happen. Um, and, uh, and it turns out that like this beats, your commercial paper, like 40% defaulted on average or something. And so you ended up with like, you know, a 12% loss of the tethered treasury, right.
Sam:
You know, the 40% of 30% or something like that. Like let's say, that's where you ended up, which of these like, you know, sort of like very negative, but like not completely implausible outcome. What happens then? So tether is sort of in some, some mystical sense is worth 88 cents or, well, it's worth it at least 8 cents, right? Like you can redeem it sort of maybe for 88 cents, you know, what's the loss, a loss there's like 10 billion or something. One possibility obviously is like nothing happens, right? Like unless people try to redeem almost all the tether in existence, like they could keep processing, maybe it doesn't even comes out. Maybe it comes out. And for whatever reason, the crypto ecosystem doesn't seem to care. Um, that is like anything, a plausible answer, right. There's just like weirdly things continue on as if that didn't happen. Um, but also, maybe there's a little bit of a run on tether.
Um, the phase, their banking partners start to get nervous, redeeming it becomes a very difficult, maybe they don't give you a dollar on the dollar for adoptions. Maybe they limit them. They say, well, the world can only redeem $1 billion per week, total of Tether maximum. And the world wants to redeem 15 billion. And so there's like a race to redeem your tethers. And most people are not getting filled on those redemptions tethered crashes down to, you know, 85 cents on the dollar in markets. You know, there is a lot of people who are stockpiling to have losses of, you know, 15%. And then I think sort of like, you know, there's some regulatory crackdowns on stable coins and these mostly continue honestly. Yeah. Were before except up like, you know, $10 billion total was lost between toddler holders. Um, maybe they recover that eventually, right? Like if either tether is effectively backed by the combined equity of Bitfinex and Tether, then like maybe that's like maybe it all ends up kind of okay.
Although like, certainly like, you know, not in the liquid sense, you know, frankly, I think they could probably do a lot of things to try and plug that in the meantime, but like, that's sort of like, I think roughly how that would end, like you would see each other get sort of like repriced to like, you know, 10 cents under or whatever 15 cents center. I don't know, you know, it a, B like a stock split and tether it's up, you know, where he didn't get more tethers and, you know, yeah. They quaint tethered start trading at different price, price, USD on major exchanges. The Paik would like mostly break. There'd be like, so raised redemptions fees for a Dean would go up 2% or two. They kind of slowly get through people, make a bunch of money doing the arbitrage, really bad luck, regulars who cracked down on stable coins and crypto in general and life would go on.
And for probably the coin crash, 10%, 15% on like the back PR that's like, sort of roughly my guess at like how that would play out. Um, I think he's like would not be disastrous for the cricket because systems had to be clearly bad. Now we can start, take this other hypothetical of like, what if it's worth zero? Right. What if they like put a hundred percent of it or 95% was in commercial paper of like one company and that one company goes bankrupt or something sort of equivalent to that. Right? Like what if somehow they lose the vast majority of the tethered treasury that's that's way worse. Like now all of a sudden you have like a $70 billion loss or whatever in crypto, I can't remember the current market cap, but like, that's the order, you know, what does that mean? Well, tether like BTC teller markets go to infinity, I guess, you know, like, like he probably gets delisted from some venues.
So there are a lot of Bitcoin tether futures out there. This is kind of a fun one, right? What if you have a quarterly Bitcoin tether future, and Heather goes to zero, like, what is your future expire two is the answer infinity. And like, how do like, what's the PNL transfer there? Like, are you trying to transfer infinity tethers each reserve dollars from the losers, the winners on that from the shorts of alongs, like, okay. So that, that, like some exchange would have to contend with that. There really are a significant open interest in Bitcoin to other people. Now, if, if it's a 10% move, maybe something, a little wacky happens. A lot of people thought they had a hedge and their head was not really a hedge. Um, but like, you can still inspire him just like aspires to 44 K instead of 40 K.
Right. If it's actually going close to zero, honestly, think that a lot of exchange, which is sort of lie, right. They just like silently removed the tea from the end of the markets and hope no one noticed. And like the indexes would be seriously change. And then there'd be like, like this $20 billion of open interest in them, which was collateralized 50% by tether from users into tethers network zero and each stage they'd have to choose between taking a massive loss or doing a massive clawback or, you know, it, it w it would be a mess.
Matt:
In other words, like a Tether, the Bitcoin-Tether feature is implicitly a Bitcoin USD future. And when Tether stops being USD, they just sort of say, well, we really meant it as a USD future.
Sam:
Exactly. That's like my honest guess about what would happen on some venues. But of course that doesn't solve…
Matt:
I mean, it's an interesting question because it's like, if you are like taking a position on Tether, are you implicitly taking a USD position? Or are you implicitly betting on the credit risk of Tether.
Sam:
And the answer is if you're taking a Tether USD future, like a USDT gets UST USD futures position, you're clearly taking a credit risk position, but if you're putting on it, exactly, no one is using that. Not no one, but like 90% of the open interest is trying to bet on bank.
Joe:
On this note, and I want to just talk a little bit, make sure we get a little bit more to some of the interesting products you have on FTX. There is like you have like this short tether future? Or like a 3x short both. Just because basically harvesting premium from all of the people that are betting on tethers collapse. Like explain that product.
Sam:
Think that's basically right. So like right now I look at the tether. So we have a USDT against USD future it's, you know, a cash settled future on that USD price of tether as a DC is explicitly a credit risk product. And, you know, and so then you can ask, what is it trading at? So spot USDT USD is currently 9, 9, 9, 9 to one.
So it's trading at a dollar and there is millions of dollars bid on both sides of that one basis point wide market. Now you look at the quarterly tether futures. So these are futures expiring in about two months, September 24th. Um, and they're currently, there's $40 million of open interest right now on days on FDX. And they're currently trading 40 cents under. So you're trading at 99 60. What that means is that like, you know, the market, if you want it to read it this way is pricing in, you know, 40 bips per month, uh, or per two months.
So 20 pips a month of credit risk and tethered every month, uh, tethered doesn't crash. Like everyone who thought it was budding was getting crashed, like bleeds a little bit. And every bet that it wasn't getting fresh gains a little bit and not surprisingly like the world is divided into two people, not three people. The people are the people who think it won't crash and the will think it will. There aren't people who think he's going to go up to $2. It's like a massive bowl on the price of $1 or what you're shooting for. And so, because of this, like no one is like trying to buy this up above a dollar, like the wars between the, the, the people shorting it at all, or, and the people who are longing at below a dollar. So it's going to settle below a dollar almost certainly with some caveats we get to actually, there's some weird market dynamics, but, um, but you know, because there's always create fluid dollar basically, and it never has blown out.
Sam:
Right. And so like just, you know, things, this is a prediction market, right? Like every year, exactly every year that tether doesn't default, like that's a little bit of a baseline update against the like tether is going to default philosophy. And it's a little bit of an update towards the, like, Heather is worth a dollar philosophy.
Um, so if you think about a CDS, right, 20 bips per month, that's what that's like three, two and a half percent a year that this is trading under, you know, is that, first of all, it's not an insane number, right. If there's a 20%. Yeah, that's right. You know, if this were trading at 20% on her, that would be an insane number. Like, that's the kind of thing where like, it's been five years and tether as an imploded, like, all right, your fault, your like your thesis is not looking so good. Like at two and a half percent a year, I think that's too big of a discount, but like, I could be wrong on that. You know, I certainly like, you know, you can't look at history and be like 2% here is obviously too big of a discount versus their PR oh yeah, absolutely. Right. This is there. And that's sort of what's going on. Right? Like it's sort of trading halfway between our PR on the one hand and the fact that, that people successfully redeem it on the other hand. Right?
Matt:
Yeah. I think that, like, if you have like some experience in TradFi, like the fact that people have successfully redeemed it for something like single digit number of years, it's like only so encouraged.
Sam:
Right. And I don't want to frame that as like, this should make you instantly encouraged about it or anything. And I, I really don't want to push back into people who think it should be at a 2% for your discount. Not necessarily agree with them, but like, I don't think they have a crazy position at all. Right.
The thing I want to sort of push back into the people who think it should have like a 30% per year discount, you know, DC is like, just not worth anything like a dollar position, which like, I think there's a lot of evidence that, that position is like, not really right. Um, whereas I think when you get to the question, it's like, treat these to be worth a dollar or like a little bit less the base commercial paper, right? Like what your tethers commercial paper trade at, you know, it's sort of a synthetic commercial paper, virtual tape or whatever, you know, and the answer is like, yeah. You know, sort of like, eh,
Tracy:
I could tell, we could talk about this for like another hour and a half probably. But I know Matt has to go because the Archegos report is calling him and I have to go feed a puppy. We should try to, maybe we should make this like a regular catch-up that we can do every once in a while. That would be fun.
Sam:
I would love to do that.
Joe:
Yeah. This was a real treat and thanks to both of you for coming on and absolutely would love to do it again. Yeah.
Matt:
Yeah. This was super fun, I’d totally do it again.
Sam:
Yeah. Me as well. Thank you guys. Thanks guys.
Tracy:
Joe, I enjoyed that conversation. It was nice to catch up with Sam as always. And I am very curious to see what he does with $900 million. One thing that struck me was his sort of vision for the ultimate end state of the exchange, like this idea of centralizing all your money in one place, not just for your investment. So you're investing in stocks and crypto, but also for payments, that was pretty intriguing.
Joe:
Yeah, I thought that was really interesting. And I, you know, it really does speak to the scope of the ambition, but again, you know, here's someone, or here's an exchange that literally, almost nobody had heard of a year ago, and now it's one of the most powerful players and the entire world. So it's like, oh, you're like kind of skeptical, like betting against it. And like, wouldn't shock me if a bunch of Americans had like their, you know, SPY ETF and TLT and all that. And FTX one day, based on the trajectory.
I thought that was like a really good episode, just cause, you know, a lot of these like crypto conversations, you know, they could be a little bit like, it was just nice to sort of strip away or get past some of the whole conversation about what this is all for, which is again another, but also just like how it really works. And I think learning a little bit about just like this idea of like how crypto like collapses a lot of this stuff. Like whether it's the clearing house and the exchange and the broker, it's all sort of flattened into one and thinking about the implications of that was a very interesting to hear Matt and Sam sort of riff on these topics.
Tracy:
Yeah. Also just weird to hear Matt Levine of all people refer to the financial industry as ‘TradFi’ — I was not, I was not ready for that. But that kind of shows how far we've come. The one other thing I would say is I still think there's an open question around Tether and we are certainly not done discussing it on the podcast. So we're going to have to dig into that one a little bit more, I think.
Joe:
Yeah. I mean, it's interesting that I was surprised because just having followed Sam and his colleagues, and even last time I got some answers to questions, but now I have more questions. Yeah. So we'll have to do another.
You can follow Sam Bankman-Fried on Twitter at @SBF_FTX and Matt Levine at @matt_levine.
