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gravescd t1_j2akrpw wrote

Reply to comment by USFederalReserve in Bahamian regulator says it seized $3.5 billion of FTX crypto assets for ‘safekeeping’ by cloud_coder

But IS it $3.5 billion? Was that the value today or when it was seized? Will that be its value tomorrow? Collateral is collateral because it has definable value. If the value is uncertain, then its value as collateral would be the likely minimum liquidated dollar value. When it comes to crypto, that minimum is getting closer to $0 by the day.

It just doesn't make sense to borrow against something that's losing value continuously, that's a recipe for a margin call.

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USFederalReserve t1_j2alq3n wrote

> But IS it $3.5 billion? Was that the value today or when it was seized? Will that be its value tomorrow?

This is why I called it volatile. The price fluctuates within an expected range.

> Collateral is collateral because it has definable value.

Not true. The lender of the FIAT will undoubtedly charge a risk premium-- that is how they will make money when the owner of the crypto hypothetically pays them back. It would likely be negotiated in such a way that the wallet is moved to escrow which would allow the lender of the FIAT to recoup whatever they are owed from the wallet itself before returning the difference to the owner of the crytpo.

The more volatility, the larger the risk, the more risk premium that can be charged. Say you are a billionaire investor who wants to take on a billion dollars in crypto-- you would definitely be willing to lend your FIAT with the crypto as collateral. Best case, you make free money when the crypto owner pays you back up. Worst case, you can obtain a large quantity of crypto in bulk off exchange via the middle man.

That's just the birdseye view. One man's risk is another man's opportunity.

> When it comes to crypto, that minimum is getting closer to $0 by the day.

Crypto may be overvalued but its definitely not going to 0 anytime soon.

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gravescd t1_j2b3xga wrote

Collateral IS the risk premium. It defeats the purpose of asking for collateral if the collateral is itself so risky it has to be offset with higher interest or can only reliably back a tiny percentage of its nominal value.

We literally just witnessed one of the most spectacular financial implosions since Lehman Bros because of this magical thinking that Crypto is stable enough to back real financial assets.

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USFederalReserve t1_j2b5b0r wrote

> Collateral IS the risk premium. It defeats the purpose of asking for collateral if the collateral is itself so risky it has to be offset with higher interest or can only reliably back a tiny percentage of its nominal value.

First, let me remind you that this is a hypothetical that we are discussing. That being said, the volatility is not this needle that moves from $0 and Current VAL.

If I have 3.5 billion dollars worth of BTC or 3.5 billion dollars worth of TSLA shares and I want to have 500 million dollars of liquid FIAT, I'm not going to sell 500 million in BTC on the open market nor am I going to sell 500 million in TSLA shares on the open market. I'm going to find a market maker and use the assets as collateral for a loan from a market maker. I'm going to pay them interest and likely negotiate a deal which specifies how obligations are to be paid by X date if there is not Y payments made or if the BTC/TSLA shares drop Z%.

This isn't a rare or unusual thing and it depends entirely on what the assets are, the size of transaction, as well as the private individuals involved in the deal, along with their perceived capabilities of repayment.

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gravescd t1_j2bi8gf wrote

I understand how this works, but you're missing the point here that is specific to crypto: that its value is too volatile (and in the wrong direction) to be effective as collateral. It's like trying to get a HELOC while your house is on fire.

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