Thread by @CaitlinLong_

QUESTIONS ANSWERED here about this🧵(thx for all the engagement!)
1) what do u mean by paper #bitcoin?
2) is all leverage bad?
3) why so sure that a leverage-flush reckoning day will come for bitcoin? Gold investors have waited forever.
4) can't traders hedge the risk? (haha, no)

https://twitter.com/CaitlinLong_/status/1472308813697060869

2/ PAPER BITCOIN=a promise by an intermediary, such as an exchange, to deliver real #bitcoin. Unless you hold the private keys, you don't own bitcoin--what you own is a CLAIM to bitcoin (an IOU). Does your intermediary own enuf on-chain bitcoin to make good on all such claims???

3/ The honest truth is that probably no one other than your intermediary itself really knows & many intermediaries are likely running fractional. It is certain that the quantity of paper #bitcoin outstanding > the 18.9m on-chain bitcoins that exist, but by how much is unknowable.

4/ IS ALL LEVERAGE BAD? No. Leverage >1:1 is bad, but leverage < or = 1:1 is fine. When total leverage >1:1, it means there are more paper bitcoins than the 18.9m real, on-chain bitcoins that currently exist. It's impossible calculate the excess of paper bitcoins over the 18.9m.

5/ Why? bc there's almost zero public disclosure by #crypto intermediaries + some of the forms of leverage are v subtle (eg, collateral substitution, or ETF market-makers being allowed to go naked short to facilitate mkt liquidity, futures exchanges running unhedged books, etc).

6/ WHY SO SURE A DAY OF RECKONING IS COMING? This is a great ? & I'm glad several of you asked it. Many commodities mkts have the same situation (lots more paper versions than the real thing exists) & it's been that way for decades. But a reckoning will happen sooner in #bitcoin.

7/ How am I so confident? A simple reason: there will never be a clearinghouse of meaningful size for #bitcoin bc ~90% of it is in private hands, not intermediaries. That # fluctuates--can be as low as ~75% during bear mkts & goes up in bull mkts as ppl pull coins off exchanges.

8/ This is VERY different than other commodities where banks control the underlying bc they control the clearinghouse. Think abt gold--it's >95% owned by central banks & clearinghouses (eg LBMA). Retail can't force a short squeeze. But oh boy bitcoiners can force a short squeeze!

9/ We bitcoiners showed who really controls #bitcoin during the 2017 #UASF--it's retail bitcoiners, not intermediaries such as exchanges or miners. (Read the history if you don't understand that reference, bc it's critical for you to understand if you're in bitcoin at all.)

10/ As Warren Buffett likes to say, when the tide goes out you see who's swimming naked. Well, clearinghouses in #tradfi mkts (such as central banks & private utilities like ICE, CME etc) have the ability to reverse the tide at least temporarily to cover up who's swimming naked.

11/ How? So many ways--allowing failures to deliver, posting a different type of collateral, high collateral thresholds, allowing time to settle margin calls, permitting intraday overdrafts, #rehypothecation of posted collateral, etc etc etc--not to mention lender of last resort.

12/ But prob no one will be able to build a #bitcoin clearinghouse of meaningful size bc so much of #BTC is squirreled away beyond reach of big players or big central banks. There's no bitcoin lender of last resort or clearinghouse to temporarily bail out failing intermediaries.

13/ A few wks ago I tweeted #bitcoin could go no-offer someday (no one selling it to intermediaries desperately trying to buy it to survive). I meant no-offer TEMPORARILY, not permanently. A failing #bitcoin intermediary could fail w/in literally hours--that's all it might take.

14/ In other words, #bitcoin going no-offer for just a few hours could be all that's needed for that day of reckoning to occur. This is one reason why I've warned that traders can't look at bitcoin as if it's just another price-volatile asset to trade. it isn't. #apexpredator

15/ It's also a reason, among others, why I've warned that #WallSt banks can't treat #bitcoin as just another commodity, & have predicted that someday it could take down a G-SIB (a global systemically-important bank). Their systems just aren't set up to handle an asset like this.

16/ LAST QUESTION--CAN'T THIS RISK BE HEDGED? Haha, no. Short-term price fluctuations can be hedged, of course, but the big risk--the gap risk of #bitcoin going no-offer temporarily--can't. I've seen this before--models show that a risk can be delta-hedged, EXCEPT FOR tail risk.

17/ And then the tail scenario happens (a <1% scenario) & you're wiped out with a loss severity of >90%. There is no hedge for such a scenario in #bitcoin. Moreover, that scenario is far more likely in #bitcoin than 1%, for the reasons in #7 discussed above.

Good luck all! 🤠🔑