This is, what I hope, to be a fun, fact filled ramble about Tethers, exchanges, and the systemic threat we face as a result of the collusion of early adopters to attempt to beat Austrian economics.
We will begin our journey with a lesson in why economists hate Bitcoin. After all, it’s their fears that are coming true.
Mises Is Laughing Because Bitcoin Is Evil
If you have never heard of Ludwig von Mises, you don’t know currency or how it works. When Paul Krugman famously commented “Bitcoin is Evil” he was demonstrating his mastery of understanding as to the underpinnings of the functioning of currency as described by Mises. His explanation was watered down for the NYT mindset, but let’s dig a little deeper into the implications of what he said.
Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
This point is supported by two facts. The first fact is that Bitcoin is only made more efficient by the employment of advanced ASICs, but it can be conducted by hand. In the industry we make jokes about Bitcoin after the apocalypse being hashed in monasteries by monks and block solutions and transactions being sent by carrier pigeon. That computers make the process efficient enough to be usable means the valuation isn’t set against the cost of “creating a Bitcoin.” Mr. Krugman was smart enough to notice this.
The second important factor to this assessment is that the first commercial transaction for Bitcoin wasn’t for fiat, but the infamous 10,000BTC Pizza. This simple economic transaction validated Bitcoin’s value proposition in that it was exchanged in goods and services prior to valuation against existing currencies. As a direct result of that foundation, Bitcoin has no ceiling or floor.
I often ask the following riddle: “If the price of Bitcoin right now is [insert current price here], what was the value of the Bitcoin mined in block #1?”
The answer is like Schrödinger’s cat: the fiat value is both infinite, nothing, and everything in between all at the same time. This means that the value of a Bitcoin is valid only when you look at it.
Trippy, but true.
What the Hell Does This Have To Do With Tether?
As we’ve established that Bitcoin’s fundamental valuation is inherently fluid, this has a unique effect on businesses which transact in exchanging the currency into fiat which collect fees in both BTC and fiat currencies.
Imagine the Bitcoin economy as a tiered ecosystem based around the amount of trading volume each exchange contributes. It forms a pyramid, with currently Bitfinex at the top. Before Bitfinex held such a lofty position, it was held by MtGox. It is worth noting that it has taken nearly three years for another entity to emerge with as much market influence as MtGox exerted when it was in operation.
Let’s assume you are Rando Bitcoin Exchange CEO and you want to check out your fee accounts and feel like Scrooge McDuck swimming in his vault of gold.
Half of your fees are in Bitcoin and half of your fees are in US dollars. You can’t pay your landlord or taxes in Bitcoin, so you have to spend the cash. However when the cash accounts run out, you have to start using Bitcoin. You can then either spend that Bitcoin as Bitcoin or cash it out in order to pay your bills. If Bitfinex has a higher price and more volume than your exchange, where are you gonna cash out? Maybe you might allow your profits to be loaned for leverage and make money while you make money making money.
The problem is that the risk of settlement then shifts from your exchange to Bitfinex, and Bitfinex still needs a place to cash out.
The Vicious Cycle
Bitfinex is faced with two choices to obtain fiat redemption of their Bitcoin assets collected as fees: cash out in their own markets by dumping on their own customers or cashing out at another exchange, paying fees, and handing money to their competition to stay in business.
Either way… you lose. Your business over time begins to leak volume to competition or… you go insolvent. There’s no winning.
This is where Tether comes to the rescue.
If you follow the work of Bitfinex’ed, the plan becomes obvious: print funny money to fill the hole that Bitcoin creates naturally and diversify the risk across the ecosystem in an attempt to avoid the inevitable collapse.
The End Game: Bitcoin Armageddon
The game of musical chairs is drawing to a close. Miners can shut down the Bitcoin blockchain, and when that happens Omni and Tethers stop moving. Bitfinex and all USDT supporting exchanges are instantly rendered insolvent and everyone with money on those platforms is rekt.
What was SegWit2x really about?
Trust no one. Onwards and upwards.