The Tether-Bitfinex scam might be a lot more elegant than what most people think and might hurt Bitcoin badly
Summary: Tether actually having the dollar reserves to back it might be a lot worse for Bitcoin than if did not and the chances of this is pretty high.
If you are a crypto enthusiast chances are that you have by now heard of this shady looking coin called Tether (USDT) and its possible role in an impending bitcoin crash. (Which by some accounts has already started to unravel).
For the uninitiated, Tether is a crypto currency that claims to be backed by equivalent USD reserves. (1USDT-1USD).The owners of Bitfinex (one of the largest crypto exchanges) also own the Tether corporation.
Now the most popular theory is that the Tether guys dont have the actual dollar reserves and are printing Tether out of thin air and in turn using it to inflate Bitcoin prices (and other cryptos) and profiting in turn. The doomsday scenario here is people figure out Tether isnt backed by USD and suddenly question the valuation of Bitcoin that has gone up astronomically recently.
Here are couple of articles covering this in detail (What Happens When the Tether Shit Hits the Fan?,How Bitfinex, Tether risk crashing global crypto markets ). “Bitfinexed” is this guy on twitter that first made this scam public and had been warning people 24*7 for months .
In this scenario the worst case is Bitcoin price going down to pre tether printing days, possibly lower as multiple tether dependent exchanges get hit and people lose faith in crypto.
I think there`s a worse scenario, what if Tether actually had the dollar reserves? That would mean that you dont have a good reason to shut down Tether and Bitfinex now, but that doesn’t mean that Tether cannot be used by the Bitfinex guys to manipulate the market.
How`s this possible you ask?
Imagine for a second that you are one of the largest crypto exchanges in the world(Bitfinex) and you also own a crypto currency thats valued at 1$ across the crypto universe. Now, if I want to buy 100 million dollars worth of bitcoin all I need to do is have a bank account with a 100 million dollars.I take a loan for 100 million dollars and the only thing I need to make sure is to pay the banks interest on time. The interest rate would be around 2–5% tops?
Now simplistically speaking I buy 100 million dollars of bitcoin of which I just need to liquidate 2–5% to pay back the interest. But this isn’t nearly as fun because as I buy 100 million dollars worth of bitcoin its price also starts going up and I also happen to own an exchange so I can wash trade on my exchange to push the prices up even higher and on other exchanges I can deploy my Tether to drive up prices like “operators” do in the stock market.
Seeing this bull run the greedy wall street guys want to join the party and start introducing their fancy financial instruments. Now you can make even more money by shorting bitcoin (Profiting when its price drops).
I look at my 100 Million Bitcoin war chest, my tether printing machine and say to myself “suckers!”. I go to my bank, pay them their interest on the 100 million without breaking a sweat and ask them to give me a loan for a billion dollars.
Based on my past history they are more than happy to advance me the loan. Now I buy a ton of short positions. Next, I start printing 100 million $ worth of Tether every day (Jan 2018), I start converting my bitcoins to Tether, the price drops, I wash trade on my exchange to drive prices further down and deploy my tether and bitcoin on other exchanges and drive prices down there by “operating”. As the “futures” expire I make a boat load of money with my short positions.
So I have made money on the way up and on the way down, I just need to rinse and repeat. But this gets even better. With such a proven and seemingly foolproof way to mint money I dont really need a bank I can raise the capital from VC`s or HNI`s with dirty money reducing my risk of defaulting and getting litigated even more.
(Another fact supporting the theory that Tether actually has the reserves is the fact that most of it was printed after it got subpoenaed by the SEC in December.)
What happens next?
I want to have this show go on for as long as I can, to do this I need to:
- Make sure I don`t get in trouble with the law:
a) For this I need to make sure that I don`t default on payment if people come to me asking to redeem Tether to USD. What do i do? Simple, I remove banking access from my system. Done.
b) These Americans can be a real pain in the ass, flying half way across the world to deliver justice to their people. Lets stop doing business with them. Done.
c) I dont really have issues paying my interest to the bank so I am good there.
2. Ensure suckers put in money on the way up:
The only way I can do this is to play on peoples FOMO, but every time we bounce from a crash the All time high (ATH) needs to be even higher to trigger the FOMO. Its a dopamine thing, if I lost money buying bitcoin at 20K my FOMO isnt going to kick in at 20K next time, I might need a 50K hit to forget my previous pain.
3. Ensure people dont get soo shit scared on the way down that bitcoin is abandoned :
I just need to control the crash- I do it in stages , watch the sentiment and then crash some more till I feel people are about to lose faith and then we start going up again. Dopamine!! Weee!! Lambo!!
You get the picture.
Can we survive?
If the above hypothesis (yea even I want to believe I am wrong now ) is right then its really disheartening to see the current state of Bitcoin. Bitcoin was meant to be the one saviour from the corrupt banking system and governments at large. The 2008 financial crash triggered by greedy bankers who were rescued by their pals in the government with fancy terms like Quantitive easing (which was basically robbing the honest taxpayer) f was begging for an innovation like bitcoin. This seemed like the one ray of hope for the informed yet powerless common man to escape the financial oppression and an inevitable global financial meltdown.
So what can we do to get out of this mess? Well for one the whole crypto community needs to come together as a whole and fight against this scam.
We need to stop using Tether no matter how tempting it is to hold it during downturns or for arbitrage. Whenever you sell your Bitcoin for Tether remember who you are selling it to, a guy that printed fake money and is now handing you the fake money for your bitcoin.
We need to pressurise exchanges to stop using Tether, start boycotting them(Bittrex has already hinted at getting USD) , DDOS the fuck out of them if they dont back down (Looking at you my Korean Brothers :) ) .
Community driven non-profit alternatives to Tether: This will slowly make Tether obsolete as exchanges can slowly drop tether for these alternatives. There`s work already going on in this space but this isnt such an easy problem to solve.
That said there might be more ingenious ways to get out of this mess and we need everyone in the community to put their heads together in this fight.
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