Moving into 2018 we’re seeing lots of interesting activity in the cryptocurrency space.
I feel like a level of critical mass was hit in the last few weeks, where everyone I know is asking how to invest in crypto currencies, what alt coins to buy, etc.
And I don’t mean a lot of people, I mean every single person. It seems to be hitting a level of frenzy, where everyone is seeing massive gains and wants to get rich quick too.
Lambos for everyone.
While I’m a bull when it comes to cryptocurrency in general over the next 10–15 years, with the current price, the type of investors (uneducated speculators), and the manipulation going on behind the scenes; I believe we will see a major price correction or crash within the next 1–2 years.
It’s important to note that markets can stay irrational longer than you can remain solvent. Even though it may seem obvious that the conditions below are ripe for a price correction — that doesn’t mean it will happen in a timeframe that your or I think is fair or logical.
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So a lot of people don’t know about a coin called Tether — it’s backed 1:1 with USD, so one tether is always equal to $1.
The reason this was needed in the crypto space is because as a large exchange — it’s difficult to deal with large amounts of USD, there’s insane fees, and many banks will not accept exchanges as clients because it’s too risky.
So where are they supposed to hold all this USD?
In an ideal world, a crypto exchange that’s trading billions of dollars per day would have a simple crypto-coin that is pegged to the dollar.
They get the benefits of a coin — they can move easily, without tons of regulations, and no SEPA fees on each transaction, with the added benefit of stability because the crypto asset is backed by $1 for each tether created.
So instead of holding your USD in a bank account, I would simply purchase Tether and know that the value of my 1 Tether coin will always be = $1, and in this scenario I don’t have to pay capital gains on a sell to USD, and I don’t have to pay any banking fees when I move these ‘USD’ funds from exchange to exchange, and don’t have to report anything to the SEC.
In theory, tether is a brilliant solution, and has enabled exchanges to grow in a way that would not have been possible without it.
The thing is, it’s gotten a bit out of hand.
Let me explain…
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While Tether is much needed and a great concept, the people behind it, and the way it’s been run will cause a domino affect across the crypto community.
There are a few key features to this ‘house-of-cards’ that makes it the perfect storm.
The first thing is that Tether is somewhat secretly owned by the CEO of the biggest exchange, Bitfinex. This makes sense because Bitfinex was affected by this problem the most, and implementing a solution like USD-Tether was the perfect solution.
I’ll dive into the specifics of who’s involved in my next post.
When a user is on Bitfinex and they see their USD balance, what they’re actually seeing is their TETHER balance — Bitfinex uses USD and Tether interchangeably in their interface.
This is a bit sneaky — as it makes you think this exchange has enough USD to cover the balance of yourself and all other exchange holders.
In reality, they have enough TETHER to cover the balance, but they certainly don’t have USD in a bank account to cover the balances.
Exchanges have Tether, and Tether claims to have enough USD to back each Tether they created.
What does this mean if the confidence in tether goes down, and 1 Tether is no longer worth 1 USD? Or there was never the dollars to back Tether in the first place?
Well, thats a problem for everyone with money on an exchange that uses Tether.
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The way tether works is it’s a company that basically said they will back each Tether created with USD in a bank account with their partner CryptoCapital.
Every month new tethers are issued, and more USD is locked in their bank account to back this new money.
To date, there have been 1,368,089,837 tether created.
This means there should be a bank account somewhere with $1.3 billion dollars in it.
Problem #1 is that CryptoCapital (the bank Tether uses to hold their USD funds) is not a bank. They are unlicensed and uninsured.
They also have not had a 3rd party audit their USD bank account. The general public really have no idea if CryptoCaptial and Tether have the USD to back the amount of Tether they created.
So if they don’t have $1.3b dollars in a bank account, essentially they can just print out billions of dollars at no cost by issuing more coins, and say ‘yep, we’ve got that USD locked away’.
There are also some people who claim that Tether isn’t even backed by USD — but by other crypto assets.
So they’re taking the value of say, their Bitcoin holdings, and using that as the value backing Tether.
This is a nightmare if true, because if the price of Bitcoin goes down, and Tether is actually pegged to their BTC holdings and not stable USD, then we’re going to watch this thing spiral down really fast. That said, I’m not confident that this is the case, it’s purely speculation.
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So, who uses Tether?
Unfortunately, all of your favorite exchanges.
When shit hits the fan, RIP to all your coins on these exchanges. They won’t have the money to pay you and everyone else out.
To me this represents at least 80% of the crypto market.
A few people will get out in time — then the exchanges will go down for maintenance due to high volume, and then their servers shut off and all these new alt coin traders will be Mt. Goxx’d.
Welcome to crypto.
Originally published at Julian Sarokin — The Future Will Be Simple.