The Crypto-Time Bomb
The popularity of Tether (USD₮) as an intermediary currency, between fiat money and cryptocurrencies, makes more sense in trading, not so much for “Hodl”. It is the stablecoin with the highest daily volume of crypto transactions.
USD₮ is a token accepted on several exchanges such as Bitfinex, Binance, Huobi Global, Kraken, Coinbase, Kukoin, Poloniex, among others, but also built on different blockchains, including Algorand, Bitcoin Cash’s Simple Ledger Protocol (SLP), Ethereum, EOS, Liquid Network, Omni, Tron and Solana, which act as transport protocols, consisting of open source software that interacts with blockchains to enable the issuance and redemption of Tether tokens.
The network effect that could cause a collapse of USD₮, that is to say the loss of parity with the dollar, its main function, would be enormous, since in addition to being the main trading instrument in the crypto market, it has its protocol running on different blockchains, as I explained.
You can see in the following detail, as of May 2022, its distribution between assets and liabilities in the different blockchains, with a notable concentration of assets in Tron and Ethereum and liabilities in Eos:
Tether has a shady origin story. You can read my article on the subject, which I leave at the end (1).
All the information that accumulates about Tether has clear indications that the entire system, both its structure, its purpose, and its monetary policy may be a scam.
The Attorney General James for the District of New York in 2019 investigated Tether Holdings Limited, ending in 2021. The result? Clearly fraud. That is, it is confirmed that the funds are not properly supported.
In a post on Hacker News, he says: “…Much like the Fed who cannot stop monetizing US deficits for fear of letting yields explode, the Tetheral Reserve must continue to print USD₮ in order to support prices. Exchanges cannot let this fail since the vast majority do not have access to the bonafide banking system and thus scrappy users must devise “fiat onramps”.
And this issuance manipulation directly impacts the market, since mainly Bitcoin is bought, with an impact on its price.
Most cryptocurrencies are purchased using Tether. In May 2022, 89% of all bitcoins traded were through Tether.
In the case of Cardano, 78% of the ADAs were traded with USD₮.
The most regulated exchanges, which do not use Tether but real fiat currency, trade higher volumes with dollars. However, in other less regulated exchanges, it is Tether. Coinbase and Bitstamp, two of the most regulated exchanges do not allow trading with Tether in some jurisdictions, which would mean a loss of business. However, in others such as Binance, Bit-Z and HitBTC, which are less regulated exchanges, in most jurisdictions, they have a much higher volume. And it is for this reason that regulators are concerned.
The more Tether issued, the more Bitcoin price. A Tether trading maneuver that promotes that relationship goes like this:
- Bob, a crypto investor, puts 100 real dollars into Coinbase.
- Bob then uses those dollars to buy $100 worth of Bitcoin on Coinbase.
- Bob transfers his $100 worth of Bitcoin to a non-bank exchange, like Bybit.
- Bob starts trading cryptocurrencies on Bybit, using leverage and receiving promotional gifts, all called Tether.
- Tether Ltd. buys Bob his Bitcoins on the exchange, almost certainly through a deniable proxy trading account. Bob receives the payment in Tethers.
- Tether Ltd. takes Bob’s Bitcoins and moves them to a banking exchange like Coinbase.
- Finally, Tether Ltd. sells Bob’s Bitcoins on Coinbase in exchange for dollars, thereby exiting the cryptocurrency markets.
In summary the mechanics of Tether is as follows:
1. Tether Ltd. prints a fake dollar out of thin air
2. They use this fake to buy BTC
3. BTC price goes up
4. “Tether is backed by undisclosed assets”
The Central Bank of the Bahamas reports how much foreign currency is stored in the domestic banks of the Bahamas, where Tether Holdings Limited is headquartered, confirming that in a period in which Tether went from USD 4.6 Billion to USD 10 Billion, the foreign currency in the domestic banks of the Bahamas only rose USD 600 million.
This economic model is not healthy for the ecosystem, where emissions are generated from nothing and Bitcoin (or other cryptocurrencies, with value) are acquired.
How long can this model last? And if it collapses, what can be the triggers for a crash in the crypto market?
You can deepen this analysis in The Bit Short: Inside Crypto’s Doomsday Machine. Always DYOR.
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