Bitcoin and Tether, Trouble Ahead!


Feb 1st

Bitcoin Scam

Bitcoin “investors” have lost half of their money since December 2017, that is a 50% loss in 45 days, on average 1% loss a day.

Of course if you read Twitter, Reddit or Coin Forums the favourite saying is “Hodl”, “Time to Invest”, or one of my favourites, “You can’t lose if you don’t sell” (this comment is the only thing you need to know to understand Bitcoin “investors”), most likely being said by people who are trying to hold up the price while they sell all of their coins before it collapses through the floor.

The reality is BitCoin has had a bad few months, respected economist have come out and said it is basically a ponzi scheme relying on new money to pay out old money, the actual true economic value as a means of payment is closer to $20. On top of that country after country rolls out restrictions on Blockchains, ICO’s and Cryptocoins, the latest being India.

So how can a cryptocoin with an economic benefit value of $20 be pushed to near $20,000? Well there looks to be three main drivers to the price. First are the “pump & dumpers” you know the ones I am talking about, people who say how “this is going to change the world”, “get in early, don’t miss out”, “this is my weekly coin pick”, “the price is going to $100,000 in 2018”. People who don’t actually believe what is being said, but they have an economic interest in pushing up the currency. Not all “pump & dumpers” got in to the coin to push up the price, but the price has now collapsed, so the only way they can get their money back is to tell everyone to “buy!”, “it could be $20,000 by the end of the month”.

That drives the second phenomenon, “dump money”, people who have no idea what they are getting in to, but read somewhere that a 17yr old teen become a millionaire over a weekend, so want in on the gold rush. Facts and logic don’t get in the way of “my precious”. It is driven by pure greed.

The final price driver is a much more interesting one and a much more nefarious one, the price of BitCoin being artificially manipulated by an entity that has an economic interest in pushing the price higher. That is what Tether is currently being accused of.

Tether is what they call a “stable” cryptocoin, it is tethered to an actual object of value, in this case the US dollar, meaning 1 tether coin can be exchanged for 1 USD, now and in the future. It is considered to be stable because the coin will only ever be worth 1 US dollar, so if you pay $12 for a coin, you can only redeem it for 1 US dollar, hence the price is not driven by speculative investors.

Because of its stability, and it being a cryptocoin people like to exchange their Bitcoins or other coins in to tether coins when they want to trade, or take profits, hence it has become very popular way of buying and paying for crypto coins. Now the logic is, when you pay for a tether coin, the company (also called Tether and there is a sister company called Bitfinex) is suppose to take the $1 USD you have paid and put it in the bank, so if you or the person you trade the tether coin to, wants to redeem the tether coin for the $1 USD, you just take it from the bank and everyone is happy.

BUT, technically, if you were nefarious you could issue a bunch of tether coins without the money being in the bank, after all you are just creating a digital string that “represents” the actual physical dollar. To stop this type of behaviour you have auditors that verify that for every tether coin you have issued you have $1 USD in the bank to cover redemptions.

Here is where it gets interesting. On December 1st 2017 the market cap of Tether was $768 million, give or take a few million, implying that there was $768 million tether coins on issue. Once Bitcoin started to collapse around December 15th, huge amounts of tether coins came on to the market, quickly amassing to over 2 Billion, yes with a “B”, flooding the market, significant amount of which was used to buy Bitcoin, around the $9500 price mark.

So the amount of the coins on issue pretty much tripled in the space of 45 days, that’s not a bad thing necessarily, after all it is being used to buy Bitcoin and push up or support the price and is long as for each of the new 1.4 Billion tether coins issued you have $1 USD in the bank for redemptions, there is no problem. Afterall we have the auditors there to verify that is happening right?

Well, no, in this case Tether (the company) has parted ways with its auditor, so at the moment this is no independent entity verifying and auditing the company, but the company is saying all is good the money is there. The US Commodity Futures Trading Commission is not so sure, they have launched an investigation and sent subpoenas to Tether.

Now the timing of the huge burst of tether coins on issue and Tether, the company, losing their independent auditors to verify those coins are legitimate could be purely coincidental. If it is not, there is going to be trouble.

For starters it would imply that Bitcoin price was being artificially supported, meaning it’s true value is nowhere near it’s current price and worse because most of those new tether coins were used to buy Bitcoins at a price of $9500 and the current price is $9250, whoever owns those coins is sitting on a combined loss of around $37 million, with their losses getting worse every day that BitCoin drops. At some stage they would have to dump them, just so they don’t go bankrupt, and THEN you will have a pretty significant drop in BitCoin prices, maybe even a run for the exits, seeing fortunes lost overnight.

Lets just hope all is above board over at Tether and it is as the company says “purely coincidental” that they have parted ways with their independent auditors right when they tripled the number of coins they issued, otherwise it is going to be a bloodbath and a zero target, or $20 “true economic” value price for BitCoin might be closer than we think.

One Response

  1. Oleg Vukmanovic says:

    Why is $20 true Bitcoin value and why are you so certain Tether’s downfall, assuming it comes to that, would crash Bitcoin to this level? Bitcoin was trading well above that price long before Tether arrived on the scene. Genuinely curious if there is anything backing up these assumptions or whether the figures have been plucked from thin air/Twitter.

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