Has Bitcoin (and the Entire Crypto Space) Been Boobytrapped by Tether? No.

By: Justice Clark Litle

Feb 05, 2021 | Investing Strategies

Did you dramatically increase your net worth in 2020, and book “life changing profits” while doing so?

If not, you should consider TradeSmith Decoder, because at least one of our subscribers did (and possibly many more).

We recently received a wonderful testimonial that illustrates what TradeSmith Decoder is all about: Helping people build real, life-changing wealth through the trading and investing process.

The reason TradeSmith Decoder makes that possible is because we provide real and powerful analysis (on a daily basis) along with compelling trading and investing opportunities (in real time).

It’s not about scalping for pennies or trying to catch a quick pop. TradeSmith Decoder is about big opportunities and big trends.

At any rate, the testimonial we received is below, slightly edited for clarity, and with the names of investment holdings redacted. (Because it wouldn’t be fair to our paid Decoder subscribers to give away the specific stock names.)

We are sharing the testimonial not just because we’re proud of our work — helping someone build wealth is a wonderful feeling — but also because the reader forwarded an intriguing article raising an important question about Bitcoin’s relation to Tether (a well-known U.S. Dollar stablecoin).

Read on for yourself, and then we’ll address the Tether question:

Dear Justice,

Thank you for your excellent analysis and remarkable talent for simplifying and clearly explaining complicated financial issues.

Thanks to Decoder, I invested about $190,000 in [REDACTED] and $45,000 in [REDACTED].

I had originally planned to hold my positions for the long term. Due to the information I am forwarding to you… I recently fully sold out and booked life-changing profits of just over $700,000 -— increasing my net worth over 50% in less than a year. THANK YOU!

I know you will appreciate the intellectual quality of the Tether article I am forwarding and I hope, as busy as you must be, that you will be able to analyze/comment/reply. THANK YOU!

— TradeSmith Decoder subscriber

The article referred to is titled The Bit Short: Inside Crypto’s Doomsday Machine. It was written by “Crypto Anonymous” and posted to Medium on Jan. 14//.

The article’s author starts out by describing the large Bitcoin purchase he made in March 2020. (We, too, made a large Bitcoin purchase in March 2020, shortly after the panic lows, via TradeSmith Decoder — and still hold a large position.)

But the author then describes why he sold his Bitcoin position, and more or less exited crypto markets, out of concern that Tether, a popular USD stablecoin, is a counterfeit operation that is artificially inflating crypto prices across the board.

The whole article is more than 5,000 words long. We’ll try to summarize the gist as we understand it:

  • U.S. dollar stablecoins, or USD stablecoins for short, are crypto assets redeemable at a fixed rate of one dollar per coin or something very close to that (e.g. $0.9979). Stablecoins are useful because they let fiat dollars move freely through the crypto ecosystem.
  • Sometimes a crypto investor will want to cash out of a particular holding, but not necessarily turn their money back into fiat currency. In that instance, they might want to, say, exchange the crypto asset they are selling for an allotment of USD stablecoins, which are, again, like holding U.S. dollars in crypto asset form.
  • Many offshore exchanges cannot accept fiat currency due to outsider status relative to the banking system. These exchanges can accept USD stablecoins, however, or they can accept Bitcoin purchased through a cryptocurrency portal that also converts fiat currency (like Coinbase, Square, or PayPal).
  • “Crypto Anonymous,” the author of the piece, asserts that Tether’s USD stablecoin is not  legitimate and above board, in the sense that it isn’t fully backed by actual U.S. dollars. There is circumstantial evidence, alongside a history of shady dealings, that suggests Tether does not have a large enough quantity of actual dollars in its accounts to redeem USDT (the Tether symbol) at a true exchange rate.
  • The author further asserts that USDT (Tether) is essentially a Ponzi scheme, and that many offshore exchanges — including Binance, the biggest non-U.S. crypto exchange in the world — are in on the Ponzi scheme.
  • The author presents evidence to suggest that real U.S. dollars enter the system through legitimate outlets like Coinbase, PayPal, and so on; that those dollars are exchanged for Bitcoin; and that the Bitcoin then migrates to other offshore exchanges, where it gets exchanged for Tethers (which are more or less a counterfeiting game).
  • In this manner, fake USD Stablecoins (not backed by actual dollars) are propping up Bitcoin, and supporting the entire crypto market, and the exchanges that are in on the deal are minting real profits by taking in real Bitcoin, swapping them for worthless Tethers, and then cashing out the Bitcoin for real profits via the back door.

It’s a lot to process — maybe we can summarize it further with a simple transaction chain:

1) Real dollars → BTC bought on real exchange → BTC moved to Ponzi exchange

2) BTC swapped for counterfeit Tether → Ponzi exchange cashes in BTC for real dollars

A further aspect of the scheme — as described by the author — is the habit of Tethers being handed out like candy as a way to back promotions and draw BTC into the system.

Imagine an investor with $50,000 worth of BTC held at Coinbase, who then hears about a promotion from a Ponzi exchange for a $500 sign-up bonus paid in Tether.

The investor moves $10,000 BTC over to the Ponzi exchange for the sign-up bonus, and now the Ponzi exchange can start swapping BTC for Tether (which are worthless) and earn profits through the backdoor.

The author sees this whole chain of events as risk to Bitcoin, not because Bitcoin itself has counterfeit issues — Bitcoin has never been counterfeited — but because Tether could be a significant source of activity in the crypto ecosystem.

As such, the author implies that Tether is a “doomsday machine” because, when the crypto community realizes that Tether does not have sufficient dollars to back its coin issuance, the result will be a kind of Bernie Madoff moment where faith in the crypto ecosystem collapses, causing Bitcoin’s price to plummet.

The article is very elegantly constructed. “Crypto Anonymous” makes a convincing case, and we can see why many crypto investors are deeply concerned.

In our view, though, the central argument has some fatal flaws.

One of the biggest problems is that Tether (USDT) can be readily exchanged for actual, real dollars at multiple points in the crypto ecosystem.

For example, the author acknowledges that Kraken, a sizable U.S. crypto exchange, allows for the free exchange of Tethers (USDT) for fiat dollars.

That alone is a major problem for the story. If holders of Tether can directly exchange USDT for dollars, then Tether could face a “run on the bank” in the sense that more real dollars would flow out than in.

Nor is it just Kraken where USDT can be exchanged for real dollars. There are multiple other avenues by which Tethers can be swapped out for real dollars.

Take USDC, for example, a USD stablecoin competitor with a $6.2 billion market cap.

Tether has significantly higher velocity than USDC  — velocity is a measure of trading volume and rate of daily turnover — because Tether is the most popular U.S. dollar stablecoin by far.

But if the crypto space lost faith at the margins in Tether, activity and velocity could easily switch to another stablecoin competitor, like USDC or BUSD or PAX. And if any of those outlets are redeemable for real dollars, that means Tether, too, is just a few clicks away from redemption.

The point here is that the very nature of cryptocurrency — and the ease with which one dollar stablecoin can be switched with another, along with the various nodal points where Tether can be directly or indirectly swapped for real dollars — make it very hard to run a true Ponzi scheme.

Another problem with the assumption that Bitcoin relies on Tether for support — because this analysis is really about downstream liquidity effects on Bitcoin, not Tether itself — is the fact that Tether’s market cap is roughly $26 billion, whereas Bitcoin’s market cap, as of this writing, is $711 billion.

So Bitcoin’s market cap is not only 27 times larger than Tether’s, Bitcoin itself also has points of exchange all over the place where BTC can be exchanged for real dollars. That, in turn, makes it hard to argue that BTC is only being supported by Tether liquidity.

If this were true — if Bitcoin’s demand were artificially supported by Tether swaps — then BTC would be leaking out of the system via dollar sales all over the place.

Additional arguments cast doubt on the Tether argument. One would have to assume that Binance, for example — one of the largest and most innovative crypto exchanges in the world — is running a giant counterfeiting scam.

Given the operational excellence of Changpeng “CZ” Zhao, the brilliant and innovative CEO-Founder of Binance — along with all the technical accomplishments and innovations Binance has achieved — we suspect it is far more likely that Binance’s profits are real, and that Binance is making money hand over fist from a booming crypto asset space.

But if Binance’s profits are real — just as their innovation is — why in the world would they jeopardize all that for blatant participation in a seedy Tether scheme?

The Tether argument has other big problems too, like the fact that disreputable offshore exchanges are known to inflate their trading volume by an extreme degree.

If the actual trading volume on these assumed Ponzi exchanges is actually much smaller than it appears — because the also-ran exchanges inflate the numbers — that would suggest the volume of trading done to facilitate the Bitcoin-for-Tether scheme is also much smaller than it appears.

Then, too, on the positive-demand side for Bitcoin, we know that institutional hunger for BTC is a real and growing source of Bitcoin liquidity.

When we look at demand assessments from sources like PayPal, Square, or the Grayscale Investment products, we can know those flows are real; those outlets are buying Bitcoin because the underlying customer demand is real.

And we can further read the research reports and expressed statements of the institutional community — including places like JP Morgan, Fidelity, Guggenheim, Ruffer, and many others — and clearly assess a real and growing demand for BTC as a global store of value alternative.

And so, all told, we think the “Crypto Doomsday Machine” argument is elegant and persuasive — but we don’t buy the charge that Tether funny business is an existential risk to Bitcoin liquidity demand.

In fearing Tether’s impact on Bitcoin, there are too many problems with the assumption that Tether can run a Ponzi scheme easily with all kinds of instant-switch mechanisms available (just buy a different USD stablecoin, for example); with the assumption Tether is an unrivaled source of Bitcoin liquidity (there are other large-scale sources, growing larger by the day); with the assumption Binance is not playing it straight (that would be illogical, and is incongruent with their innovation track record); and with clear, empirical evidence that institutional demand for Bitcoin is high (and growing). Is Tether shady? Absolutely. We put a red flag on their accounting practices years ago.

But is Tether a source of liquidity risk for Bitcoin? All told, we are skeptical. It’s a good argument, but it doesn’t hold up.

In closing, though, we’ll make one last point. The crypto asset space may not face existential collapse risk from Tether (we just don’t see it) — but there could, in fact, be severe downside risk simply from the fact that crypto assets are white-hot right now.

Just look at what Elon Musk is doing to Dogecoin, a practical joke of a crypto asset that is soaring because Elon thinks tweeting about it is funny. That is a sign of very extreme froth, and when froth like that wears off, prices can fall hard — very hard.

So anyone involved in crypto right now should be aware of significant downside-risk concerns relating to the fact that crypto assets, over all, are exhibiting mania-like behavior, and mania-like episodes can end with severe price declines.

But that is not at all the same thing as anticipating a collapse of the crypto space due to Tether issues — which we simply don’t see happening.

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