Can anyone with a more studied background in economics help hypothesize the after-effects on Bitcoin and other altcoins if this 814M 'digital counterfeiting' for lack of a better term, is true? For example, 800M has been artificially pumped into the Bitcoin and general crypto ecosystem, like air in a bicycle tire.
If people want to pull dollars out of bitfinex, and can't redeem tethers, then the price of bitcoin will skyrocket on bitfinex due to tether hyperinflation (we're probably already seeing that, and have been for months). People will be buying bitcoin at basically any price on usdt denominated exchanges, and start moving them to other exchanges to sell. At that point, you'll start to see price differences between usdt and usd exchanges, as the bitcoin price skyrockets up on bitfinex and drops on gdax.
Probably at some point, bitfinex will become insolvent and shutdown withdrawals entirely. Not sure what will happen then-- probably the price of bitcoin collapses in a general panic.
Speculation: When Mt Gox froze withdrawals and closed it either triggered or participated in a massive correction. If Tether allegations are true, I would speculate increased volatility in a bearish direction. It should start with rising volume on USD exchanges and shrinking volume on USDT exchanges as traders withdraw BTC, USD/USDT volatility on Kraken, BTC/USD and BTC/USDT price diverging across exchanges. Chicago futures if they open will set the reference price. If BTC anchor price is volatile alts will probably get hurt. KRW fiat rates will probably be affected. If it dips in the long run it could be a good buying opportunity.
> For example, 800M has been artificially pumped into the Bitcoin.
This is impossible with Bitcoin. Bitcoins can only be created via mining, Bitcoin mining is a proof-of-work crypto currency. Crypto's typically use proof-of-work or proof-of-stake in order to have value.
Tether, on the other hand, seems to have no proof-of-work or proof-of-stake at all and just claims to have a 1:1 ratio of their currency to dollars. Seems there is some skepticism around this claim of a 1:1 ratio.
If Tether, was found out to be a fraud I think it would have minimal impact on real Crypto currencies that use proof-of-work or proof-of-stake. The only negative impact would be the people that exchanged a real Crytpo for Tether might be burned and decided not to use/accept Crypto at all, which could impact the larger Crypto market a bit, but IMO I don't think it would shake it too badly, unless of course the main stream media took the story and click baited it with crappy headlines and poorly written articles that would falsely come to the conclusion that such a artificial pump is possible with real Crypto.
The statement that "this is impossible with bitcoin" is false. While initially bitcoins are issued as proof of work, as soon as there is a somewhat liquid secondary market then bitcoin becomes a financial asset with a value determined by the market. That value is effectively completely indepdent of any "inherent value" and fully determined by supply and demand
But the demand can change. Given a constant quantity supplied and an increase in demand, price goes up
If you cannot increase supply in response to a higher price driven by higher demand, prices will increase even more
See this Econ 101 chart [1]:
Y axis represents price, x axis represents quantity. The lines represent simplified supply and demand curves (Wikipedia can explain why they are shaped as they are)
Initial supply and demand is represented by supply "s" and demand "d". Their intersection gives us initial price "p1" and quantity produced "q1".
If demand increases from "d" to "d2", normally suppliers would produce more to meet the new demand. So the price would increase to "p2" and quantity increase to "q2". So even here you get a price increase
But with supply constrained assets like bitcoin, you can't increase quantity supplied to q2. So the only way the market can absorb new demand is by a further price increase. Basically more people want a good, but more can't be made, so sellers rationally realize they can charge more. In the chart, the new price would be the point where the dotted vertical line above q1 intersects with d2
Just like housing in the bay area. The supply can never increase, hence prices must go up, even if no almost no one can afford it. All that matters is that the .001% of the population that's buying houses can afford those higher prices.
You're fundamentally missing the main idea here. If you don't understand the fake Tether situation then in this case consider:
Someone makes 1M of counterfeit US Dollars using their own printing machine and puts it in a suitcase, and they exchange that suitcase with you, and in return you give them 1M of bitcoin in their digital wallets.
Not true. A simple recipe for manipulating Bitcoin supply by acting as a bank:
1. Create accounts for customers. Balances are private and not connected to wallets
2. Keep Bitcoins used to cover the accounts in a single bank wallet.
3. Rely on the observation that customers won't withdraw all their Bitcoins at the same time and use bank wallet for trading in the bank's name.
This is basically how every normal bank in the world operates, except that the amount of money the have to keep in reserve is heavily regulated so that this scheme does not turn into an infinite pool of money. There is no such regulation for cryptocurrencies.
> bitcoin has no intrinsic value, just a exchange rate with other things
1. It has proof-of-work, which gives it value
2. Supply of the coin and demand for the coins determine the price.
The only thing that can vary widely is the demand, the supply cannot be fucked with (unlike fiat currency). It is impossible for whole bunch of new coins to suddenly appear out of thin air. There is no way to artificially inflate the supply.
"I burned a bunch of electricity and created a cryptographically provable magic token".
There is no value here beyond exchanges with the other bitcoin speculators around you. The value you describe is no different to the value of a pixel on the million dollar homepage.
There will be a point where the emperor is revealed to have no clothes and when you try to extract actual value from the bitcoins that you are holding (i.e. sell them), you will find there is nobody who wants to buy.
Although if you like, I'll trade for beanie babies. I've got rare ones, nobody else has these. They only made a few.
This is like saying you can't lend out a dollar bill you don't have. It's strictly true, but doesn't accurately represent how the banking system work. The $1,000 dollars in my Charles Schwab account don't correspond to 1,000 physical dollar bills somewhere. They are simply a number in a database somewhere. When I go and withdraw that money, I get back a random selection of $1 bills that other people have deposited.
A bitcoin bank would work the same way. You deposit bitcoins by sending them to the banks wallet. They put a number in a database saying that you have 20 bitcoins in your account. If you then withdraw it, you will get a random selection of bitcoins they have in their wallet.
Unfortunately fractional reserve isn't safe for a currency that is this volatile. Depending on what the "fraction" is, some major withdrawal demand against one of these exchanges would topple it
So you are a Big Fish. You have a boatload of money in exchange X. You go to take it out and they don't immediately give it to you. They say, "Listen, we can't get to it, it's in our cold wallets, it will take a week." A week goes by, they say, "Listen, here's 10% of what you asked for, we'll get you the rest shortly.". This goes on, they periodically give you some of the money but there's a lot of evasion.
What's the Big Fish to do?
a) Quietly keep pressure on the exchange, taking the money as it comes, while not putting any back into the exchange.
b) Make a big stink, bring in lawyers, write press releases and bring down the exchange, possibly destroying any opportunity of getting the money back.
A is obviously the choice here... but that's a problem if you have a lot of big fish trying to get their money but can't. The price should be tanking, but everyone is too afraid to trigger a run on the exchanges that would kill their investment. There's really no way to know if this is happening. It could have already started.
But as an exchange, you can lend out Bitcoin you have, while still displaying unchanged balances on people's accounts. So you have a fractional reserve.
Couldn't they do it partially by betting that not all their customers would withdraw their funds simultaneously? Lot of less technically inclined people seem to keep their coins on one exchange like Coinbase
And this is a game theory sort of question, too:
If this is true: now, what?