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The Bit Short: Inside Crypto’s Doomsday Machine (crypto-anonymous-2021.medium.com)
325 points by tim333 52 days ago | hide | past | favorite | 285 comments



It seems that this guy decided to go heavily into Bitcoin because of a mistaken belief that seems all too common: "At the time, I saw a market dislocation and the likelihood of significant dollar inflation due to the US Government’s likely response to the unfolding pandemic."

He thought that government responses to severe crises that inject lots of money into the economy will cause "significant dollar inflation". In the real world, over the full year of 2020 inflation was 1.4% in the US (food costs went up a bit more, energy costs went down). Failure to inject money into a failing economy results in massive deflation. That's because money was rapidly disappearing from the economy. Money isn't created primarily because governments print it; whenever a bank creates a loan money is created, and when they call in loans money disappears. Central banks control the money supply by regulating banks, and their goal is to keep things stable.

Source: https://www.bls.gov/news.release/cpi.nr0.htm


Hi, I'm the author.

> Money isn't created primarily because governments print it; whenever a bank creates a loan money is created, and when they call in loans money disappears.

Yes this is right, and I am in fact aware of this mechanism. As I say in the post: "[...] anticipated high levels of lending and consumer spending post-pandemic, seemed likely to fuel substantial USD inflation in real terms through the end of 2021."

Velocity-of-money and the M2 money supply weren't that relevant to the main story I wanted to tell, so I went into no more than superficial detail here.


Even if inflation were to occur at the levels you anticipated, I would find it hard to justify crypto being a safe hedge against the dollar. Dollar backed productive assets are largely much safer.



Thanks for a great article. Wondering what would be the best way to follow your writings, given that you're currently anonymous.


CPI is a very distorted view of actual living costs over time. House prices aren't included and we've seen prices balloon over the last decade. Sure, your apples cost the same but good luck trying to buy property.

Yes we have the usual supply constraints, etc.


>House prices aren't included and we've seen prices balloon over the last decade

Depending on exactly what you mean, this is not a great criticism of the CPI.

House prices are excluded on purpose. Housing costs are included (including for housing equivalent to what an owner owns).

CPI does include housing expenses: "The CPI represents all goods and services purchased for consumption by the reference population (U or W). BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups (food and beverages, *housing*, apparel, transportation, medical care, recreation, education and communication, and other goods and services)." [1]

Furthermore, it includes housing expenses for owner-occupied housing as follows: "The [owners' equivalent rent] index is designed to measure the change in the rental value of owner occupied housing change. In essence, OER measures the changes in the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market." [see p. 107 of [2]]

As the BLS notes, the primary service provided by houses is to shelter the inhabitants. The house itself may be held as an investment. See [3]

So the CPI explicitly captures the cost of providing shelter, though it excludes the investment value of the property.

[1] https://www.bls.gov/cpi/questions-and-answers.htm#:~:text=BL...).

[2] https://www.bls.gov/opub/hom/pdf/cpi-20180214.pdf

[3] https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...


Thanks for the extra context - I should have been more clear. CPI does capture OER and rental costs as you show.

I get that mortgage costs and the like aren't considered as consumption ( rightly so ) but that makes the measure inaccurate when assessing prices people pay to live day to day. Rental prices are generally a more applicable indicator for most of the population as the BLS says but the rising costs of houses and mortgage costs by extension imo should be captures because it signals how money is flowing.

Is there another metric perhaps that captures both consumption costs and housing beyond rent/rent equivalents?


I think what you're missing is that many people are not paying market price for housing, because they bought their houses a long time ago. If they have mortgages, they were set by the home price when they bought.

CPI is an average. The people who have owned their own homes for years are dragging down the average for the cost of living. You can't get the cost of living that they have if you buy today.

Averages can mislead. It's like the old joke about average income in a room when Bill Gates is in the room.

By changing who is included in the average, it might be possible to construct a CPI that's more relevant to you?


If homebuyers are irrationally paying significantly more than it would cost to rent the same house, then that doesn't seem to me like a valid reason to inflate the indexes.

If homebuyers push prices of housing up and that does increase rents, then it is a valid reason to adjust CPI upward, and they do, AFAIK.


What I'm saying is that many home owners are paying significantly less than it would take to rent the same house, because they bought decades ago.

Though of course there are also those who bought at high prices too.

If you want to know about rents, it would make sense to just look at rents. I wonder how the housing component of CPI would look if there were a survey that was limited to renters?


My understanding is that the index relies on estimates of what homeowners would pay in rent for equivalent housing.

If you think longtime homeowners are paying less, then substituting equivalent rent should push the CPI rate of inflation to be higher than the genuine rate. An overestimate.

So you think correctly calculated inflation is less than the CPI says?

I thought everybody who thinks it is inaccurate thinks it is an underestimate, that the government is covering up inflation being rather high.

Also, if they just didn't survey non-renters, then the result would not include how much homeowners spend on, say, hamburgers or whatever.


Hmmm, it looks like they just ask people what they think it would rent for and use that number:

"If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” [1]

So, I was wrong about this. I'm wondering how people might be biased, though? They could over- or under-estimate what their property would go for.

[1] https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...


Yep, the new money has flowed into capital assets rather than consumption goods. But inflated, prices have.

It would be like saying there’s no inflation because milk prices are steady, ignoring that cows cost three times as much.


> Yep, the new money has flowed into capital assets rather than consumption goods.

Yes, because the wealth has flowed to people who primarily relate to the economy as capitalists, rather than laborer/consumers.

> It would be like saying there’s no inflation because milk prices are steady, ignoring that cows cost three times as much.

So, it would be true, for the purpose for which we have and measure general inflation. It would not be true for certain other inflation measures which are also used, but which aren’t part of (and aren’t relevant to the purposes of) general inflation measures like the CPI


Depends on who the “we” is there. Certain agencies don’t care that new money is flowing into capital assets but probably should care.


> Depends on who the “we” is there.

I would argue the statement is true for any significant government or private use of general inflation measures.

But, sure, if you’ve got a case where the CPI is actually used for a purpose and you think a different measure of inflation that incorporated asset prices would be a better replacement for the CPI, please feel free to present (1) the existing use in question, (2) your proposed replacement measure, and (3) your argument for why your proposed replacement is better.


That was the purpose of comparing to cows and milk. For all the same reasons you should worry about cows being expensive (even if milk is still cheap), you should worry about real estate being expensive (even if rents are low).

In the case of a household, those mean that you can't take some of your production, and save it for the future in capital goods -- the same kind of thing that happens when more of your income has to go to the same necessities.

In the case of a central bank, those mean that the injections of money aren't (currently) effective for stimulating economic activity, but are simply causing a wealth transfer and rallies in whatever stores of value remain. That is the same signal it needs to get back as when consumer goods become more expensive: you are not relaxing a limiting factor on economic growth.

Edit: toned down


> For all the same reasons you should worry about cows being expensive (even if milk is still cheap), you should worry about real estate being expensive (even if rents are low).

I would argue that the only reason you should consider cows being an expensive an issue if milk is cheap is in regard to it making some other bovine product expensive; cows aren’t important in and of themselves, but as instrumentalities in the production of milk and other products.

> In the case of a household, those mean that you can’t take some of your production, and save it for the future in capital goods

No, asset inflation absolutely does not mean that. Increasing the minimum buy in for asset investments would do that, but we’ve got mature enough financial markets that a general increase in asset prices doesn’t increase the minimum needed to enter productive investments.

> In the case of a central bank, those mean that the injections of money aren’t (currently) effective for stimulating economic activity

No, it doesn’t; driving money into productive investments and out of cash (which, as an expected side effect, produces asset price inflation) is part of the mechanism by which loose monetary policy is expected to stimulate economic activity. Asset price inflation does not indicate that that is not working, it is what you expect if it is working.

What would indicate that it is not working is if output figures did not exceed what was expected without the policy.


>No, asset inflation absolutely does not mean that. Increasing the minimum buy in for asset investments would do that, but we’ve got mature enough financial markets that a general increase in asset prices doesn’t increase the minimum needed to enter productive investments.

Yes, "can't", taken literally (and uncharitably), is incorrect. I was exaggerating. The point is it becomes much more difficult with lower yields, just as it becomes so with cows. To produce the same X units of milk tomorrow, you have to save more milk now (to buy the cow) -- the same effect as if you had less to save due to your consumption goods being more expensive.

So, no, "mature financial markets" don't really solve this.

>No, it doesn’t; driving money into productive investments and out of cash (which, as an expected side effect, produces asset price inflation) is part of the mechanism by which loose monetary policy is expected to stimulate economic activity. Asset price inflation does not indicate that that is not working, it is what you expect if it is working.

Money going into productive investments is only good if it also translates into productive economic activity. You can't just say, "we gave it the old college try, so that's a win". We're seeing P/E ratios go up (earnings yields down), which means that the higher asset prices aren't translating into that productive use of assets. And even by your own standard, the flows into gold, bitcoin, and idle real estate indicate a failure.

>What would indicate that it is not working is if output figures did not exceed what was expected without the policy.

So, non-falsifiable, then.


House prices are absolutely included and are the single largest item in CPI. It's Owner's Equivalent Rent. Overall, shelter represents 33% of CPI.


To the extent that purchase prices vary independently of rental prices in the same market, the CPI inclusion of equivalent rents will not reflect home purchase prices.

Then again, I don’t see why it should, unless it is some measure based on the lower of rents (actual or equivalent) or amortized purchase and ownership costs (as you need shelter one way or the other), but that could only drive the CPI down compared to just considering rents as is done now.


Those inflation figures, much like unemployment figures, are not really representative. If you take a basket of good that includes consumer discretion items like cheap tech gadgets, subscription music, staple foods, then these “balance out” the much worse inflation in housing, college costs and medical care, things which have a much higher quality of life impact.

I’n not making any claim on how this dichotomy relates to cryptocurrency speculation, but I do think in general nobody should be using CPI-based figures or traditional BLS figures at all, and anyone seriously talking about US inflation needs to be starting from the given baseline fact that “real” inflation (ie, excluding discretionary consumer toys, subscription services, staple foods) is much higher than 2%, and has been for a long time.


People often don't understand the implications of an elastic monetary system that is also decentralized because of the way that the Fed and member banks are structured.

There are things the Fed or the government could do to frogmarch devaluation (like, for example, encouraging banks to pay people to carry credit card balances through negative interest rate policy or encouraging no-doc/no-credit check loans of all kinds) but that is not their prerogative.


People also don’t realize that moderate inflation is a good thing. You want a gentle inbuilt mechanism to encourage consumption. And we have good tools to combat inflation whereas we don’t really have any tools to combat deflation.

There’s a reason nobody spends Bitcoin and it’s mostly not about fees or block size.


> People also don’t realize that moderate inflation is a good thing.

Price stability is a good thing, and moderate deflation (which discourages productive investment) is worse than moderate inflation, so policy targeting moderate inflation is a good thing. This isn’t because moderate inflation is a good thing in and of itself, its because you can’t perfectly target price level outcomes with policy, so you want to bias missing on the less harmful side.

> You want a gentle inbuilt mechanism to encourage consumption.

The utility of consumption encourages consumption. To the extent that inflation is good its more as gentle inbuilt mechanism to discourage nonproductive saving of cash in favor of productive investment.

> There’s a reason nobody spends Bitcoin

Right. You definitely don’t want deflation, which encourages hoarding currency that is surplus to immediate consumption desires and thereby sucks money out of productive investment.


> Price stability is a good thing, and moderate deflation (which discourages productive investment) is worse than moderate inflation, so policy targeting moderate inflation is a good thing.

That is one of the reasons. But arguably, even if a central bank could be 100% sure of hitting their inflation target exactly, they might still prefer moderate inflation to absolute price stability, because (a) it encourages productive investment and (b) it gives a simple mechanism for downward adjustment of sticky nominal prices/wages.


> You want a gentle inbuilt mechanism to encourage consumption.

This kills the planet.


This kills the environment, planet doesn't care, after we are gone, it starts over


Why do you want a gentle inbuilt mechanism to encourage consumption?


Because if you made a better return by hoarding cash then by investing -- holding bonds, buying apartment buildings-- investment would stop and people would stuff cash into mattresses.


Is that necessarily a bad thing? Growth at the cost of everything doesn't seem to bode well long term. What would the potential consequences of an economy not based on continuous growth? Genuine question, not trying to be inflammatory.


The proceeds from whatever growth there is should go to the people involved in growing it, not uninvolved previously-wealthy bystanders. With deflationary currencies, any growth in the total amount of stuff leads to one dollar corresponding to more stuff, which is like a tax on all of the people making stuff paid to the people holding mattress money. That's the most powerful argument against the gold standard, for example. People who spend gold to do actually useful things are punished and people who pile it up are rewarded.


Yes, that's a bad thing.

This is the primary mechanism that has stagnated Japan's economy since their asset bubble burst in the 80's.

If you want to start a business you need investment and customers. You will get neither if everyone is hoarding cash. Investors will not stomach your risk when they can just safely sit on their balance. Customers will hesitate to buy your product because they will always expect your prices to go down the longer they wait.


It depends on the type of growth. Growth through efficiency gains extends the productivity runway of economies reliant on finite resource consumption.

I think consequences of a no growth economy are pretty bad. It would mean much more of the world becoming zero sum. The pie would be fixed.


And in turn pollution might decrease, frivolous consumer waste might decrease, frivolous ad waste might decrease, people might turn to crafting and making their own home goods, and feel more pride and accomplishment, and the standard of return on investment to actually draw cash out of the mattresses would be higher, rather than building in a mechanism that stresses people into giving their cash over for hollow waste, and entrenching false “market demand” narratives around the whole destructive charade.


That’s a different argument from the GP, who was justifying it on the grounds of encouraging extra consumption, not investment.


To create employment and growth.


Distributed, not decentralized.


Deflation is a wonderful thing. It means more people can buy more stuff. It should be one of the primary goals of our civilization.


>Deflation is a wonderful thing. It means more people can buy more stuff.

The problem is if you know your money is going up in value, why would you buy stuff with it? You'd hold on to it even harder... thus increasing the deflation, as people lose their jobs, homes, and society falls apart... but hey... your hoard is going up in value.

Deflationary spirals kill people.


Sure, if we're driving 100mph in one direction and suddenly place the car in reverse, there will be damage. But yes, if we weren't artificially spiking the system with inflation there will be an increase in savings, which is not a bad thing (yes! *gasp*).

It's pointless driving the economy in circles wasting fuel, which is akin to the 'spending is automatically good' mantra. We should be using the car efficiently to get to our destination faster. This means allowing the economy to be more geared towards essentials, which we all must spend on, making them immune from deflationary spirals. And essentials are not only toilet paper, they also include things like medicine and other vital technologies.

When spending power is more concentrated to these economic categories, the competition will increase to produce better versions. Companies will also be incentivised to get a bigger slice of a currency that increases in value over time. Through society's greater savings rates, the banks will have more capital to lend to producers. Innovation, including the move towards (hopefully human-values-aligned) AI and nanotech, will continue because companies without these technologies will eventually vanish.

Finally, if we accept that the environment is dying (or something like that), the real inconvenient truth is because ultimately there are too many consumers. Regardless of how carbon neutral we become, we can never get to zero and no (pre-superintelligent AI) strategy is a match for an exponentially growing population. Therefore, unbridled growth can become a destructive force of its own.


I believe the deflation virtue described above refers to the capacity to a business in democratising a product or service that used to be expensive. The growth here ( typical example is Uber) of the company called mes with a deflation of the price.


You’re talking about rising purchasing power, which is better achieved through rising income than deflating currency.


To verify, though: in fact, the M2 is skyrocketing in 2020, right?


Yes, but velocity of money is plummeting.


Is there reason to think that velocity will remain low in the long term, though? If it's just temporary economic effects caused by COVID (e.g. less physical commerce), then surely we will see higher inflation as those effects go away?


> Is there reason to think that velocity will remain low in the long term, though?

There's reason to believe that as velocity rebounds, ceteris paribus, monetary policy will tighten to avoid rapid inflation.

Congress may leave fiscal policy on autopilot all too often, but you aren't likely to find the Fed completely asleep at the monetary policy wheel.


Yes. See https://fred.stlouisfed.org/series/M2. In 2020 the M2 Money Supply increased with 25%.


>their goal is to keep things stable

But they've only got a few levers and there are a lot of things. The priority is to keep the real economy ticking along and retail inflation reasonable but if people are not spending much on things some of the easy money ends up going into financial assets which is one reason we have record stock and crypto prices. It's an unwanted side effect.


> In the real world, over the full year of 2020 inflation was 1.4% in the US (food costs went up a bit more, energy costs went down).

Are you sure about that? https://chapwoodindex.com


The Chapwood index looks a bit weird. It's based on only 500 items (compare to CPI which uses 94,000 according to [1]). And those 500 items[2] include things like "cat grooming", "horseback riding lessons" and "first class airfare" (but not economy class airfare?). Tennis is apparently very important because there's "tennis lessons", "tennis racquet" and "tennis ball" in there separately. Something similar is going on for golf: we find "golf shoe", "round of golf" and "golf lessons". I could not find information on how these items are weighted.

[1] https://www.bls.gov/opub/hom/cpi/pdf/cpi.pdf

[2] https://chapwoodindex.com/chapwood-index-items/


On the other hand, the billion prices project (http://www.thebillionpricesproject.com/) is generally well-correlated with the CPI.


CPI may not have gone up, but it sure seems like the prices of a lot of corporate stocks are pretty inflated...

I don't know if that is related to a change in money supply.


Really good article, recommended read for anyone interested in crypto.

For me, it's almost 100% aligned with what I've felt was going on with Tether in the last 2 years.

Also, it sort of crystallized an answer to a question I've had about Binance for quite a while: how did they manage to get so big, so fast.

Answer: easy, they never had to establish proper on and off ramps to the traditional banking system and lured customers with unreasonable leveraged offers (which BTW is another Tether-related scam in itself: if you are an exchange with a shit ton of USDT, you can manipulate the price up and down, and trigger artificial margin calls whenever you damn please).

The real interesting question is though: what will happen when (not if) Tether explodes. There will be a sudden huge demand for exiting from USDT, and the only way looks like buying BTC on semi or fully fraudulent unbanked exchanges (good luck with that).

This will also trigger a big price unbalance between exchanges, and it remains to be seen if arbitrage channels will be able to weather the storm and if so for how long.

If you hold USDT, better get out quick unless you want to be left holding the bag.

If you hold BTC (as in: for real, in your own wallet, not on some shady exchange, not your keys not your coins), it's likely the BTC ecosystem is going to undergo a very large "event". Up or down, who knows.

If you hold BTC on an exchange, especially a shady one with 100x leverage type offerings, get your coins out of there ASAP before you get BTC-E'd [1]

[1]: https://en.wikipedia.org/wiki/BTC-e


> it sort of crystallized an answer to a question I've had about Binance for quite a while: how did they manage to get so big, so fast. ...

No, Binance didn't get big because of Tether or leverage. It was already eating most of the crypto-only exchanges volume when altcoins were almost exclusively paired with BTC and before it acquired its perpetual futures business.

The main reason they managed to attract so many users is flamboyant altcoin pump and dumps orchestrated with ICO teams and Chinese whales, and pioneering exchange coins with the securities/utility token mash-up called BNB. Users came to chase the pumps, and stayed when they were invested in the platform itself.

Binance's thriving in its later phase even as Coinbase ramped up its altcoin listings can certainly be attributed to Tether though.


Also Binance is quite simply a better exchange. It works flawlessly even when the market is hot. The quality of what they've developed and the speed at which they did it makes the average silicon valley team look like 7 year olds.


Most of what they developed is customization over white label solutions (that's how the main exchange was started), and acquisitions. The UI is a convoluted mash-up of different systems. Try using their margin trading. They're spending very little on in-house software development compared to their revenue and the average SV company of that size, and it shows.

> It works flawlessly even when the market is hot.

That's factually false. It holds up better than Coinbase sure, that's not hard, but it very frequently gets overwhelmed during volume spikes. The web UI and the various price feeds often fall behind. The orderbook feed falls out of sync even during normal usage hours. The more robust part of their stack, the trading API, rarely goes down though, I'll give you that.

I guess your comment makes my point about BNB. It's a great way to keep customers loyal and engaged. I do agree that overall it is the best cryptocurrency exchange, but let's not use HN as a shilling avenue.


Lol. I hold precisely 0 BNB, and never did. These guys are execution masters, and the proof is in the pudding.


Sure, praise for their business execution is warranted. It might even be allocating so little resources to the surface product (UI/UX) that's allowed them to move so fast in other more important avenues like liquidity, diversity of offerings and customer support.


1. I don't hold BNB.

2. I have had way less problems with Binance than Coinbase, so I am a happy Binance customer.


The bar is low with Coinbase, and I was replying to a specific unwarranted praise about Binance, already mentioning that it's indeed arguably the best exchange overall.


I think you can attribute a lot to the founders background. Previously he'd built trading systems for the Tokyo stock exchange, Bloomberg and

>In 2005, he moved to Shanghai where he founded Fusion Systems, known for "some of the fastest high-frequency trading systems for brokers." (wikipedia)

He presumably knew his stuff.


Sure would be nice if he applied his supposed trading systems expertise to Binance... quite ironic that his current exchange is one of the slowest on the market: https://latency.azidyn.com/


> and pioneering exchange coins with the securities/utility token mash-up called BNB.

To be fair there were other exchanges that tried this 'invest in the house' gambit, but Binance made it stick.


Author here. I really appreciate your kind words about the post - thank you!

I'm also broadly in agreement with your conclusions as to what this means for a crypto trader or holder. I've zeroed my net exposure to this ecosystem myself, both in anticipation for such an event, and out of recognition that I frankly understand it far less well than I originally thought.


I am not a Bitcoin holder, but Ethereum. I zeroed all my Ethereum except the ones locked due to staking (32 ETH, but I bought them when they were $600) because of these Tether news lately. I will wait for more clarity before jumping back in.

It is kinda sad that in this technology there are so many frauds like that.


>I will wait for more clarity before jumping back in.

Probably wise given how correlated ETH and BTC prices are.

>It is kinda sad that in this technology there are so many frauds like that.

It is, but it is also unavoidable.

As the author correctly points at towards the end, many of the properties of cryptos (high liquidity, non-reversible, pseudo-anonymous), while very useful to legitimate users, are a wet dream for crooks.

As a matter of fact, Bitcoin has been used to scam people for its entire existence, e.g.[1][2], sometimes even in new and innovative ways.

There is one aspect of Bitcoin that many people entirely overlook, especially newcomers: [3]

[1] https://en.bitcoin.it/wiki/Trendon_Shavers

[2] https://archive.is/PZdxu

[3] http://trilema.com/2013/the-story-of-pointless-and-witless/


Indeed. It is part of the game I guess.


Long ago I spent $100 on a graphics card, and mined 1 Bitcoin over the course of a year... then lost it on MtGox... that was a cheap lesson compared to what appears set to happen.

Thanks for taking the time and effort to put this together. I'm sure it'll help some people avoid a costly lesson.


I remember reading the first announcement of Bitcoin on Slashdot over a decade ago, and every time I begin to feel regret over not having downloaded it then, I realise that I would almost certainly have lost anything I had from one of a thousand ways its possible to lose your coins - MtGox being a major one in the early days!


> it's likely the BTC ecosystem is going to undergo a very large "event". Up or down, who knows.

This seems to be one constant of BTC: "events" which you might expect to have a negative effect on the price often don't.


...because Tether has been there to ensure that.


The author implies that the recent growth in tether's market cap is an indication of an incoming exit scam.

A cursory glance at Coinbase's USDC's market cap [1] shows that it too is growing at almost exactly the same pace as tether's [2]. I think most players in this market would agree that Coinbase, for all of it's failings, is unlikely to be planning an exit scam at this point.

It doesn't disprove the whole thesis, and some elements of it might have merit, but at least one element of it seems weak to me.

[1] https://coinmarketcap.com/currencies/usd-coin/

[2] https://coinmarketcap.com/currencies/tether/


Author here; I agree this is a valid objection and that one should be very cautious when extrapolating cause-effect relationships. Systems like these also often have multiple embedded feedback loops in them, which can make it impossible to identify a single cause once the flywheel gets going.

It's when you combine the USDT/BTC correlation with the available evidence for Tether's unbacked issuance that the problem becomes clearer, in my view. When issuance is unbacked, it can be decoupled from real demand — and that's a degree of freedom that allows Tethers to be injected arbitrarily into the system. Coinbase's stablecoin is backed by audited reserves, so USDC is constrained by demand — making it more plausible that USDT is the causal factor rather than USDC.


  one should be very cautious when extrapolating cause-effect relationships
Interesting statement after publishing this article with that title.


Which is why they backed their claim with lots of data.


Check the volume for USDC/USDT. It has been increasing the last couple of weeks.

So one could argue that people are trading largely unbacked USDT for backed and audited USDC. Which increases the demand for USDC and the USDC minting.


No, it doesn’t. In fact it’s exactly what you’d expect if Tether is fraudulent. Stablecoins are a great way to transact in dollars that you otherwise wouldn’t be able to, for instance the proceeds of illegal activity. The author notes the exact mechanism: print USDT, buy BTC on sham exchanges, send BTC to Coinbase, sell for USDC.

You would expect them to increase in lock step if this is happening. If it were legitimate flows, you would actually expect USDC to far outpace USDT given the much greater ease of conversion and trust in the sponsors.


> print USDT, buy BTC on sham exchanges, send BTC to Coinbase, sell for USDC.

The steps you described don't result in new USDC being minted. That happens only when people send dollars to Coinbase and change them to USDC.

> If it were legitimate flows, you would actually expect USDC to far outpace USDT given the much greater ease of conversion and trust in the sponsors.

No, USDT has been around for a lot longer and lots of very liquid trading pairs are based on it. So if you need to buy lots of crypto currency you might need tethers so you can buy on an exchange with a liquid trading pair (BTC/USDT on Binance being the most liquid trading pair).


I think it does. People send USD to Coinbase to buy Bitcoin. Coinbase maintains the stable value of USDC by creating new USDC and selling it to people for BTC. The cash to back USDC comes from people depositing USD to buy BTC.

You can think of it virtually as three balanced flows:

USD -> USDC -> BTC (Retail BTC Investors)

BTC -> USDC (Tether refugees)

USDC -> USD (Coinbase)


> Coinbase maintains the stable value of USDC by creating new USDC and selling it to people for BTC.

If tou want USDC you can simply change your dollars on coinbase. No need for them to use their own funds to maintain a stable price - there's no usdc/usd market on coinbase.


I should have added an implicit step: sell for USD, convert to USDC. It’s a lot easier to launder and move illicit USDC funds than it is USD.


Coinbase unlikely to do an exit scam?

You mean IPO? https://finance.yahoo.com/news/coinbase-ipo-will-be-controve...


> Now fast-forward one year. In March of 2020, I bought a large amount of Bitcoin. At the time, I saw a market dislocation and the likelihood of significant dollar inflation due to the US Government’s likely response to the unfolding pandemic.

I'm frustrated by this statement. If you predict inflation in the USD that is not currently priced into the market, then there are already plenty of conventional ways to make money on the prediction.

For example, go long on real-return (inflation-adjusted) bonds, and go short on nominal bonds. Or purchase call options on commodities (preferably ones like food or energy that would be directly part of the predicted inflation). Or just invest in less-speculative equities like utilities or transport.

There's no need to structure investments to also bring in the entire unhinged, speculative nature of cryptocurrencies just to place a bet on inflation. Bitcoin (vs the USD) has had tenfold increases (year-over-year) and larger than 50% drops, all against a USD that has not in fact experienced abrupt price-level swings (expressed in terms of consumer goods).


My favorite way to short the dollar is to use fixed-rate debt to buy productive assets (real-estate, etc.). Double whammy. Assets in general should keep pace with inflation and fixed-rate debt gets inflated away.


Does this actually work if you're being paid a salary in USD that wont likely rise with inflation?


Not to be flippant, but it's on you to negotiate better salary terms if that's how you get paid.


Uh, like most people I get around a 5% raise per anum, if inflation is higher than the CPIU estimates I'm treading water, like most people. If you're getting 10% per anum those are very unusual terms even for a high performer


You're frustrated by the fact that he invested in an asset that 4-5x'd his money in 10 months? Ok...


Yes, because it did so for the wrong reason.

"I thought that Apple stock was overvalued, so to short it I bought a lottery ticket" is nonsense, even if the lottery ticket wins.

Portfolio construction isn't about picking the biggest winner. It's about finding the optimal rate of return for a given amount of risk tolerance. "I think we're due for hyperinflation" is a statement of risk aversion; bitcoin is not usually the risk-averse answer because it's correlated with so many other risky things as well.


I'm sure he's dying to hear your analysis as to why he should've invested in another asset that would've made him less money.


This is nothing more than FUD designed to benefit a short position. The reason why exchanges like Binance and Bybit have their inflows from Tether... is because (as the author explains) they only take Tether!

Why do they only take Tether? Because US banking is incredibly expensive and a regulatory nightmare.

Why do people use Tether exchanges, over Coinbase? Not just because of leverage, but also because many do not AML/KYC, especially if you only deal with crypto. A LOT of people in the crypto community don't like to pay taxes, and we've known this from day one.

Many crypto enthusiasts also boycott "regulated" exchanges like Coinbase, because they shut down accounts if you use it to gamble on a sportsbook, or whatever their surveillance doesn't like.

So it should not be a surprise that many people in the crypto community, me being one of them, actually prefer to use Tether and Tether exchanges.


How about Tether's refusal to do an open audit of its books?

Or when they had some funds seized and loaned funds between Bitfinex and Tether, breaking the 1:1 peg?


The "all the banks in <random caribeean island> only hold a tiny fraction of the cash Tether claims to own" argument is a fairly solid one.

Care to deconstruct it?


> Why do people use Tether exchanges, over Coinbase? Not just because of leverage, but also because many do not AML/KYC, especially if you only deal with crypto. A LOT of people in the crypto community don't like to pay taxes, and we've known this from day one.

I don't know if evading taxes is the main reason but it is definitely not the only one. Going through KYC is an embarrassing and demeaning experience, unless you like prancing in front of a camera.

It is also close to equivalent to just plastering your picture and ID all over the public Internet as that is exactly where they'll end up when your exchange of choice is eventually broken into.

Just another gift from the anointed ones.


>But during the same period, total issued Tethers increased by almost $5.4 billion — going from $4.6B to $10B

>The implication was shocking: there weren’t nearly enough dollars in all the domestic banks in the Bahamas to >back the Tethers that were floating around in the crypto market.

Doesn't match up with whats shown here[1], Bahamas banks are holding 110bn in customer deposits.

[1]https://stats.bis.org/statx/srs/tseries/LBS_D_PUB/Q:S:L:A:US...


Those numbers are for all bank offices located in the Bahamas, most of which are foreign bank branches. The numbers in the row "By type of bank - Domestic banks" [1] appear consistent with the article.

[1] https://stats.bis.org/statx/srs/table/A5?c=BS&m=S&p=20202&o=...


Author here; this is the correct answer. The larger number refers to all banks. Deltec is known to be a domestic bank, so we can use the smaller number to get tighter uncertainty bounds on its currency flows.


Upvoted for coming armed with an actual fact related to the article, disagreeing with the author's premise based on some actual evidence. Might be right, might be wrong, but it's something other than just more opinion. Wish I could upvote more than once.


I'd like to point out for you to refrain commenting in this style, it reeks of reddit-ism. Also, another comment [1] clarified why the original commenter's analysis might be flawed.

[1] https://news.ycombinator.com/item?id=25789949


Related: Tether’s bank Deltec says it invests customer funds in Bitcoin

https://www.deltecbank.com/2021/01/14/a-covid-year-in-review...

https://www.coindesk.com/tethers-bank-says-it-invests-custom...

https://twitter.com/patio11/status/1349873798078558209

The next weeks/months are going to be fascinating to watch, as US regulators and invested institutions fight to both regulate and protect their crypto investments. Maintaining the inflated cryptocurrency valuations propped up by Tether while simultaneously removing it from the game before too many eyes set on it, will surely require subtle maneuvering.

Ultimately I do suspect OP indeed, sold early, as the game theory mechanics strongly favor just participating in the Ponzi rather than trying to bring it down, especially when this has the potential to be the one last great bubble before a major recession.


The OP said that he got out 100% right? Why not get out with something along the lines of 96% of your portfolio if you made over 600% profit anyway?

Eh, I would never bet 100% of my investment in a market based on knowledge I obtained myself, there's no no noo way I can see the entire picture.


US equities are the one last great bubble. But crypto are a symptom of the same disease.


I don't get it. tether sucks. If you hold tether it may turn into air. But your bitcoin is still bitcoin. Also, when tether is going down wouldn't you want to sell it thus creating pressure in btc/tether market and value of of tether/btc going up? It's always been clear to me that USD/BTC and USDT/BTC are two different markets. USDT is just another cryptocurrency. Many of them were scams and disappeared and many more will. Same with exchanges. It seems like describing somebody maliciously selling fake or paper gold and concluding that gold is bad.


Did you read the article? The author doesn't concluse that Bitcoin in itself is bad, they simply realized by themselves that most of the dollar value increase was caused by Tether, and they fear Tether eventually going down might be a black swan event causing prices to tumble. But 1 BTC = 1 BTC, yes.


Many value increases are irrational, whatever that means, I understand how it can be used to pump the price. I just don't understand how it takes bitcoin with it when collapsing.


Tether will almost certainly collapse, and then you'll have a lot of bitcoin chasing very few dollars. There is likely to be a stampede for dollars, which becomes a vicious cycle deflating the price of Bitcoin - the liquidity is consumed (Bitfinex is printing Tether because there aren't enough dollars to go around at unbanked exchanges, afterall) at the same time the downward volatility dramatically increases the perception of Bitcoin's risk; market makers start heading for the door; the cost of liquidity becomes massive.

There's some magic number for the price of Bitcoin, and it's hard to say what it is, where the miners start to lose money. If it stays too cheap for too long, it puts pressure on the miners to either switch to other coins or get out of the game entirely.

Things could get very bad, very quick. The only reason I don't have a bearish position in Bitcoin is that I can't find a counterparty that a.) I can afford at my account size (eg not CME) and b.) that I'm confident will still be around after this crash.

Stay cautious. Happy trading.


There are some Defi options on Ethereum that could allow you to short BTC with a USDC [1] collateral, like dYdX [2].

You would need to keep a small amount of ETH to operate the smart contracts, which could fluctuate in dollar value, but even after a black swan event, there's no reason that this decentralized infrastructure would not still be running, allowing you to redeem the USDC to real dollars.

[1] Circle dollars, 1:1 backed stablecoin from a well regulated issuer.

[2] https://trade.dydx.exchange/perpetual/BTC-USD


I appreciate the idea, but I neglected to mention (c) is legal in the US. Speculating on bubbles is just out of my league, and I'm okay with that.


If tether is pumping BTC then it’ll stop pumping BTC when it’s taken away. Weak hands will fold and then there will be a crash


OK, yes, that's a fair point. But it's not clear to me that pumping being taken away would be a bigger change than people trying to get out of USDT and buying BTC.

Also we've been there (mtgox's willy etc). I don't think bitcoin will be much less volatile any time soon. https://www.youtube.com/watch?v=XbZ8zDpX2Mg


> But it's not clear to me that pumping being taken away would be a bigger change than people trying to get out of USDT and buying BTC

People trying to get out of USDT into BTC because the USDT:USD parity assumption collapses will boost BTC:USDT prices, but probably not enough to avoid dropping BTC:USD, because it would be less than the USDT:USD drop, is the idea.


How would you sell USDT? You’d buy on a BTC/USDT market. These markets aren’t unified—there are different markets for tether and backed USD. Who would be counterparty to a tether exchange?

Thise specific USDT pairings would crash. If they wanted USD (as they presumably do), they’d then crash the other stable coin or backed pairings.


People are not buying BTC to get out of USDT, they're buying other stablecoins and tokens pegged to real world assets. The last week has seen a surge in the price of those tokens compared to USDT. I've made good money arbitraging the bouts of panic.


Bitcoin has no fundamental/breakup value and no market maker.

In the same way that there's no obvious ceiling to its value, if a lot of people try to get out of it at once, there's no obvious floor either.


Tether market cap is 24bil, Bitcoin market cap is 714bil. Its just 3%. I think that Tether isn't inflating BTC that much. The institutions that buy BTC like PayPal, Square, JPMorgan have much bigger effect on Bitcoin than Tether.


That’s not quite how it’s gonna work. It doesn’t matter what the Tether market cap is. The BTC market cap is coins x price. If Tethers represent 70% of inflow and they disappear, price is gonna come down. Likely a lot more than 3%.


This is addressed in the article.

Basically the market cap of BTC is not relevant here, but rather the daily volume.


JackFr Fair point. Thank you.

Well, it will be an interesting week for sure.


And from the 3% of tether, probably 74% is actually been backed.


The argument basically is tether has been inflating the price of bitcoins. If tether collapses bitcoins will still be there but may trade at $3000/coin rather than $38000.

Comparing with gold it's like the price has been inflated by people buying it with forged dollar bills.

That said the author seems a bit new to this all with his shock at finding Bob is likely being scammed. Bitcoin has been linked with scams almost from the start, certainly since 2014 with MtGox. Things will go on in spite of the scams.


Why on Earth would $100 billion worth of Tether rushing for a conversion into anything else drag _down_ the price of BTC? Or any other coin for that matter?

Have you actually sat down and thought about this, even if 99% waited and cashed out over weeks, that 1% is still a huge injection into the ecosystem.

People have been shown time and time again that the money is there, the peg can hold, the underlying company is also a cryptoexchange that can print cash simply by existing and all haters have left is attaching their ego to this notion and clinging to the dream of it going bankrupt over night. And the more they are wrong the more they desperately cling to this idea.

Tether had $1B stolen from them when it was a significant % of their assets, along with the US govt taking other funds in the NYAG case and they easily survived, if not thrived.

These comments/stories on HN have been here for years and they don't age well, it's hilarious to watch.

You can all go short tether or bitcoin today for a fraction of a penny on the dollar, and yet, don't :/

Why not do it, you can hold a bitcoin future going short for the next year less than a coffee per / $1k, why not do that? Would surely make a great story.


> Why on Earth would $100 billion worth of Tether rushing for a conversion into anything else drag _down_ the price of BTC? Or any other coin for that matter?

Price in which terms? USD? USDT?

Suppose it turns out tether is a fraud. What will happen? Tether holders will try to sell it for USD or Bitcoin. High supply of tether will lead to higher BTC/USDT and higher USD/USDT rate. Those who managed to convert tether to BTC will likely try to convert BTC into USD. This will lead to relative over-supply of BTC versus USD and BTC/USD will decrease.


There's a very strong point to be made that shorts in a rigged market are not a good idea, because squeezing the shorts is easy for the money printers (who plausibly have visibility over the liquidation price points), whereas the odds of actually collecting in a black swan crash are slim to none.


I'm having a hard time wrapping my head around how squeezing Tether or Bitcoin would work in this case. Could you please explain?


Say you think Tether USD (USDT) is worthless and is being printed willy nilly to prop up the price of Bitcoin. As a corollary, you are basically forced to assume that large exchange owners are aware of this fact because quite simply there is no other way for fraud to happen at such a large scale without their knowledge, since exchanges KYC their customers and are aware of their balances and trade volumes.

So you find an exchange that will allow you to short the BTC/USD (not USDT) pair and take a position. The liquidation price of your short is known to the exchange operators. If your position is large enough to create a problem for the whole scheme, the exchange owners can inform the Tether printers of your liquidation price, which they can use to squeeze you out, because they know exactly how high the price has to be to trigger your margin call.


If the scheme described by the article really exists, then it represents a substantial fraction of the demand for BTC. It's true that such a scheme collapsing would drive demand for BTC from USDT holders up. That's of course assuming they could still trade their USDT. Tether (the company) cancelled $30 million worth of coins stolen from them a few years back which suggests if the company was seized the ability to trade USDT could be disabled. But it's also true that such a scheme collapsing would instantly drive demand for BTC from Tether (the company) to zero. If that demand really is almost 70% of all the demand for BTC then BTC's price should decline significantly.


> Why on Earth would $100 billion worth of Tether rushing for a conversion into anything else drag _down_ the price of BTC?

If USDT:USD collapses, BTC:USDT will naturally go up, but it's also quite likely that BTC:USD (whether direct or indirect) will go down, to the extent it has been inflated by artificially inflated USDT:USD.


> ” you can hold a bitcoin future going short for the next year less than a coffee per / $1k”

Genuinely curious about how could I do that. I am not that much into cryptocurrencies, so I appreciate if you have the time and will to be specific in the operationals. I do have a (currently empty) account at Kraken, if that helps.

How can I short BTC?


Kraken has margin trading, which allows you to hold negative positions in BTC. However, this means you are borrowing the BTC that you're selling, and the interest on that is rather high (0.01% per 4 hours). You also need to keep EUR or USD as collateral in the account to cover potential losses when the price goes up.


Buy put options on deribit, or short USDT-BTC on FTX


Put options on deribit appear to settle in BTC, no? To short the ecosystem requires something that settles in USD


> Why not do it, you can hold a bitcoin future going short for the next year less than a coffee per / $1k, why not do that?

Assuming you have enough collateral, you currently even get paid money to hold a short.

As to your general point, I'd avoid holding the view that a 7 or so years old business can't fail as any kind of general truth. I know many smart people who are extremely bullish on cryptocurrencies, with huge investments. None of them think Tether will not fail one day. Everyone is playing the current market as a bubble.


Even a short requires a counter party to fulfill!

If market craters and the counter party to your short disappears, where are you going? The SEC? Finra?

Honestly, you really have no idea.....


>short tether or bitcoin today for a fraction of a penny on the dollar

I shorted tether one time, on Kraken, and it was horrendously expensive, like 25% per annum. Do you know where it can be done cheaply?


https://ftx.com/en/trade/USDT-PERP

Slightly positive predicted funding at the moment, which means you would get paid for shorting.


How do you short Tether?


FTX exchange. Unavailable to US residents though.


Sidenote: It currently costs miners ~$10K to produce 1 BTC.


This is only relevant because if the price of BTC drops below this, many miners may shut down their hardware.

The amount of money & electricty wasted to generate a BTC is otherwise unrelated to the price of BTC in dollars or other assets.


> The amount of money & electricty wasted to generate a BTC is otherwise unrelated to the price of BTC in dollars or other assets.

Isn't it _directly_ related? If I'm a miner and the BTC I'm mining doubles in value I can afford to spend 2x as much money on hardware/energy and still make a profit.


You've reversed the directionality: price drives mining activity, but mining activity doesn't determine the price. Miners spending more on hardware & energy won't produce more bitcoins (it just means the difficulty will increase and more CO2 will be released).

I'm saying the fact that you have to waste $10,000 worth of electricity calculating redundant hashes in order to make a bitcoin doesn't mean that bitcoin somehow contains $10k worth of "value" or that the cost of production sets a floor on the price.

People sometimes get confused about this, perhaps reasoning by way of analogy with real-world goods that will (typically) never be sold for less than the cost of their inputs, or they imagine some computerized form of the labor theory of value applies[0], but this is not true. The only factors determining the price of bitcoin are supply (fixed) and demand (driven by speculation).

[0] https://en.wikipedia.org/wiki/Labor_theory_of_value


Tether is lovely for many people, because there are many entry points without AML/KYC.

This allows you to trade while minimising your exposure to the taxman, something that many people in crypto value.

Of course, there is the calculated risk of Tether being seized, but that's part of doing business.

Bitcoin itself was born out of active rebellion with the existing financial system, and depending on who you ask, rebellion of the state itself.

Go to a bitcoin meetup that's a few drinks in, and ask how many people pay taxes ;)


Please pay taxes. Change the system instead of giving it reasons to put you into jail. I don't think very highly of people who brag about not paying taxes which they are due.


Please do your darndest to legally pay the least amount taxes possible and find every opportunity to change the system so taxes are lowered: you tax money will, in the vast majority of the cases, be wasted

Stop feeding the beast.

Starve it every opportunity you have.


How about paying your taxes and "doing your darndest" to change the system so that tax revenue is spent wisely for the benefit of the whole of your society?


I prefer not to play games that I know are rigged against me.


Both opposites of this tax debate spectrum are flawed. Most important thing is to enjoy life. If you focus too much on avoiding taxes, or pay them too much, you are losing. Pay what you pay and only spend resources on tax planning if it makes sense.


I prefer to support Swedish's society and just pay my due taxes, thank you. The beast here is responsible for a lot of the quality of life we enjoy, public services included.


Very much the same here, I've been paying taxes on crypto for years now and I'm in the Netherlands.


[flagged]


Sweden isn't socialist (quite far from it, one of the freest markets in the world), and I wasn't born nor raised here.

So the two core assumptions of your comment are dead in the water.


> Sweden isn't socialist

The transition from the system described in the 19thC as “capitalism” to the modern mixed economy was an adoption of socialism (while it wasn't mostly adopted as a coherent program but instead a series compromises between different factions, as a deliberate program it would have been a form of what Marx described—and opposed—as “bourgeois socialism”. And the Nordic .model, including the form in Sweden, leans into some of the socialized elements more heavily than is typical, with notably strong social safety nets and public pensions.


>Sweden isn't socialist

Say you make the yearly local equivalent of 150k USD, what is your income tax rate in Sweden?


Tax rate doesn't have any relationship to socialism, what's your point?


The point is, like a sheep on a farm, you're being milked and sheared by your government, like in most socialist countries.

Sure, like sheep on a farm, you're well tended to, but you basically live in a society where people exist to serve their government rather than the opposite.

That may not be your definition of the word "socialism".

Call it "collectivism" if that fits your definition better.

That won't change the fact that you're living in hell AFAIC.


Hell is a funny word for a place that has one of the greatest quality of life of any OECD country. Yes, their tax rates are high, but not vastly higher than one might pay in California. I'll say this for them, at least they pay for their spending. Sweden's national debt is 35% of GDP, while ours was over 100% even before Covid-19.

Basically, if sweden is 'tax and spend' we're 'spend and future financial crisis'. I know which country I'd rather live in long term if I did not have a life to uproot here in the US.


I surely don't want to enter into this discussion, it seems baseless and meritless. Talking about sheep in a farm being tended to while disregarding upsides, without leaving room to discuss different models of social contracts and trade-offs. And worse, while you conceal what is your vision of a good model for society.

There is a lot to unpack here and I surely don't want to keep going when the rhetorics is so loaded, calling others sheep and misusing terms won't lead to a healthy discussion.


Can I ask where you choose to live right now that isn’t a socialist society or on the way to one? Genuine question because I am thinking of emigrating after this pandemic is over and that would definitely make my shortlist.


Like talking about storming the capitol, plotting to evade taxes is all fun and games and may even work for years, until it goes "too far" and everyone gets arrested.


If you don't pay taxes, you're cheating the rest of us.

We in the west have extremely luxurious societies but this isn't cheap. When a few rich people cheat on their taxes, a large number of poor people suffer.

Not paying your taxes is theft from the rest of us.


“depending on who you ask, rebellion of the state itself” — as if it was a bad thing!


Environmental protection - check Public education - check Research spending - check Social security - check NASA - check

There’s a lot I like about the state! Yes, I admit it has many problems and frustrations.

But given we moved *away from the gold-standard, what is different now that makes it wise to accept a fixed money supply?


Bitcoin is supposed to be a store of value, is it not? If most of this 'value' stored turns out not to be real, the implications for the price of Bitcoin are not good. If the value of USDT falls to nothing then USDT holders trying desperately to offload aren't going to create much demand for BTC, compared with what was being created when new USDT supposedly worth a dollar entered the system every day. And if the price of BTC falls, it isn't a very good store of value any more so people who have traded legitimately earned wealth for BTC have an even stronger incentive to sell. If 70% of gold's daily trading volume was down to orders based on fake gold securities, it would also be a very bad time to hold gold (but at least if you took a big enough loss you'd find someone that wanted it for reasons other than their belief about its ability to hold value)

It amazes me how Bitcoiners scream 'hyperinflation' every time the Fed prints more money (with the goal of increasing prices by 2% annually) and yet struggle to understand the relationship between Tether printing dollar-denominated crypto-purchasing vouchers (with the goal of increasing crypto prices by as much as possible) and the supposed dollar price of BTC


I'm not really sure I understand this, neither finance nor crypto is my strong suit, but I think it's saying that most bitcoins are purchased with tether, and if the tethers are fake then that means most of the demand for bitcoin is fake. If the demand falls a lot, the price will too.

Not sure if I'm misunderstanding this though. It's hard for me to believe people buying and selling bitcoin wouldn't notice this somehow.


I don't believe any significant number of people buying Bitcoin are using Tether. Tether was aimed at the exchanges, institutional level investers, and day traders that wanted to move between dollars and crypto without creating taxable events (this loophole has since been closed). Its primary purpose was touted as allowing exchanges to move US dollars between themselves quickly and without using the banking systems directly.

Things may have changed in the last two or so years though, so maybe Tether's role radically changed.


>when tether is going down wouldn't you want to sell it thus creating pressure in btc/tether market

It will only create pressure on exchanges that allow you to actually sell USDT for BTC.

These will unfortunately be the same one that will likely go the MTGox route the quickest, leaving you a bag of virtual BTC that you can't withdraw.

Not your keys, not your coins, and doubly so for USDT.


I'd be very careful to take advice from this guy.

1. He's definitively bad at investing. He doesn't have an investment strategy, and probably never heard of portfolio re-balancing.

2. He got in lucky and made some good returns. Now he thinks he is a genius because of that, and as a result can predict the next market move.

3. He didn't do good market research. For example, most of the volume in USDT is faked by the exchanges. Coinbase, GBTC, and CME each one of these is are probably bigger than USDT in size and volume. Unregulated derivatives are an alternative to USDT for more sophisticated traders and they are also huge.

4.USDT is now also used outside of the crypto-market. Not because it is great, but because of the practicality. This offshore unregulated market of USD is worth in the $ trillions. USDT having a market cap of a dozen billions is really peanuts. That being said, I'd be more interested in an investigative journalism on how Tether has succeeded in moving such amounts of money while avoiding all the KYC bonanza a regular joe (or business) has to go through.


Hi, I'm the author.

> He doesn't have an investment strategy, and probably never heard of portfolio re-balancing.

This is perhaps a reasonable inference to draw based only on the information in the article, but it is incorrect. Without going into too much detail, the missing context is that I have effective long exposure to certain markets through my ownership of founder stock in a startup that operates in those markets. And while I place a high expectation value on that stock, it's also illiquid and can't be easily hedged. For reasons I didn't go into in the piece, I believed Bitcoin would also serve as a partial hedge for that market exposure, which justified a higher allocation than one might naively expect.

(I'll also observe that portfolio rebalancing isn't the right decision in all situations. Startup founders rationally concentrate their net worths into their companies, which is justified by their overwhelming informational advantage.)

> He got in lucky and made some good returns. Now he thinks he is a genius because of that, and as a result can predict the next market move.

I agree with the first sentence. I would strongly dispute the second. It's precisely because I don't think I can predict what will happen next that I've zeroed my exposure to this entire ecosystem.

> He didn't do good market research. For example, most of the volume in USDT is faked by the exchanges. Coinbase, GBTC, and CME each one of these is are probably bigger than USDT in size and volume. Unregulated derivatives are an alternative to USDT for more sophisticated traders and they are also huge.

I'm aware of these claims — there are rumors of wash trading by the big unbanked exchanges that I consider quite credible. I didn't include those in the piece because I wasn't able to find confirmatory evidence in the time I'd allocated to research it. I would be extremely interested if you could share any evidence you may have collected about these claims.


I like your style. Off topic question: why are you so absolute in your investment decisions? Can’t predict what happens so you totally exit? Thought you had figured out some inflation dynamics so you all-in BTC?

I’ve lately decided I need to be more moderate in my investing to avoid quagmires of conflicted indecision.


I think I agree with most of your points. I actually wrote an article about Tether in 2018 on a major investment site.

I believe Tether is organized crime and would love to see a deep investigation into the lifestyle and finances of everyone involved.

Thing is, right now, we know that more bitcoin are being purchased with REAL dollars than are being minted. So, the market has support. Yesterday, Grayscale bought 5132 bitcoin. They hold those in cold storage, so, they really bought them. I'm sure paypal, cashapp, square, also bought some.

But NO ONE in the industry has any motivation to question Tether.

The question becomes, how much bitcoin has been purchased by people that might sell it if Tether implodes. I am not sure it is a significant enough amount. Perhaps.

The current chart for bitcoin is extremely bullish. I would guess it moves up from here.


> It's precisely because I don't think I can predict what will happen next that I've zeroed my exposure to this entire ecosystem.

I think, given the context, it was the wisest call to make.


> For example, most of the volume in USDT is faked by the exchanges.

I agree this volume cannot be trusted. Much like the asian volume in 2017 turned out to be mostly fake. I find it hard to believe that Binance got so big so fast.


Seems like the article is flagged as hell. That's disgusting if you're flagging because you're long BTC.


The real USDT/USD market is not the Kraken one (or similar ones), but the implied synthetic market creating by arbing BTC/USDT and BTC/USD.

Companies like Alameda trade billions arbing this synthetic USDT/USD market close to peg:

https://twitter.com/AlamedaTrabucco/status/13487730276395622...


Today, January 15th is the court-ordered disclosure date for Tether. So soon we should know how big the Tether bubble is.

Clearly, it's time to get out of USDT. There's no upside potential, and there's a big downside potential.


But there will be no news for some time until the attorney general’s office review all the delivered documents right? Or should there be relevant news in the next few days already?


We don’t know yet


I thought the same, then realised Courts move very slowly. May be months before we have any reaction or statement.

What IS fascinating and will be very telling is to closely watch Tether issue from ‘Treasury’. Seems they have stopped as they KNOW what is in the millions of pages they delivered to AG and from now on need to be much more careful. If Tether issuance decreases, crypto prices should fall. Must also watch Tether volume per day.

Two scenarios:

1. Tether decides to go legit: mild short term crypto price fall. Tether actually has an independent audit as much promised. Audit reveals not good, but not catastrophic.

2. Tether execs have decided to delay / obfuscate and exit when forced: continued fraudulent Tether issue and price bubble accelerates.

Something is already up: BTC price rocketed every holiday and long weekend recently. This one it is falling = no support from Tether printing?


It is very likely that Tether is a scam -- the evidence has been mounting for years -- but the peg won't break until the market believes it. Unfortunately, there isn't a good way to short Tether. You can short the Kraken USDT/USD pair on margin, but the margin rates are ~20% a year. You can borrow tethers on compound.finance, but the rates are ~15% a year. I think part of the reason we haven't seen the unwind of tether is simply because it's too expensive to short.

Also, no one will loan you their tether if you tell them you're going to break the peg and give them back a worthless token.

(I actually had a kraken short on for a while in ~2018 but gave up because it's just too expensive.)


Article seems mostly accurate but there's a mistake in understanding about the Whale Alert tweets

> What’s more, the supposed USD inputs (e.g., 401,431,056 USD in the top left transaction) are giving perfectly round Tether outputs (e.g., 400,000,000 USDT in the same transaction) in every block — regardless of the prevailing exchange rate or anything else.

Whale Alert uses exchange rates to convert currencies in the post. The "USD inputs" are simply the USDT that was minted converted using a USD/USDT exchange price (I'm not sure which one)

Whale Alert has also hard-coded USD/USDC to 1:1, which is why the coinbase pro minting Tweets match exactly


> For the rest of 2020, my inflationary thesis looked right

Just to make it clear: there's absolutely no broad inflation almost everywhere in the world, certainly not in the United States. It may still come, but inflation is not why Bitcoin is on such a tear. Look at CPI or PPI of you don't believe me.

Although this does remind me of the Green Lumber Trader story from Taleb. Congrats on the trade!


Inflation is already here, it's just that the wealth hasn't "trickled down" into the middle/lower class so consumer goods haven't spiked yet. It will seep out eventually, but right now it's mostly still sitting in financial markets and corporate accounts. The trillions (yes, trillions) of dollars that have been pumped into the economy via QE and other fed programs don't just go away.


Where's the inflation in the Eurozone? They're way ahead of the US. Or even better, Japan, "printing" like a madman since the 90s, uhm where is that inflation you mentioned?

But yes, they don't go away, such things actually cause deflation because they prevent recession-cleansing of inefficient organizations, keep property prices high, cripple people and organizations with debt, ...


>there's absolutely no broad inflation

If your measuring stick is fiat, then sure there isn't any inflation.

However, you're using a measuring stick whose length isn't constant.

If you use Gold as your measuring stick, then things change.

If you user Bitcoin as your measuring stick, things change dramatically.

If you use real estate - can you still say there is no inflation ?


You confused the numerator with the denominator. To get inflation we put a basket of things in the numerator, and currency in the denominator, then compute annualized % change in the said number.

Now if you swap (in the denominator) the USD for either gold or bitcoin you'll conclude we've been in a severe deflation in 2020.

(I do not agree with the above, I am just fixing basic mistakes in your reasoning)

If you would like your basket of things (the numerator) to consist solely of Bitcoin or gold then go ahead but you may as well put baseball collectible cards there, as it doesn't relate to people's consumption needs.


Author here. I agree that past inflation has been minimal; what I was referring to was the expectation of future inflation after the pandemic has materially ended. It would have been rational (or so my thinking went at the time) for investors to buy into Bitcoin in anticipation of this shift.


There are explicit contracts for such things (based on TIPS, so it's not some small shady market). Inflation expectations are still low, though materially higher than even in May:

https://fred.stlouisfed.org/series/T5YIFR

In particular they do not go outside of the 3.0% range where we've been stuck for decades (the US CPI itself hasn't printed anything above 2.5% year-over-year since the 90s).

Inflation will come one day (one year? one decade?), but sure as hell isn't here yet.


inflation in consumer goods might not be high, but financial assets have clearly inflated: a quick look at gold denominated SPY shows it.


Why not TSLA/gold? That proves there is inflation! Or I know, BTC/USD, that clearly proves there's lots inflation and look at that bitcoin price is perfectly correlated with it!

(I am only half-joking here, the point is that broad inflation is much much more important than some bull market in this or that asset class)

On a more serious note a lot of commodities are looking really bullish, including some foodstuffs, and that's obviously not good news ...


Real estate inflation is the real driver behind practical inflation all over the world though.

Real estate bubble -> High deposits for house purchases -> High rents -> Effective inflation

Most governments don't include real estate (or even rent payments) in their inflation calculations to keep it artificially low.


> Most governments don't include real estate (or even rent payments) in their inflation calculations to keep it artificially low.

Housing is > 40% of the US CPI:

https://www.bls.gov/cpi/tables/relative-importance/2019.pdf


It is not “doomsday machine”, it is “Tuesday”. Yes, Bitcoin is volatile, and crypto markets are manipulated (just like all other markets, e.g. tech stocks with Softbank-originated program trading right now).

If tomorrow Bitcoin will cost $10000, nobody will be surprised. Neither if it will be $70000. We are not building crypto systems for speculation.


This.

If you're really interested in Bitcoin and the crypto space, paying attention to the price should only be relevant because it is volatile and slows down adoption.

Its absolute value is essentially boring.


> There’s a scene in The Big Short where Mike Baum meets a stripper who’s taken out mortgages on five properties. The stripper doesn’t think there’s anything wrong with doing that, because her mortgage broker told her she could always refinance her mortgages when the prices of her houses went up. And housing prices would always go up.

Of course, our Government ended up bailing out people like the "stripper" who would complain that they "lost their homes."

Let's hope the new administration doesn't bail out crypto specu-vestors.


I am afraid of Bitcoin because of Tether.

However, there is one part of this argument that I don't quite understand:

If we woke up tomorrow to find out that Tether caused a disruptive event overnight and BTC/USD fell from $30,000 to $10,000 or $3,000.....

Wouldn't there be a gigantic line of people who have been experiencing FOMO for the last 6 months ready to jump in at the new attractive price level, driving the price straight back up?

Or is the side of people who could lose out on Tether just so huge that the newcomers would not be able to cover them all?


If tether crashed I would expect bitcoins price to go up not down. It would suck for people holding tether because nobody would want their tether.


> If tether crashed I would expect bitcoins price to go up not down.

Bitcoin’s price in what reference currency? USDT? Clearly.

USDC? Actual USD (probably measured indirectly via intermediary currencies)? Something else? For anything but USDT, the reason for such an expectation could use some explanation.


All of the above if most of the demand from people fleeing from USDT goes into Bitcoin, which is likely.

More people chasing the same thing -> price goes up.

But obviously the BTC/USDT price would go up a lot more because USDT would be going down at the same time.


What many people believe is that there's not anywhere near the demand to justify a 35 K USD price and that's it's tether printing which pumped the price of BTC to these levels.

So if the tether printing press stops, the price would crash back to 3K USD or something in a hurry.

Crypto investors/gamblers concerned about tether/USDT already own zero USDT. What they're concerned about is that it would take the entire crypto market down.

Now on the very short term it may cause a BTC price spike: should it be true and USDT going down a lot, people hodling them may desperately try to get out and buy any BTC they can, shortly raising BTC's price.

But if tether is the reason the BTC price is so high, it won't take long before "zero new issuance of USDT to pump the price" would totally crash the market.

In any case it's an interesting story to follow...


> The first red arrow on the chart points to April 25th, 2019: the announcement of the OAG’s investigation. Notice how, as the investigation progresses, the issuance rate of Tether begins to rise — initially in large single blocks, of around $1B, every few months.

The below is an analysis of printed tethers vs known institutional buyers for 2020. I find a ratio of 4 to 1.

Tether market cap for 2020: march: 4.6B$, april: 6.3B$, may 8.8B$, july: 9.9B$, 29August: 10B$, 1stSept: 13B$, 28Sept: 15B$, Jan21: 24B$

Compared to known institutional buyers:

Grayscale: march: 500M$, april: 600M$, may: 1B$, july: 1.4B$, 31August: 1.8B$ (approx), 28Sept: 2B$

Microstrategy: 1.1B$ average price (august to september, as per https://bitcointreasuries.org/)

Difference: between march-september 2020, Tether printed 10B$ while the biggest known institutional buyers spent 2.6B$ (grayscale+microstrategy=1.5B$+1.1B$=2.6B$)

That is to say, Tether prints appear to be 4 times the big buyers amount.

ref for grayscale buy amounts: https://hackernoon.com/grayscales-gbtc-pump-effect-means-202...


Hi, I'm the author. Using a throwaway for all the obvious reasons.

I'll try to dive into this thread over the next few hours to answer any questions folks may have about this. Please feel free to ask.


My personal prediction (shasum256): fd559af88adde4082122c16e6b77356a90d2a367600f43acbdd6615c3dc4cc28


Wow, that's a bold prediction. Not sure I agree though.


Some people want Bitcoin to fail so much that they‘ll believe in literal conspiracy theories if it supports their priors. A legitimate market for hard money is impossible for these people to believe, it must be fraud.


On the other hand, some people want Bitcoin to succeed so much - or rather want the price of Bitcoin to succeed because they speculate on it - that they'll engineer some fraudulent schemes in a relatively unregulated market to support their bank accounts.

I think it's likely a bit of both, but you can't deny there is something unsavory going on with Tether and these offshore exchanges


Thanks for this article, I've gotten out of crypto for the moment for the exact same reason.

The probability that something fishy is going on which would trigger a panic-sale when it's discovered is too high until we know more about the court case against Tether, imho.

Though all the people insisting on calling this FUD do make me wonder whether I'm seeing things or this is an "emperor's new clothes" situation.


This article really changed my view and caused my to sell most BTC.

Two things can be true: that BTC is a good long term inflation hedge AND the price is being manipulated short term by the tether scam.

I just think the risk reward of tether being shut down within the next year makes it pruden to take some gains off the table here - hopefully to get back in at a lower cost basis when the market clears.


So if I understand this correctly, you can go to one of these pyramid scheme exchanges, tank up on highly leveraged tethers, and then go sell them on Kraken. Do this often enough and you will drain the resources of the pyramid scheme, causing it to collapse. So you make a profit and provide a social good all on one smooth move.

Have I got that right?


You can do this indeed but that'll cost you money as USDT is valued slightly below 1 USD, and you will incur slippage the larger your amount is. The best way to withdraw large amounts of Tether's to USD is through their platform itself, for a fixed ~$1000 fee.


How exactly do you plan to make a profit in this scenario?


Well, if I understand the OP correctly, it sounds like tethers are basically being printed and sold cheap in return for real money, so lots of people think they have a profit because they have more tethers than the dollars they started with. So if you can get in to that situation and then quickly sell the tethers before the whole thing collapses then you should be in the money.

OTOH if that isn't possible then the allegation that this whole thing is a pyramid scheme fails.


> sold cheap

Where? Find a place that consistently sells tether cheap. If anything, the lack of this place is a sign of poor research base for the original article.

They mention that some exchanges give tether "prises" sometimes, on some occasions, to a select number of users. I don't see how that is so bad, and neither do I see how you could consistently profit from that. Those incentives are likely to be once per user, or once per referred customer, etc. There are likely protections in the form of "you have to trade for this much in order to realize the total prise amount". I don't see how this is any different from bonuses that many online casinos give out, and no one takes that as a sign that a given casino that does this is insolvent.


Good point, for those tethers to have that big an influence on the market, they need to get into the hands of real people buying tether with real money somehow.

According to the article it looks like this

1. Person buys btc with usd on coinbase or equivalent

2. Moves btc to shady exchange with tether promotions

Those promotions need to be _huge_ in for those newly minted tethers to get into the hands of real people trading.

I looked at the site with promotions linked by the article, and the front page features a couple of missions that give 50 USDT total for doing things like "join our telegram group", "set up a notification on our app".


A complementary paper from 2018 investigating how Tether (USDT) influenced Bitcoin and other cryptocurrency prices during the 2017 boom: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3195066


I’ve always been, and remain still, a skeptic of all things crypto. I typically skip the crypto-focused articles on HN. I’m sure glad I didn’t today.

> The US Treasury should enforce 100% reserve requirements on all USD-pegged crypto stablecoins, with mandatory audits.

Laughter is really the best way to start my day.


So, you are glad to see articles that support your viewpoint?

Don't you regret at all missing all the gains you have made along the years by not buying small amount of BTC? In the end the guy who wrote this article made quite good amount bu buying BTC low and selling high. Lets see how it ages.


Honestly I don't care about articles that support my skepticism, they largely bore me as well. What made this article and others like so amusing is the tremendous irony of demanding regulation, irony that the author seems completely oblivious to.

Do I regret missing out on all of the crypto gains I could have had? Honestly I don't really think about it that often and when I do it's largely because I work in tech and I'm often forced to work with people who won't shut up about it. But I lived through similar periods with the first dotcom bubble, and the housing market in the run up to the financial crisis. I don't like 'greater fool' investing as a strategy (but certainly some people have gotten very rich with it) so no I guess I don't regret it.

(One sidelong observation there are a lot more paper gains than realized gains. I've worked with a number of bitcoin millionaires. But if I filter the count to those who have > $1mm in USD, in a US domiciled bank, the number drops top zero. Who knows? Maybe it's adverse selection. Maybe the real winners aren't working anymore.)


What irony? I've been involved with bitcoin since 2010, and I too think all exchanges should have reserves enforced and audited.

Not all bitcoin enthusiasts are anarcho-capitalist extremists.


You are certainly an outlier in the crypto community. Most crypto enthusiasts seem to be opposed to regulation.


Regulating USD on-ramps and endpoints is not regulating bitcoin itself.


Laughable indeed.

Banks, which are essential to our economy, have 0% reserve requirements but this niche company that can crash to 0 without doing much harm to the economy should be forced to have 100% reserves? Who cares, just don't accept Tether in exchange for anything and you're good.


On kraken, one can short Tether against the US Dollar. Since Tether is usually pretty close to $1, I wonder if it’s worth it to open a short in case it’s all falling apart. I mean, in case of a crash the price of tether would most certainly fall, right?


Counterparty risk.

If Tether controls the price of Tether, they can simply cause Tether to spike to $2 or $10 for a few days or weeks, before leaving. Tether may drop below $1 afterwards, but you might get short-squeezed on the way out.

There's no way you can win vs an entity that fully controls the price.


That's a good point, there's almost no downside to shorting Tether besides the interest, since it would never go much above USD.

Given that the interest must be wild, no?


I don't understand the section about minting tethers. Couldn't Tether Ltd choose to mint in round numbers legitimately? If they aren't continuously creating and destroying individual tethers then the minting process could be in round numbers but only released to the wild in a controlled manner. The Bahama bank evidence is a lot more compelling. Did the NY court order have a typo in the extension being to January of last year?


Ok, so let's say Tether is a scam, unbacked, and everyone dumps it. How does this affect Bitcoin? In my opinion it would send it to the moon. When Tether is exited, where will it be exited to? Not the USD, maybe some into alt coins or USDC, but mostly into Bitcoin. Tether is scammy indeed, but it doesn't change the scarcity of Bitcoin, and the fact that there is still a huge demand and a constant supply for BTC.


Assuming the Tether exchanges remain functional, yes, everyone will try to get out of Tethers and coins are the only option. People would then try to get their coins off the exchange. It will be a terrible scramble. The question is, what happens to BTC/USD on USD exchanges. My best guess is that panic and additional supply withdrawn from tether exchanges (for those who manage to get out) will crash the price.


When everyone is dumping tether, who’s trading BTC for tether?


Crypto today is pretty wild. Most of the crypto currencies are trash with good intentions or straightforward scam. On the other hand, the flaws make it a great opportunity for those who dare.


> The US Treasury should enforce 100% reserve requirements on all USD-pegged crypto stablecoins, with mandatory audits.

Lmao. Have you heard of decentralised stablecoins? There are many types of decentralised stablecoins such as overcollateralised ones, fraction reserve ones, algorithmic ones etc. Overcollateralised ones like DAI (backed by ETH/USDC/WBTC etc) and sUSD (backed by SNX) are the most popular ones. How will you enforce a reserve requirement on a decentralised stablecoin like this?


>What’s more, the supposed USD inputs (e.g., 401,431,056 USD in the top left transaction) are giving perfectly round Tether outputs (e.g., 400,000,000 USDT in the same transaction) in every block — regardless of the prevailing exchange rate or anything else.

You're misunderstanding. There's no USD input. They're simply looking at the exchange value of USDT and converting it into dollars. Their data source says that USDC = $1 USD, so USDC minting is in round numbers.


Is there any way to "short" bitcoin? I don't really trust any of the fly-by-night cryptocurrency exchanges, but is there a real derivatives market somewhere?



My broker has allowed trading their futures since 2017: https://www.interactivebrokers.com/en/index.php?f=25379


See if someone will loan you Bitcoin, paid back in Bitcoin. Then you sell the Bitcoin, wait for the price to go down, and buy some to pay back the loan.


Short on Coinbase Pro, or Kraken


You can short on pro?


My bad, you can go margin but not short.

Kraken can short though.


Is Kraken SEC regulated?


Assume so, based in US, available for 48 states.

https://support.kraken.com/hc/en-us/articles/360031282351-Is...


LedgerX options.


Great article "cryptoanonymous" (welcome to HN btw): really lots of information in there but...

Aren't you writing this because now that you could get out and got the (real) USD on your bank account, you actually want the price to crash very badly to buy much more coins?

If the price were to crash back to, say, 3K USD, wouldn't you be tempted to put a few millions back in and ride to 15K and more again?


There seem to be quite a lot of misunderstandings in this post. Not sure how familiar author really is with inner workings of crypto markets.

First thing first, is Tether sketchy? Yeah, pretty sketchy. But not for the reasons provided in the article.

USDT is the most traded asset against other crypto because it is the easiest vehicle to use for all sorts of arbitrage. USDT is available to trade with on every non-US exchange and it is the easiest asset to move around. As overall market size increases, it makes sense that demand for USDT is increasing because it is used in most of the trading/arbitraging/etc...

When looking for highest USDT/USD trading volume, it isn't Kraken that you should be looking at, but Curve. Curve is a DEX that does largest amounts of stable coin trading volume. Curve also has incredible liquidity depth. Right now, you can go there and exchange: 10 million USDT to 9.99 million USDC in a single transaction. USDC can be cashed out for USD very easily and is regulated not just by regular US regulators but also NY financial department too, which is the most aggressive regulator to ever exist probably. If you wanted to, you would be able to cash out billions of USDT to other NY regulated stable coins in a single day.

While USDT is certainly very sketchy, it is the dominant market player specifically because of its sketchiness (and due to it being the first one). USDT's independence from US regulators is a huge plus for most of the major non-US crypto players. Those players would be more worried about holding USD (or USDC) directly, because they are more worried about US government freezing their funds, rather than Tether going insolvent.


Are USDC transactions less private or decentralized than USDT?

It looks like it's possible to freeze an account [1], but I'm wondering how that's done.

[1] https://news.bitcoin.com/centre-obliges-government-request-f...


Excellent Excellent. I have been trying to explain this to people. Now i can just send a link to this. Excellent.


> Bob: Leverage. I personally only use 2–3X leverage, but they let you leverage your positions up to 100X if you want. You can’t do that on Coinbase.

> Me: Gasps audibly

Hahahaha Binance offers 125x leverage.

Imagine thinking $20B of USDT is enough to drive BTC up $600B in market cap.

Wait till he hears about algorithmic stablecoins.


Ok, for everyone here worried about the value of their BTC, please consider this. At the end of the day, all that really matters is what percentage of BTC bought was from HODLERS. If 80% of all BTC bought was from HODLERS, it means the market cap of BTC can NOT drop anymore than 20%, at the very maximum drop, and since the number of BTC coins in existance is constant, it means the drop in value of BTC is at MOST 20%.

The last bitcoin bubble was mostly bought up by speculators who eventually sell very quickly, which what allowed the price drop to occur so much because most BTC holders were not hodlers and most were just speculators.

You can sidestep all the concerns about Tether and USDT and conversion, etc. Just figure out what percentage of BTC is bought by HODLERS or get some kind of estimate, and that will tell you your downside risk.

I for one, am long BTC, because I know this time around a much higher percentage of BTC was bought by HODLRs and there's a whole lot more coming in 2021.


There are issues with almost every assertion and conclusion in this post, but I will limit my critique to the idea that the downward movement of BTC is capped at the % of BTC people are willing to sell. It's simply not true. The spot price of BTC is a function of what people are currently willing to pay and what people are willing to accept. If the primary source of demand and liquidity in the BTC trading markets collapses - which this article argues is Tether - the price could rapidly collapse even on small trading volumes.

If you add in the fact that these exchanges allow trading on margin, you could have a situation where people are forced to liquidate their holdings regardless of the current price. It's the perfect storm for a flash crash.


Ok, you make a good point about the possibility of collapsing demand. but, even after tether collapses, as long as bitcoin has sufficient buying demand, then there's no problem.

(assuming there's a fixed set of HODLRS). As bitcoin sells off, the number of sellers decreases, correct?

Assume on a given day, 10K buyers and 10k sellers.

As the number of sellers decreases, the ratio of buyers to sellers increases, correct?

maybe 10K buyers, 5k sellers, then 10k buyers, 1k sellers, then 10kbuyers 500 sellers, etc. this continues to put increasing upward pressure on BTC.

The above example would still be true even if bitcoin buying demand went from 10k to 2k. (collapse of tether BTC demand)

All that matters is that there's a certain minimum number of people willing to buy bitcoin for a given time period and the HODLRs who won't sell there BTC. as long as those two conditions are met, the number of buyers will soon outnumber sellers. it's just math in the end.

how can this be wrong?


Ah, I see. Your problem is a fundamental lack of understanding of financial markets. I'd recommend Investopedia as an easy way to get into understanding things.

First of all, in financial markets there is almost never a "fixed number" of buyers for anything, and especially not for something like Bitcoin. If you want to see something with (as good as you can get) to a fixed number of buyers, look at uranium. It's almost entirely used as fuel for nuclear reactors, which take years to build and to be shut down, so not only is the demand very stable, the future demand (for the next few years) can be pretty easily predicted. You'll be surprised to see that yes, sharp price drops can occur, even in such conditions.

Next, of course, the market of sellers for Bitcoin, "HODLR" or not, certainly does not behave how you imagine. Some sellers are forced to exit large Bitcoin positions every day, with reasons ranging from tax liabilities not payable in Bitcoin, businesses that accept Bitcoin that do not wish to maintain a Bitcoin position, divorces, governments that seize Bitcoin, etc etc. Then of course you have people exiting Bitcoin because they're people and life happens: their partner told them Bitcoin was stupid, or their government added rules to holding Bitcoin that scare them, or they read that a shady entity was printing billions of fake dollars to buy Bitcoin, or they bought in years ago and wow, they can buy a car with the profit! or they bought in yesterday and the drop in price spooked them.

None of this is to say anything about the price of Bitcoin or if you should buy Bitcoin - I'm just saying that your _reasons_ are deeply flawed.


Sorry, but this comment is wrong on every level.

First: that is very much not how prices work. If everyone else stayed on the sidelines and did not sell or buy any Bitcoin, the price could be set by two people - one buyer and one seller.

Second: you have no way to know who bought BTC. You can get a guess from various media, but you can never truly know. Large amounts of Bitcoin frequently change hands in entirely private transactions. Lots of volume is on shady exchanges, and of the volume on legitimate exchanges - what's to say that those are all "HODLERS"?

I have no idea what the price of Bitcoin will be in the future, but your comment is definitely not correct - downside risk is certainly not limited by the type of people who bought in.


What you're saying is only partially correct.

Imagine if everyone stayed on the sidelines and did not sell any bitcoin (the HODLRS), as the number of sellers continues to diminish more and more and more, this puts upward pressure on bitcoin as the percentage of buyers outnumber the selllers more and more. It's like trying to buy a house in the bay area. there's very few people who can afford to buy a bay area house but there's even fewer houses for sale and so the prices keep going up and up and up.

What matters is the ratio of buyers to sellers. and once you run out of sellers, the price starts going up again.


No, what I said was entirely correct. I did not say "if everyone did not sell any Bitcoin", I said "if everyone did not sell or buy any Bitcoin".

I'd also like to point out that you do not need to own Bitcoin to sell Bitcoin. If you believe the price of Bitcoin will be lower in the future, you can borrow Bitcoin and sell it now, also know as "selling short", or "shorting". You can, of course, also borrow Bitcoin and not sell it.

I would also like to mention - if you truly believe that you can forecast future prices based on the psychology of recent buyers, you can make lots of money. There are a number of regulated markets where the buyers (or at least a decent portion of them) -are- known, so if you feel that you can do this, be my guest and become the next Warren Buffett.

Finally, Bitcoin is entirely unlike Bay Area property. You cannot generate Bay Area property out of thin air using computers, there are no schemes being investigated for printing billions of fake dollars to buy up Bay Area property, and it is far less liquid than Bitcoin. The price of Bay Area property also does not double in a month.


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