Should-Read: Chris Ellis (December 11, 2017): Bitcoin Only Has One Way To Go If This Is True-Winklevoss Bitcoin Trust ETF (Pending:COIN)

Should-Read: Anybody know whether this is right? Whether Tether has actually managed to get a bunch of wanna-be arbitrageurs to implicity back it this way? Or, indeed, whether the Tether market issue figures are accurate? Chris Ellis (December 11, 2017): Bitcoin Only Has One Way To Go If This Is True-Winklevoss Bitcoin Trust ETF (Pending:COIN): “I believe that the fundamental value of the cryptocurrency is zero…

…However, I cannot deny that it has market value. That value has been increasing, which means that some people somewhere are buying. But who? I believe that question can be answered by Tether… a cryptocurrency controlled by Tether Limited… issued (not mined) and seeks to maintain a stable exchange against the dollar (i.e. tethered)… whereby each Tether is backed by one US dollar in the company’s bank. One can acquire Tether directly through the website or trade through an exchange. One can convert Tether to USD at Tether Limited, though Tether Limited has the right to refuse for any reason…. Traders like tether for its portability across platforms as it is a digital token whereas transacting in USD would require much more hassle involving banks…. The supply of Tether has increased from virtually nothing prior to 2017 to 845 million as of the time of writing, corresponding to 845 million USD. That’s the asset size of a large community bank. Interestingly, the surge in supply corresponds with the massive price increase in Bitcoin…. Causality is difficult to prove, but based on the correlation between the supply of Tether and Bitcoin and Tether Limited operating model, I am highly confident that the issuance of unbacked Tether is driving the insane rise of Bitcoin in USD….

Tether Limited management also runs Bitfinex, one of the largest cryptocurrency exchanges. Tether Limited has not been audited, and the management actively dodges any request for an audit, with the CFO of Bitfinex stating that “Writing that some non-specified “third party” audited our numbers and found nothing wrong with them is something what will re-assure you about our honesty?” Note that no one is asking for a “non-specified third party.” It is unclear where Tether Limited banks (given reason is protection privacy), but we do know that Wells Fargo has severed its relationship…. If one believes that this is all a legitimate operation, one would have to believe that there are some astute traders/investors willing to write checks each worth tens of millions dollars multiple times in several days to an offshore corporation that is unaudited, in exchange for digital tokens for which they legally have no recourse should conversion to USD be denied; the management is allergic to an audit because it has nothing to hide, thus doesn’t need an audit; and that high correlation between Tether’s supply and the price of Bitcoin is purely coincidental. If you do, then I have a bridge to sell….

Tether Limited first issues… Tethers to Bitfinex, who can then put massive (theoretically unlimited) buying pressure on the Bitcoin/Tether pair. As we can see in the following table, liquidity across exchanges is very deep for the Bitcoin/Tether, over $300 million in 24 hours…. A rise in Tether/Bitcoin will cause Bitcoin/USD to rise in value as arbitrageurs will move in. Once an arbitrageur spots that Bitcoin/Tether is trading at a higher price than Bitcoin/USD, he will short the Bitcoin/Tether pair and buy Bitcoin/USD. The final leg would be to sell/convert Tether for USD. Note how an artificial upward pressure created on the Bitcoin/Tether pair will automatically cause real upward pressure from arbitrageurs to push up the price of Bitcoin/USD…. Tether Limited doesn’t solicit new investors, but the deep liquidity of Bitcoin/Tether solves that problem, as every sell order on the other side of the buy orders… loops them into the scheme. As long as there are no sudden conversion requests at Tether Limited, the scheme will never collapse. And why should traders convert at Tether Limited? Selling on the market is much faster, and for the purposes of trading (denominated in Tether that is), Tether has much less friction than USD…. Tether is already a tradable security with a value that is completely backed by the faith of those using it….

Getting to the end game involves Bitcoin. Right now, its investors should be happy that Tether Limited is running the scheme, as perpetuating it will drive the price ever higher, as long as they all agree to “hold” that is (i.e. the current mentality). But… somewhere down the line… Bitcoin/USD will likely see significant selling pressure…. The final leg of the arbitrage is to convert Tether into USD…. If the liquidity of the Tether/USD pair is insufficient, as it will be if there is monstrous selling pressure on Bitcoin/USD, the pair will begin to break away from the peg, withdrawal requests will follow, ultimately leading to Tether’s demise….

Bitcoin investors should have a keen interest in Tether…. If the correlation between Tether’s supply and the price of Bitcoin is causal rather than coincidental as I suspect, then Tether’s doom will be the end of Bitcoin as well…


Brad DeLong
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