Tether's Mysterious Crash: Is the Money Really There?
I will get to the new concerns in a moment, but first let's review how Tether works as well as the long-standing suspicions.
Please consider the Wall Street Journal April 12, 2018 article on the Mystery Behind Tether, the Crypto World’s Digital Dollar.
> A fast-growing digital currency that claims to be backed by U.S. dollars has become a cornerstone of the volatile cryptocurrency market. The problem: There isn’t hard evidence the cash supporting it exists.
> Unlike other cryptocurrencies that fluctuate wildly in value, one tether generally equals one dollar. This makes it a sort of digital-dollar substitute.
> But Tether has never produced an audit showing it has the purported reserves. The company that controls tether maintains it has the reserves, yet it has never named the banks it uses to hold these funds, nor said where they are based and regulated.
> Tether Ltd. marketed its cryptocurrency as a way to mediate the sector’s volatility—offering the safety of the dollar along with the speed and anonymity of a digital currency. The pitch worked. Tether’s market value has risen steadily over the past 18 months, to $2.4 billion from about $10 million at the beginning of 2017. That has made it a crucial link in the wider cryptocurrency market.
> As a result, tether has become a key source of liquidity. At times this summer, tether has represented as much as 80% of bitcoin trading volume, according to research site CryptoCompare. When the year began, it accounted for about 10% of bitcoin trading volume.
> Nearly half of tether’s trading volume is among just a handful of tether-accepting exchanges, including some of the market’s largest.
Since the inception of Tether, there have been a huge number of red flags. The WSJ mentions a few of them.
- “There are a couple of forces in this market that if they failed, it would be catastrophic,” said Ding’An Fei, a managing partner at Ledger Capital, a digital asset investment firm in Beijing. “Tether is one of them.”
- Chainalysis also found tether trading is increasingly concentrated among smaller, more speculative digital currencies, a sign it is being used as a tool of “pump-and-dump” schemes, in which traders hype an asset, causing its price to rise, before dumping it for a profit.
- Tether trading in newer tokens such as EOS and NEO has risen to about 20% of overall tether volume, according to the report.
- The Securities and Exchange Commission recently singled out tether in its rejection of a proposed bitcoin-based ETF, citing studies that raised the possibility that the digital currency is being used to manipulate the bitcoin market.
With that backdrop out of the way, please consider the Tether Death Spiral by cryptocurrency trader Hans Hauge.
> There are so many red flags around Tether, I don't know where to start.
> Bitcoin priced in Tether spiked to a premium of $1,000 above the market average on exchange Bitfinex, which owns Tether. The same thing that happened right before Mt. Gox collapsed. Tether traded as low as $0.86 on the Kraken exchange in the last 48 hours.
> First, Tether adds liquidity to the market, but it's based on a lie. They're supposed to have $2.5 billion in the bank, but do they? These funds are how they control the price of Tether, keeping it pegged to the US dollar. In other words, Tether should always be worth $1.00.
> You notice that the Tether price starts to drop. It's gone from $1.00 to $0.98 over the last couple days. People are getting nervous, and meanwhile, Bitcoin starts going up in price on Bitfinex. Then you get an email about "possible restrictions on withdrawals for some users." In other words, you might not be able to get your money out. What do you do?
> The answer you should have arrived at is just dump your Tether for Bitcoin!
Hauge notes that the price of Bitcoin to Tether spiked over $1,000 as people were unable to withdraw funds.
>Bitfinex lost their relationship with Wells Fargo back, but that's old news now.
> As they hop from bank to bank trying to stay afloat, it is already being reported that their relationship with HSBC is done after just about one week!
> Apparently, a new bank has taken the stage from Hong Kong, called "PROSPERITY REVENUE MERCHANDISING LIMITED." Does anyone care to bet on how long this relationship will last?
> Oh, and this new bank... it's four months old.
Rongli? Prosperity Revenue?
Head for the Hills
Hauge concludes, and I agree "If you own Tether, run for the hills."
Is the money there? Who knows? I don't. But long-standing suspicions suggest it isn't.
Here's another possibility, even if the money is there:
Tether purposely creates these illiquid situations. Since it can time them, it can profit from them.
Dear Customers: You cannot do withdrawals. ...
Ahead of such operations, Tether invests in Bitcoin knowing it will spike. Then Tether sells Bitcoin before sending the "all clear" signal.
That is just one of many possibilities. And of course the money might not be there at all and it is necessary for Tether to pull off these scheme to put back siphoned money.
Either way, and especially considering the WSJ's suspicions, I have a bit of advice.
Get Out Now!
Mike "Mish" Shedlock