I nearly ventured to Austin Wednesday, but my flight was canceled due to the storm, havoc, and general disaster in the area. I found another flight later in the day and was headed out the door, when I thought, nah. Turned out to be a good decision, since I probably wouldn’t have survived more than a day without wifi.
Last week, Tether issued another 2.2 billion tethers, so you can buy bitcoin with real cash at a higher price. As of today, Feb. 21, there are now $34 billion worth of tethers in circulation—all backed by Tether’s good word. Oh, and they just printed another 800 million this morning.
More lulz for Mr. Musk—this time a double entendre.
Bitcoin is over $57,000. Why? Because it is a Ponzi scheme, and people who put their money into a Ponzi or MLM scheme get excited when numbers go up because they think they are getting hilariously rich. When bitcoin reached $1 trillion market cap earlier this week, it was an occasion for celebration in the bitcoin world. All of the bitcoiners on Twitter gave themselves laser eyes—in the hopes of pushing bitcoin to $100,000—and posted pictures of raw, juicy steaks.
Market cap, as I have explained, is a delusional number when it comes to crypto. A trillion-dollar market cap assumes everyone who owns bitcoin bought it for $55,000 and could sell it for that. That is nowhere near the truth. Many bitcoiners bought bitcoin for a fraction of what it is today. And if everyone sold at once, the market would collapse. It’s all fantasy.
My weekly reminder that I have a Patreon account. Thank you to my new patrons, who pushed me up over $600 last week. You can subscribe for as little as $5 a month. It’s like buying me a beer or a latte every four weeks.
Okay, let’s talk about bitcoin’s newest crazy god, who also has laser eyes on his Twitter profile.
MicroStrategy: More cowbell
Every single day, MicroStrategy chief Michael Saylor is on Twitter—or elsewhere—shilling bitcoin. This has literally been his new day job since he staked the future of his entire company and his reputation on “number go up.” His tweets are bizarre and often make no sense. Lately, he has been taking random quotes from famous people and attributing them to bitcoin.
In his latest move, Saylor has taken MicroStrategy deeper down the debt hole. Last week, the company sold $1.05 billion in convertible senior notes, which it plans to invest in more bitcoin. The notes mature in February 2027. (Decrypt, MicroStrategy PR)
This is on top of the firm’s $650 million bond offering in December, which MicroStrategy also used to buy bitcoin. Those notes mature in December 2025. The company owns 72,000 bitcoin per a February regulatory filing. And don’t forget, Saylor has his own personal stash of bitcoin, though we don’t know how much he still has—or if he was selling when MicroStrategy was buying.
If the price of bitcoin collapses, MicroStrategy could literally go bankrupt. But remember, Saylor owns 70% of the company’s voting stock, so he calls the shots. The other MicroStrategy board members can only sit back and watch in horror.
Big companies buying bitcoin and putting them into cold storage means more bitcoin getting pulled out of circulation so that the already small supply of circulating bitcoin grows smaller and the market becomes easier for whales to manipulate—even if those whales bought their hoards of BTC via alias accounts funded with tethers.
So what if MicroStrategy puts another $1 billion into bitcoin and Tesla buys $1.5 billion worth? Tether issues that much fake money in a week. Meanwhile, all the real cash in bitcoin goes out the door as miners sell their 900 newly-minted bitcoin per day for fiat. Bitcoin itself generates no revenue. It’s simply investor money going in one end and out the other.
Jorge Stolfi, a Brazilian computer scientist, estimates that the accumulative amount that bitcoin investors have lost so far is at least $15 billion. When you invest in bitcoin, you immediately lose money, just like all those who invested in Bernie Madoff’s fund, though they went on for years thinking they were making money.
NYAG / Bitfinex—status update
We should be hearing something soon on the New York attorney general’s investigation into Bitfinex/Tether, but probably nothing big, or earth moving—not yet at least.
Bitfinex’s law firm Steptoe filed a letter on Jan. 19, saying Bitfinex/Tether needed more time to send in their documents. Here is what they said exactly: “We will plan to next contact the Court in approximately 30 days to either provide a final status update or to schedule a conference with the Court to discuss any open items.”
The office of the attorney general still has to take a position on the material it receives, and Bitfinex boasted that it had spammed them with some 2.5 million documents. My guess is that Bitfinex, like failed Canadian crypto exchange QuadrigaCX, hasn’t kept accurate records of their financial dealings and they are flying by the seat of their pants. Quadriga operator Gerald Cotten kept no books, commingled funds, and viewed customer money as his personal slush fund.
Tether doomsday scenario
Some people—Nouriel Roubini in particular—have predicted that Tether will get taken down this year, though it will take a much larger effort than the NY AG alone. Still, what will happen if Tether’s operators are arrested and its bank accounts seized? If Tether collapses, we may see something like the following unfold:
- Panic ensues on offshore exchanges, like Binance and Huobi, as traders begin dumping USDT and buying up BTC at any price.
- The price of BTC on banked vs. unbanked exchanges begins to diverge. BTC goes up on unbanked exchanges and drops on banked exchanges, like Coinbase, as people start selling their BTC for cash en masse.
- Banked exchanges face liquidity crises as they can’t keep up with withdrawals. We start to see system outages and paused trading—similar to what happened with Robinhood on Jan. 28.
- The price of BTC collapses to the point where bitcoin miners cannot pay their monstrous power bills.
- At some point, the bitcoin hash rate will drop, and bitcoin will go into a death spiral. When miners can’t pay their electric bills, they unplug from the network. This leaves bitcoin vulnerable to attacks, and the virtual currency becomes worthless.
Mind you, bitcoin will never die off completely. Unlike other Ponzi schemes, which disappear when they collapse, bitcoin will spring back to life from time to time. This is the fourth—and by far the biggest—bitcoin bubble since 2009.
Bitcoin’s sick energy consumption
After Tesla announced it bought 1.5 billion worth of BTC, bitcoin’s grotesque energy consumption has come under fire. Based on some estimates, the network consumes as much energy as the entire country of Argentina with 45 million people. Christmas lights are literally a more productive use of electricity to bring joy to people’s lives than bitcoin. (This is a joke. In 2018, bitcoiners claimed that Christmas lights consumed more energy than bitcoin.)
Bitcoiners like to argue this is all green energy, but that is simply not true. Two-thirds of bitcoin mining is based in China, a country that relies heavily on coal-fired electricity. Some miners in the Sichuan province get power from hydro, but only during the wet season. The rest of the time, they turn to fossil fuels. (My blog)
And for those still claiming bitcoin uses clean energy, Trolly had a few more points to add:
- The Three Gorges Dam—a gargantuan structure straddling the Yangtze River in China’s Hubei province—has long been criticized for its environmental impact and displacement of two million people. The dam generated a record 112 terawatt hours of electricity in 2020. According to Digiconomist, bitcoin consumes 79 TWh of electricity per year—more than half that.
- You need one million Bitmain’s Antminer 19s Pros to reach the current bitcoin hashrate of 110M TH/s. That means there are at least one million nodes on the bitcoin network—more if miners are using Bitmain’s outdated S17 model. These machines are good for two years max before they get tossed into landfills and replaced with more efficient ASIC rigs.
- Bitcoin processes 300,000 transactions per day. The all-in cost of a single bitcoin transaction is $20 for infrastructure and $40 for electricity. Miners currently break even when the BTC price is $20,000. (That’s based on energy and other costs.)
Coinbase behind Tesla’s BTC purchase
Coinbase facilitated Tesla’s recent $1.5 billion purchase of bitcoin, according to The Block. An unidentified source told the outlet that the San Francisco-based crypto exchange made the purchase on behalf of Tesla over the course of several days in early February. The price of BTC in the first week of Feb. was around $38,000.
Similar to how it helped MicroStrategy make its big BTC purchase, Coinbase broke up Tesla’s order into small pieces and routed those to over-the-counter trading desks to minimize the impact on the overall bitcoin market.**
Coinbase wrote up a case study on how it bought bitcoin for MicroStrategy.
Motley Fool’s ship of fools
Another ship of fools has headed off to sea.
The Motley Fool is a private financial and investing advice company based in Alexandria, Virginia. It’s been around since 1993, so you would think they actually do their due diligence. Apparently not. Also, regular folks rely on them for sage investment advice, which is why I was shocked to learn Motley Fool was putting $5 million into bitcoin. (Fool announcement)
Motley Fool justified the investment with these three reasons:
- We believe it will store value more effectively than gold over the long term.
- We believe it may become a medium for transactions, as/if pricing stabilizes in the decade ahead.
- We believe it can act as a productive hedge against inflation.
All three reasons are blitheringly stupid. Medium for transactions? If the price stabilizes in the future? Name one time in the past decade where the price of bitcoin has stabilized. As I explained earlier, the more people who hodl bitcoin, the less stable it becomes. It will never be a stable asset. And you can’t call bitcoin a “store of value” if you get only 20% of what you paid for it.
At least one sensible Motley Fool contributor explained why investing in bitcoin is a horrible idea.
GameStop hearing #1
I spent two hours on Thursday watching the first half of a five-hour GameStop House Financial Services Committee hearing. Most of the questions were not that interesting. This is the first of three hearings. I’m not sure I can watch anymore, unless someone from the SEC, such as Gary Gensler, joins in on the questioning.
The nut is that Robinhood CEO Vlad Tenev apologized to his users for stopping customer trading during the peak of the madness, but says he wasn’t colluding with hedge funds. “We don’t answer to hedge funds,” he said. “We serve the millions of small investors who use our platform every day to invest.” (NPR)
He also would not admit there was a liquidity problem when he limited trades in January.
David Portnoy doesn’t like Vlad’s hair. He thinks it makes him look untrustworthy.
And Keith Gill (Roaring Kitty), who made $48 million from a $53,000 investment in GameStop, came off as a likable, honest guy. Although, he may need those profits to defend himself against at least one proposed class-action. (Complaint)
Other newsy bits
Cynthia Lummis (R-WY) added laser eyes to her Twitter profile pic, confounding the political press and turning bitcoiners into a bunch of cooing babies (Slate)
A few years ago, the SEC shut down the entirely fraudulent ICO market. A sudden shutdown of the DeFi money market (DMM) may be the start of the next regulatory wave. (David Gerard)
The U.S. Treasury Department accused crypto payments platform BitPay of facilitating over 2,100 transactions with individuals in sanctioned nations. BitPay will pay $500,000 to settle the charges. (Coindesk, enforcement notice)
JP Morgan calls Tether an unbacked wildcat bank. “A sudden loss of confidence in USDT would likely generate a severe liquidity shock to Bitcoin markets, which could lose access to by far the largest pools of demand and liquidity,” analysts said. (Bloomberg)
FTX, one of Tether’s biggest customers, claims on Twitter that its volume and customer numbers are real. All you need is an email to set up an account—no KYC for tier 0, 1 accounts with up to $9,000 USD daily withdrawal,* which means anyone can set up any number of alias accounts. Trading volume is a meaningless number due to robot trading and probably wash trading.
Stephen Diehl on Bitcoin mining: “The Crypto Chernobyl.” (blog post)
BitMEX’s Arthur Hayes—who was indicted in October and is still at large—has resurfaced to argue the Robinhood shutdown was orchestrated by financial elites. This is a sign that retail investors should buy crypto, he said. (Cointelegraph) (Tweet)
*Updated to note FTX has no KYC on both tier 0, 1 accounts. In an earlier version of this newsletter, I said you did not need KYC to withdraw up to $1,000. But it’s actually up to $9,000 per day for high-volume accounts.
**Updated March 2: An earlier version of this story incorrectly stated that Coinbase routed the Tesla order to OTC desks, so as not to “crash” the price of BTC. This is incorrect. A large order would lift the market. Story has been altered to reflect that.
Feature image: Ship of fools depicted in a 1549 German woodcut
Amy Castor 
Fiat is the biggest ponzi! Dollar lost more tha 95% od the purchasing Power last 100 years!!
You clearly don’t understand how money works. USD is not an investment, therefore, not a Ponzi. By design the dollar loses value each year—this is so people do not hoard USD.
Thanks for a well written article that clearly has a huge amount of work behind it! Could you clarify your train of thought on the Teather doomsday scenario where you write: “The price of BTC on banked vs. unbanked exchanges begins to diverge. BTC goes up on unbanked exchanges and drops on banked exchanges, like Coinbase, as people start selling their BTC for cash en masse.” How would people selling USDT en masse on unbanked exchanges lead to people selling BTC for cash? I’m not asking as a critic, just trying to understand.
When people (likely insiders first) realize that USDT is useless, they will act quickly to dump their USDT. They can’t dump it for cash, so they will buy BTC (or some other popular crypto) and move it to a banked exchange where they can sell it for fiat.
Thanks for the article, Amy.
However, in any stock exchange (applicable to any commodity/company) if everyone sells at once, the market will collapse, be it Tesla, Honeywell, Amazon or anything. Current market cap is always defined by the total number of shares/coins in circulation multipled by the current price, unrelated to the “immediate sale effect” (which would definitely bring the stock to collapse – as well as any given bank would collapse if all customers withdraw their deposits at once). One particular issue which bothers me though is these never-ending story with the documentation delay in the BitFinex case and quite a passive approach from NYAG.. Or are they just scared of the potential consequences..?
Companies have cash flows, buildings, patents. When you buy shares, you’re buying a share of the company’s assets and its profits. You essentially become part owner of a company. Bitcoin is not a company; the term market cap makes no sense
Fascinating stuff. It will be interesting to see how it unwinds. I suspect there will be very few apologies from the pumpers (maybe motley fool). There’s a lot of people’s vested in interest in maintaining some elevated price to keep their jobs and mining going and the dream of the next bubble will always remain. Mostly likely will go on for years. Thanks for your thorough research, keep up the good fight!
I’m confused about something. You wrote:
“Coinbase broke up Tesla’s order into small pieces and sent them to over-the-counter trading desks, so the buying would not crash the bitcoin price. ”
I don’t understand why buying would crash the bitcoin price. Am I misconstruing “crash” in this context? It seems fundamental that heavy buying would bid up the price.
Yeah, that doesn’t look right. I’ll fix that. Thanks for pointing it out