Tag: Jorge Stolfi

Welcome to Grayscale’s Hotel California 

If you happen to be taking Amtrak and pass through Penn Station or Union Station, you will notice something unusual: every available ad space has been taken up by Grayscale. 

“We care about crypto investors,” the crypto asset manager says in its ads. Grayscale is urging the public to write to the Securities and Exchange Commission and convince them to approve the first spot bitcoin ETF in the U.S.

Grayscale wants to convert its Grayscale Bitcoin Trust (GBTC) into a bitcoin ETF after flooding the market with shares. GBTC is trading 25% below its net asset value, and investors are rightfully pissed off. Grayscale wants them to be upset with the SEC, but the regulator isn’t really to blame. If anything, the SEC should have warned the public about GBTC years ago. 

Over the last eight years, Grayscale has been telling investors to buy shares of GBTC, advertising the fund as a way to get exposure to bitcoin without having to buy bitcoin.  

Accredited investors plowed dollars (or maybe bitcoins) into the fund all through 2020, looking to take advantage of an arbitrage opportunity. They could buy in at NAV, and after a 6 to 12-month lockup, sell on the open market for a premium. All through 2020, that premium was around 18%, on average.

Everybody was happy until February 2021, when the Purpose bitcoin ETF launched in Canada. Unlike GBTC, which trades over-the-counter, Purpose trades on the Toronto Stock Exchange, close to NAV. At 1%, its management fees are half that of GBTC. Within a month of trading, Purpose quickly absorbed more than $1 billion worth of assets. 

Demand for GBTC dropped off and its premium evaporated. Currently, 653,919 bitcoins (worth a face value of $26 billion) are stuck in an illiquid vehicle. Welcome to Grayscale’s Hotel California. 

The plan all along, Grayscale claims, has been to convert GBTC into a bitcoin ETF. On October 19, 2021, NYSE Arca filed Form 19b-4 with the SEC. The regulator has until early July to respond. 

In all probability, the SEC will reject the application, just as it has every single spot bitcoin ETF application put before it to date. 

Bitcoin’s price is largely determined by wash-trades, whales controlling the market, and manipulation with tethers. SEC Chair Gary Gensler knows this. He taught a course in blockchain and money at MIT Sloan before his appointment by the Biden administration. 

This is Grayscale’s second time around. It applied for a bitcoin ETF in 2016, but withdrew the application during the 2017 bitcoin bubble because “the regulatory environment for digital assets had not advanced to the point where such a product could successfully be brought to market.” Meanwhile, the trust’s assets under management grew as did Grayscale’s profits.

Closed-end fund

“Inflation is rising, we need to diversify!” a panicked woman tells her son over the phone in the middle of the night. “I’m buying crypto!” She hangs up. Her son rolls over in bed. The scene is from a series of TV commercials Grayscale ran in 2020 to convince the public that GBTC was a sound investment.  

Digital Currency Group is the parent company of Grayscale. Both firms were founded by Barry Silbert. DCG is invested in hundreds of crypto firms. It owns crypto outlet CoinDesk, which essentially functions as a PR machine for the entire crypto industry. 

Initially called the “Bitcoin Investment Trust,” GBTC launched in September 2013. It was promoted as an investment vehicle that would allow hedge funds and institutional investors to gain exposure to bitcoin, without having to deal with custody. Coinbase has been the custodian of the fund since 2019 when it bought Xapo, the previous custodian. 

Legally, GBTC is a grantor trust, meaning it functions like a closed-end fund. Unlike a typical ETF, there is no mechanism to redeem the underlying asset. The SEC specifically stopped Grayscale from doing this in 2016. Grayscale can create new shares, but it can’t destroy shares to adjust for demand. Grayscale only takes bitcoin out to pay its whopping 2% annual fees, which currently amount to $200 million per year.

​​In contrast, an ETF trades like a stock on a national securities exchange, like NYSE Arca or Nasdaq. An ETF has a built-in creation and redemption mechanism that allows the shares to trade at NAV via arbitrage. Authorized participants (essentially, broker-dealers, like banks and trading firms) issue new shares when the ETF trades at a premium and redeem shares when they trade at a discount, making a profit on the spread. 

How it all works 

Grayscale periodically invites rich investors to pledge money into the fund in private placements at its discretion. The minimum investment is $50,000. Grayscale uses the cash to buy bitcoin and issues shares of GBTC in kind. 

Investors can also pledge bitcoin directly — a great advantage if you happen to be a large holder who wants to unload your BTC without crashing the market. (More on this later.)

After a lockup period, investors can sell their GBTC on the open markets. Anyone can buy and sell GBTC on OTC Markets Group, the main over-the-counter marketplace, or via a brokerage account, like Schwab or Fidelity.  

Up until early last year, GBTC has typically always traded at a premium on the open market. That premium occasionally soared to over 100%. During the 2017 bitcoin bubble, GBTC traded as high as 130% above NAV.

Why would anyone pay the premium? Many institutional investors can’t buy bitcoin directly for compliance reasons. And there are a lot of individuals who don’t want the headache of figuring out how to set up a bitcoin wallet. GBTC was initially the only option for getting exposure to BTC, without having to buy BTC, at least until bitcoin futures came along. However, bitcoin futures contracts came with their own risks, costs, and headaches. GBTC was easier.  

In early 2020, GBTC became an SEC reporting company. This allowed investors who purchased shares in the trust’s private placement to sell their shares in 6 months instead of the previous 12 months. You could now make more money faster!

Unsurprisingly, the trust went into overdrive in 2020. Starting in January 2020 up to Feb. 23, 2021, Grayscale filed 35 reports with the SEC indicating that it sold additional shares to accredited investors, according to Morning Star’s Bobby Blue.  

The trust’s holdings doubled from roughly 261,000 BTC in January 2020 to 544,000 BTC by mid-December 2020, per Arcane Research.

Red flags

Harris Kupperman, who operates a hedge fund, explained in a November 2020 blog post how GBTC’s arbitrage opportunity created a “reflexive Ponzi,” responsible for sending the price of bitcoin hyperbolic.

There were several versions of the arb. You could borrow money through a prime broker. You could use futures to hedge your bet. You could recycle your capital twice a year. 

Every version involved Grayscale purchasing more bitcoin, thus increasing demand, widening the spread in the premium, and pushing the price of bitcoin ever higher. Between January 2020 and February 19, 2021, the price of BTC climbed from $7,000 to $56,000. 

“When the spread is 26% wide and liquid to the tune of hundreds of millions per week, you can bet the biggest guys in finance are all over it,” Kupperman said. “As you can imagine, everyone big is putting on some version of this trade.” 

Kupperman wasn’t the only person to raise alerts about the fund, which mainly benefited wealthy investors. As soon as GBTC launched, skeptics voiced their concerns. 

“You can put a nice wrapper around a turd, and present it in a very well-manicured product to investors that you say is safe,” Barry Ritholtz, a wealth manager and founder of The Big Picture blog, told Verge. “But at the end of the day, it’s still crap.”

In September 2017, Citron Research called GBTC “the widow maker” and “the most dangerous way to own bitcoin.” Citron’s Andrew Left accurately predicted GBTC’s collapse:

“Citron believes that as new methods become available for investors to gain exposure to bitcoin — including traditional ETFs — that money will move to these regulated instruments and out of the uncertain waters of GBTC, which we believe can fall by 50% easily.”

Who holds GBTC?

The press has repeatedly credited Grayscale as a massive buyer of bitcoins, and evidence of institutional money entering the cryptoverse. This may not be the case.

Even though Grayscale states its holdings in dollars, it accepts deposits of bitcoins. A whale, or a good friend of Grayscale, can trade in their BTC for shares of GBTC, which they can flip six months later at well above the actual price of bitcoin.  

The last time Grayscale broke out the numbers in Q3 2019, they said that the majority of deposited value into their family of trusts was in crypto, not dollars: 

“Nearly 80% of inflows in 3Q19 were associated with contributions of digital assets into the Grayscale family of products ‘in-kind’ in exchange for shares, an acceleration of the recent trend, up from 71% in 2Q19.”

Grayscale stopped breaking out the percentage of crypto deposits into its trusts after 2019, and just stated everything in dollars. They may want to break out the numbers again, as this is something the SEC might be interested in. 

Crypto lender BlockFi’s reliance on the GBTC arbitrage is well known as the source of their high bitcoin interest offering. Customers loan BlockFi their bitcoin, and BlockFi invests it into Grayscale’s trust. By the end of October 2020, a filing with the SEC revealed BlockFi had a 5% stake in all GBTC shares.  

Here’s the problem: Now that GBTC prices are below the price of bitcoin, BlockFi won’t have enough cash to buy back the bitcoins that customers lent to them. BlockFi already had to pay a $100 million fine for allegedly selling unregistered securities in 2021. 

As of September 2021, 47 mutual funds and SMAs held GBTC, according to Morning Star. Cathie Wood’s ArkInvest is one of the largest holders of GBTC. Along with Morgan Stanley, which held more than 13 million shares at the end of 2021.

Such a lovely place

Grayscale was happy to take investor money during the bitcoin bull runs of 2017 and 2020-21 and saturate the market with shares of GBTC. Anyone sitting on GBTC now is forced to take their losses, or hold out in the hopes Grayscale will do something to fix this. 

Investors, many of whom are regular folks with GBTC in their IRAs, have every reason to be upset. Meanwhile, Grayscale is pointing the finger at the SEC as the reason we can’t have nice things.

Michael Sonnenshein, Grayscale’s chief executive, told Bloomberg he would even consider suing the regulator if Grayscale’s application to convert GBTC into a bitcoin ETF is denied. 

Sonnenshein argues that because the SEC has approved bitcoin futures ETFs, it should also approve a bitcoin spot ETF.  

This makes absolutely no sense. The two investment vehicles are totally different animals. 

A bitcoin futures ETF indexes a bitcoin futures contract on the CME. It is a bet in dollars, paid in dollars. Nobody touches an actual bitcoin at any point. In contrast, Grayscale’s spot bitcoin ETF application represents an investment that is backed by bitcoins — not derivatives tied to it.

A spot bitcoin ETF is good for bitcoin, because it means more actual cash flowing into the cryptoverse. Crypto promoters are pushing hard for this. Bitcoin is a negative-sum game that relies on new supplies of fresh cash to keep it going.  

But what happens if the SEC doesn’t approve Grayscale’s application?  

Grayscale can issue more buybacks. In the fall of 2021, DCG began buying back over $1 billion worth of GBTC. In March 2022, it announced another $250 million in buybacks for Grayscale trusts. The effort had little impact. GBTC continued to trade well below the price of bitcoin.

As Morning Star points out, Grayscale has the power to make this right. It can redeem shares at NAV and simply return investors their cash or bitcoin. That is, if Grayscale really does care about crypto investors.

Grayscale offered a redemption program before 2016. However, the SEC issued a cease and desist order because the repurchases took place at the same time the trust was issuing new shares, in violation of Regulation M.

The situation is different now. Grayscale stopped issuing new shares in March 2021. That leaves the door open for it to pursue a redemption program and bring GBTC closer inline with the price of bitcoin.

I doubt this will ever happen. Grayscale is sitting on a cash cow. As long as it can redirect investor anger at the SEC, why change?

“There is no obligation to convert to an ETF,” David Fauchier, a fund manager at London’s Nickel Digital Asset, told me in a tweet. “If things stay as they are, they will print money into perpetuity basically, it’s a FANTASTIC business if BTC doesn’t zero.”

Fed by stimulus money, tethers, and a new grift in the form of NFTs, the price of bitcoin reached a record of nearly $69,000 in November 2021. Bitcoiners rah-rahed the moment.

However, the same network effects that brought BTC to its heights are working in reverse and can just as easily bring it back down again. At its current price of $40,000, amidst 8.5% inflation, bitcoin is not proving itself to be the inflation hedge Grayscale hyped it up to be. 

It’s worth noting, that Barry Silbert left Grayscale in August 2021. Incidentally, Jeff Skilling jumped ship at Enron in August 2001, shortly before disaster hit, for some reason.  

Submit your comments!

I encourage anyone reading this to submit your comments to the SEC regarding Grayscale’s application for a spot bitcoin ETF. Jorge Stolfi, a computer scientist in Brazil, has provided an excellent example, and so has David Rosenthal, also a computer scientist. You can submit your own comments here.  

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Posted on by Amy Castor 3

My first story in MIT Tech Review with added ramblings on Web3 and Ethereum’s Beacon Chain

I just wrote my first story for MIT Tech Review. 

It is an explainer piece on Ethereum’s move to proof of stake. What follows are notes from the story — along with additional ramblings and quotes from your favorite crypto skeptics.

When NFTs became a big thing in 2021, that drew a lot of attention to Ethereum, where most NFTs are traded. It also brought a lot of attention to the environmental horrors of proof of work.

Bitcoin and Ethereum both rely on proof of work to add new blocks to the chain. Together, they consume as much electricity as the entire country of Italy, according to Digiconomist. 

Meanwhile, venture capitalists are shoveling cash at companies building Web3 — a supposedly new iteration of the internet where apps will run on permissionless blockchains, mainly Ethereum. 

The problem is that permissionless blockchains — those that are open to the public and depend on a cryptocurrency to incentivize miners and maintain their security — are incredibly inefficient. They are sluggish. They can’t handle much data, and they don’t scale.

Case in point: CryptoKitties slowed the entire Ethereum network to a crawl in 2017. 

In his article “The Web3 Fraud” Nicholas Weaver, a researcher at the International Computer Science Institute at Berkeley, explains that Web3 is “a technological edifice that is beyond useless as anyone who attempts to deploy a real application will quickly discover.”

Andreessen Horowitz (a16z), one of Silicon Valley’s top venture capital firms, is a big promoter of Web3. It has invested heavily in at least a dozen platforms that support NFTs alone, among them: Dapper Labs, OpenSea, Manifold, and soon, possibly, Bored Ape Yacht Club. Ethereum is crucial to a16z’s Web3 story.

Clearly, that story needs something more to support it. It needs a rocket-boosted ETH 2.0.

Scaling to the moon

In a proof of stake system, validators replace miners. Instead of investing in expensive ASIC systems that eventually end up in landfills, you invest in the native coins of the system.

Ethereum Foundation, the nonprofit behind Ethereum, says its proof of stake will consume 99.95% less electricity than proof of work. Ethereum currently handles roughly 15 transactions per second. Its founder Vitalik Buterin said ETH 2.0 could potentially handle a whopping 100,000 transactions per second. That would beat out Visa, which claims 65,000 transactions per second.

Ethereum was supposed to be a proof of stake blockchain from the start, according to its whitepaper. But in 2014, Buterin concluded that developing a proof of stake algorithm was non-trivial. So Ethereum settled for proof of work instead, while it went to work developing a proof of stake algorithm. Ethereum’s switch to proof of stake has been six months away for years. 

Now, supposedly, the big moment is soon to arrive.

Ethereum is currently testing a proof of stake blockchain called the Beacon Chain. This will be the heart of ETH 2.0. So far, 9.7 million ETH ($25 billion) is staked on the Beacon Chain. To become a validator, you have to lock up 32 ETH. If you don’t have that much ETH on hand, you can join a staking pool.

In an upcoming event called “The Merge,” which was supposed to happen in Q1 2022 but got pushed to to Q2 2022 in October, Ethereum will combine the Beacon Chain with the Ethereum Mainnet.  

After The Merge takes place, the next step is sharding — splitting the Ethereum chain up into 64 separate chains, so the network can scale. Sharding won’t happen until 2023. This is where the network reaches toward that theoretical number of 100,000 transactions per second.

Critics, however, doubt sharding will be any more efficient than a single chain. 

Jorge Stolfi, a computer science professor at the State University of Campinas in Brazil, told me: “Almost every transaction will require updating two shards in an ‘atomic’ way (either both are updated or neither is updated). That will be the job of the central (Beacon) chain. I doubt very much that they can do that more efficiently than the current single-chain scheme.”

Ethereum, a centralized system

Scaling isn’t the only issue at hand in Ethereum’s move to proof of stake.

Proof of work’s decentralization suffers from economies of scale. Large mining operations are better able to maximize profits while lowering costs. This resulted in five mining operations controlling more than half of Bitcoin’s hash rate in 2020.

Like proof of work, proof of stake will naturally tend toward centralization.

Those who have the deepest pockets and stake the most coins will have the best chances of “winning the lottery,” thus reaping newly minted coins in the form of the block reward.

The big staking validators are already getting themselves into position. US crypto exchanges Coinbase and Kraken hold 78,000 out of 296,000 validators on the Beacon Chain.

A16z is also getting in on the action. It invested $70 million into staking provider Lido and is using Lido to stake an undisclosed portion of its venture arm’s ETH holdings on the Beacon Chain.

Proof of work and proof of stake both aim to get rid of a central gatekeeper, but that comes at a huge cost. One wastes electricity; the other wastes coins, which get locked up and pulled out of circulation.

“Whatever Sybil defense they use, economics forces successful permissionless blockchains to centralize; there is no justification for wasting resources in a doomed attempt at decentralization,” David Rosenthal said in a recent blog post. Rosenthal is known for co-creating Stanford University’s LOCKSS technology for the distributed preservation of digital content. 

The one advantage of proof of stake that we can count on? At least it won’t destroy the planet.

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Posted on by Amy Castor 1

Crypto predictions for 2022: A bitcoin crash is coming—eventually. Regulators will kill stablecoins, soon NFTs

I wrote a prediction piece last year, wherein I spoke to several nocoiner luminaries to get their predictions for 2021. I also gave my own predictions. Were we right? Did any of our predictions hold true?

Well, yes, we were spot on. All our predictions were 100% correct!

We predicted 2021 would be a year of comedy gold. It was! Where to begin? El Salvador adopted bitcoin as a national currency. You can’t get any dumber than that—or maybe you can. How about Bitcoin Volcano bonds? Or Elon Musk sending the bitcoin price falling when he tweeted a broken heart emoji?

Several of us also predicted bitcoin would collapse in value. Bitcoin has not suffered a stupendous crash yet, but the conditions are ripe for a crash—loose regulatory oversight and a lack of real dollars in the system. It’s just taking a little longer than we thought. 

Bitcoin started 2021 at $32,000. It went on to set a new record high of $69,000 in November 2021. It’s now below $50,000—already a 30% drop in price. The higher it goes, the farther it has to fall. The question is not if crypto will plunge, but when.  

Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, who has been following Bitcoin since 2012, told me he expected the crypto markets to collapse six months ago. 

“I’m surprised the [bitcoin] mining hasn’t collapsed yet, but I think it’s being propped up by mining companies HODLing and going into debt on power bills.” Bitcoin miners mint 900 new bitcoins per day and they have to sell those for cash to pay their monstrous electricity bills.

Weaver added: “I think the huge hype with Crypto.com, Robinhood, and the others IS drawing in some retail suckers, just not enough.”

Robinhood, the popular stock trading app, starting shifting into crypto in 2020. In an attempt to become a household name, Singapore crypto exchange Crypto.com plastered its name on L.A.’s Staples Center. The media attention helps lure more real dollars into the crypto ecosystem.

Carol Alexander, professor of finance at Sussex University, told CNBC that she expects bitcoin to collapse to as low as $10,000 in 2022. As far as she’s concerned, bitcoin “has no fundamental value.” It’s not a real investment, just a “toy.”

To keep the game going a little bit longer, coiners will need to come up with a new way to lure dumb money into the crypto markets. How will they do this in 2022?

In 2017, initial coin offerings were the answer. In 2021, NFTs lured in the dumb money. David Gerard, author of “Attack of the 50-foot Blockchain,” predicts “there will be some attempt to invent a new form of crypto magic bean that’s more blitheringly stupid than NFTs, but I’m at a loss as to what it could be.”

Changing tides

Jorge Stolfi, a computer science professor at the State University of Campinas in Brazil, is reluctant to make bitcoin price predictions but he thinks change is definitely in the air. “If 2022 doesn’t see a massive crash plus regulations, enforcement, etc then I will be really shocked,” he said in a private chat. 

Stolfi pointed out that critics are less restrained now. In the past, they would tell you to “be careful.” Now they are outright calling bitcoin a Ponzi. Headlines tell the story. A recent opinion piece in the FT carried the headline: “Why bitcoin is worse than a Madoff-style Ponzi scheme.” On CNBC: “‘Black Swan’ author calls bitcoin a ‘gimmick’ and a ‘game,’ says it resembles a Ponzi scheme.” And a June 2021 headline in Vice read: “President of the Minneapolis Federal Reserve Called DOGE a Ponzi Scheme.”

Stablecoins

Stablecoins spun completely out of control in 2021. The supply grew 388%, driven by decentralized finance (DeFi) and derivative trading, according to research by The Block. 

In early 2021, there were 21 billion tethers sloshing around in the crypto markets. Twelve months later, that number quadrupled to 78 billion. Tether is now shamelessly moving tethers in 1 billion and 2 billion batches. And where are Tether’s two remaining principles—CEO Jean-Louis van der Velde and CFO Giancarlo Devasini? Nowhere to be seen is where. They disappeared from the public eye long ago. I suspect we won’t see them again until the U.S. DOJ catches up to them. 

Growth in the second most popular stablecoin was even more staggering in 2021. Circle’s USDC went from 4 billion to 42 billion. In July 2021, Circle shocked everyone when it announced plans to go public via a SPAC, thereby sidestepping the financial scrutiny of an IPO.

We haven’t heard any news on that SPAC since, even though the merger was supposed to close in Q4 2021. My guess is the heat is excessive.

Both Tether and Circle claim that their stablecoins are fully backed by reserves, but the big question is — how carefully are these reserves audited? Some of those reserve assets, like commercial paper, are riskier to convert to cash. Regulators are worried that stablecoins could fuel digital-era “bank runs” if a large number of investors rush to redeem them.

The Biden administration said in 2021 that it wants to regulate stablecoin issuers the same way as banks. SEC Commission Chairman Gary Gensler likened stablecoins to “poker chips at the casino.”

I predict stablecoin companies will continue to feel the pressure from regulators in 2022, and eventually, it will become impossible for them to stay in business. They are becoming too big of a risk.

NFTs — another regulatory loophole to be closed

In 2021, NFTs became dinner table talk after a Beeple piece sold for $69.3 million in crypto at a Christie’s auction. It turned out, the person behind the sale was the former operator of a shady cryptocurrency exchange in Canada, who partnered with Beeple on plans to fractionalize the NFT with a B20 token. He actually gave Beeple 2% of the B20 supply and kept 60% for himself.

Out of seemingly nowhere, NFTs have now become a $40 billion market.  

The initial coin offering market was huge in 2017, until regulators gave fair warning that most ICO tokens were unregistered securities. I predict the regulatory noose will tighten on the NFT market as well. Regulators are already warning that fractionalized NFTs resemble illegal securities. 

If NFT marketplaces are deemed art dealers, they could fall under the bank secrecy act, which means platforms will have to ID their customers and submit suspicious activity reports to the government. 

In short, 2022 will be a year that regulations put a stranglehold on crypto. Until then, expect more comedy gold and corruption in El Salvador, where President Nayib Bukele is now trading bitcoin on his phone and tweeting about it.

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Posted on by Amy Castor 0

RSA Conference goes full blockchain, for a moment

RSA Conference, arguably the world’s largest gathering of computer security experts, surprised everyone Saturday night when it suggested replacing the entire internet with — a blockchain. 

“The Internet has a serious fundamental flaw: the transmission control protocol/internet protocol (TCP/IP) — the primary engine underpinning the Internet — is less secure. Is #blockchain the solution we need to eliminate this flaw?” RSA Conference tweeted at 8 p.m. EST.

RSA holds an annual conference in San Francisco in late spring. This year’s May event was virtual, but the year prior saw more than 42,000 attendees.

TCP/IP, or transmission control protocol and internet protocol, forms the backbone of the entire internet. The notion of replacing it with a decentralized database is like a bad joke to those in the security world.

The organization deleted the embarrassing tweet minutes later after the entire information security and computer science Twitter dunked on them — but not before the tweet was archived.  

“[D]id you know?? a property of content on a blockchain is immutability, so you can’t go and delete prior embarrassing content,” Canadian software engineer Nathan Taylor said on Twitter.

Speaking of immutable — a Google cache of the article also remains. 

“RSA Conference, how could you let this moronic tweet get through? Is this year’s Conference Chair a Tarot specialist? Do you also have a session on ‘Network Connectvity on a Flat Earth?’ Jorge Stolfi, a computer scientist in Brazil, tweeted.

“There’s no question that Blockchain is the answer to TCP/IP security: by making TCP unusable, nobody will be able to exploit it!” tweeted cybersecurity researcher Jake Williams, president of Rendition Infosec.

“The stupidity, it burns. I challenge anybody anywhere to find a more epically vacuous take than this,” said Tim Bray, former vice president of Amazon Web Services and one of the co-authors of the original XML specification.

The vacuous tweet was accompanied by an even more vacuous blog post titled “Understanding Blockchain Security” posted on July 1 by Rohan Hall, the CTO of RocketFuel, a blockchain-based payments firm.

Hall is a “30-year veteran in the blockchain and DeFi space who has built and implemented technology solutions for multiple Fortune 500 companies,” according to his bio.

The claim raised more than a few eyebrows given blockchain has only been around for 12 years — and decentralized finance, about five years. In fact, Hall’s LinkedIn profile reflects less than three years of blockchain experience.

Hall’s blog post is chock full of the usual blockchain nonsense and never even attempts to make a case for how blockchain is even relevant to TCP/IP. 

After deleting the tweet and blog post, RSA Conference tried to recover from the faux pas with the following:

“Earlier today we shared a recently published RSAC blog to our social channels that caused warranted concern. The content of the blog, and thus the subsequent promotion on our channels did not meet our editorial standards for neutrality. We have removed the blog, and as there is no content to support the social post, we have removed that, too. We will do better. We are not blaming an intern.” 

The bit about the intern is funny, but seriously, RSA Conference, what were you even thinking? Never mind your editorial standards for neutrality, what about your editorial standards for connecting to reality?

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Tether’s first breakdown of reserves consists of two silly pie charts

Tether, the world’s most popular stablecoin issuer, released a breakdown of the composition of its reserves backing tethers on May 13. 

The breakdown is no surprise to Tether followers: Two lame pie charts showing, at best, only a fraction of assets are in cash, and the rest are in risky assets.

Specifically, this is a breakdown of the composition of Tether’s reserves on March 31, 2021, when Tether had roughly 41.7 billion tethers in circulation. (As of this writing, Tether now has nearly 58 billion tethers in circulation.) 

According to its settlement agreement with the NY AG, Tether must issue these breakdowns quarterly for two years—though it may have to provide more detail to the NY AG, in addition to what it has made public today. 

Let’s take a closer look at the two pie charts. (This information may be updated, as I get more feedback.)

The blue pie chart

According to the first pie chart—the blue one—the majority of Tether’s assets (nearly 76%) are socked away in cash and cash equivalents. (Tether breaks all this down in a second chart, which I’ll get to in a moment. Hint: these can barely be considered cash equivalents.)

But first, let’s look at what else is here:

12.55% is in secured loans — Loans to who, secured by what? We have no idea. These could well be loans to large tether customers backed by shitcoins, other worthless assets, or promissory notes.

9.96% is in corporate bonds, funds, and precious metals — A corporate bond is a bond issued by a corporation in order to raise financing. The question is, who is issuing these bonds? If it is a blue chip company, great. But if it’s some dodgy crypto start-up, these are likely worthless.

1.64% is in other investments, including digital currency — Tether wants us to believe that only a fraction of Tether’s reserves are in bitcoin. (Tether/Bitfinex general counsel Stuart Hoegner told The Block that “digital tokens” refers exclusively to bitcoin.) I have a funny feeling Tether will get into a great deal of trouble if it admits to using tethers to purchase bitcoin en masse. (Recall this interview, where Hoegner completely avoids the question pertaining to, are you using tethers to buy bitcoin?”)

The orange pie chart

Tether further breaks down the largest slice of its blue pie chart—which shows that more than three-quarters of its reserves are in cash and cash equivalents. Just a tiny bit is in cash and there’s a big question as to whether any of the non-cash items are cash equivalents at all. 

Here’s how Tether divvies it up: 

65.39% is commercial paper — Commercial paper refers to a short-term loan for up to 12 months. It is similar to a bond in that you have the ability to transfer and trade it. The problem is we don’t know who the issuer of the commercial paper is. If it’s IBM or Amazon, that’s as good as cash. But if Tether is giving tethers away to their largest customers (FTX, Binance) and counting that as loans, this is meaningless rubbish.

Frances Coppola, an economist and bitcoin skeptic, suggests Tether’s commercial paper is probably unsecured. “In which case it is NOT a ‘cash equivalent’ as the analysis says. It’s a current asset with significant credit risk.”   

25.2% is fiduciary deposits — These are deposits placed by a customer with a third bank (recipient bank) through an agent bank. Who are the holders of these fiduciary deposits? We have no idea. 

3.87% is cash — This is such a tiny bit of cash. What happened to all the cash backing tethers? Recall that up until a few years ago, Tether maintained tethers were fully backed by cash. 

3.6% is reverse repo notes — This appears to be a made-up term. Martin Walker, a director for banking and finance at the Center for Evidence-Based Management, isn’t familiar with the term either. “I’ve never heard of a Reverse Repo Note before, and I am the product manager for a couple of repo trading systems and used to run repo technology at an investment bank,” he said in a private chat.

2.94% is treasury bills — T-bills are a short-term financial instrument issued by the U.S. Treasury with maturity periods from a few days up to 52 weeks. These are as good as cash. In fact, this is the only slice of pie, other than cash, that can be considered cash.

If we do the math, we can see what percentage of the total each asset represents. Commercial paper is nearly half. Image courtesy of @MelchettsBeard

The bottom line 

For a company with nearly $60 billion in assets, these pie charts are pathetic. I’m sure the folks at the Office of the NY AG are rolling their eyes. The only thing backing tethers is once again, smoke and mirrors. 

To be clear, Tether has no obligation to redeem any money in the Tether bank accounts. Per its terms of service:

“Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all.” 

With that in mind, we may as well consider these pie charts a window into the personal bank accounts of the Tether/Bitfinex triad. The crumbs of remaining cash? It is just their “bonus” money that they haven’t withdrawn yet.   

Jorge Stolfi, a computer scientist from Brazil, quoted privately: “If someday [Tether/Bitfinex] get tired of making real money with their sucker mining machine, they can just close Tether Inc and divide its assets among them. They won’t even have to leave the traditional crypto good-bye word on their website.”

David Gerard offers further analysis of Tether’s pie charts.

Related stories:
The curious case of Tether—a complete timeline of events

Updates on March 13— Added quote from Martin C. Walker on Reverse repo notes, as even he is not familiar with the term. Defined treasury bills, and noted they are the only cash equivalent in the mix, and added Trolly’s brilliant tweet. Also, added a link to Gerard’s post and later, the graph.

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Posted on by Amy Castor 1

News: MicroStrategy needs more cowbell, Tether surpasses $34B, those laser eyes, Tether collapse doomsday scenario

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:

  1. We believe it will store value more effectively than gold over the long term.
  2. We believe it may become a medium for transactions, as/if pricing stabilizes in the decade ahead.
  3. 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

Posted on by Amy Castor 9

Nocoiner predictions: 2021 will be a year of comedy gold

The last year has been particularly annoying for nocoiners—those of us who don’t hold crypto and view bitcoin as a Ponzi, like a Ponzi, or something more complex.

We have had to endure Tether minting tethers with abandon ($17 billion worth in 2020 alone) and bitcoiners obnoxiously cheering bitcoin’s new all-time highs, the latest being $33,000. Considering bitcoin began 2020 at around $7,500, that is a long way up. (Things went full crazy in March.) But we believe 2021 will be a year of comedy gold when this giant hill of dung all comes tumbling down.

I’ve spoken with several notable bitcoin skeptics, gathered their thoughts, and compiled a list of new year predictions. They shared their prophecies on Tether (a stablecoin issuer that has so far minted $21 billion in dubiously backed assets to pump the crypto markets), new regulations and the future of bitcoin. 

Here is what they had to say:

Nicholas Weaver: T’will be the year the music stops

“This is the year the music stops,” Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, told me. 

Weaver has been following bitcoin since 2011. His work is largely funded by the National Science Foundation. He believes the bitcoin ecosystem is running low on cash. (This is the fate of all Ponzi schemes. Ultimately, they run out of new investors and when that happens, the scheme collapses.) In the case of bitcoin, he believes real dollars in the system are rapidly being replaced by fake ones in the form of tethers.

“Tether has been squeezing every dollar out of the system, and there aren’t enough suckers,” he said, meaning there aren’t enough folks waiting in line to buy bitcoin at its ever increasing prices. “When the dollar stock goes to zero, the system will collapse completely because you get a mining death spiral.”

Miners reap 900 newly minted bitcoin per day in the form of block rewards. If they can’t sell those for enough fiat money to pay their monstrous power bills, it makes no sense for them to stay in business. And since their job is to secure the bitcoin network, bitcoin will become vulnerable to repeated attacks.

Also, governments are finally waking up, said Weaver, alluding to new global efforts to clamp down on money laundering, capital outflows, and the financing of terrorism via cryptocurrencies. 

He foresees Tether getting the Liberty Reserve treatment any day now. He also thinks China will decide “screw it, bitcoin is evading capital controls as a primary purpose, let’s cut off the subsidized electricity.”

Without cheap electricity, bitcoin miners—most of whom are in China—may find it difficult to stay afloat. Already bitcoin miners in Inner Mongolia no longer receive electricity at subsidized rates. 

Jorge Stolfi: I can’t make price predictions

A computer science professor in Brazil, Jorge Stolfi wants to avoid making predictions on bitcoin’s price. He’s been following bitcoin since 2013—and has seen it through two prior bubbles—so he knows too well that anything can happen.

“I really don’t know how far the insanity can go. The crypto market is 100% irrational, sustained entirely by ignorance and misinformation,” he said. “How can anyone make predictions about that?” 

Stolfi is a denizen of r/Buttcoin, a subreddit that makes fun of bitcoin, where he painstakingly explains the finer points of crypto nonsense to the unenlightened. In 2016, he submitted a letter to the U.S. Securities and Exchange Commission warning against the risks of a bitcoin exchange-traded fund and comparing bitcoin to a Ponzi scheme. (The SEC has shot down every bitcoin ETF proposal to date on the basis that bitcoin’s price is too easy to manipulate.)

“And since price determines everything else in the crypto space, I can’t make predictions on pretty much everything else,” Stolfi continued. “For example, If the price were to crash below $10,000, I bet that we would have a lot of comedy gold coming from MicroStrategy.” 

Over the last several months, the Virginia-based enterprise software company has funneled $1.2 billion of its funds into bitcoin. As a result, Michael Saylor, the company’s CEO, now spends most of his time on Twitter shilling bitcoin. In September, Saylor compared bitcoin to “a swarm of cyber hornets serving the goddess of wisdom, feeding on the fire of truth, exponentially growing ever smarter, faster, and stronger behind a wall of encrypted energy.”

Stolfi also thinks that we will probably forget about several coins that were big in the past, like Bitcoin SV (BSV) and IOTA, maybe even bitcoin cash (BCH). “And we will also forget about blockchain technology.”

Frances Coppola: Crypto exchanges will become like licensed banks 

Over the last week, Frances Coppola has been battling an army of bitcoin trolls and sock puppets on Twitter after suggesting that bitcoin is not scarce in any meaningful sense. 

Scarcity is a key part of the myth bitcoiners perpetuate to make people think bitcoin is valuable in the same way gold is and to create a sense of buying urgency—quick, grab some before it’s all gone!—so naturally, bitcoiners responded by dog piling on her. She isn’t happy about it. 

“I hope bitcoin crashes and burns because I am so bloody furious, but I think it will be a while yet before it does—maybe about June,” she said. 

Coppola is a UK-based freelance writer, who spent 17 years in the banking industry. She wrote the book, “The Case For People’s Quantitative Easing,” and has 58,000 Twitter followers.

The cause of bitcoin’s upcoming crash, she believes, will be an epic battle between the Wild West of crypto and regulators, a topic she covered in a recent Coindesk article.

If the regulators win, crypto exchanges will become like licensed banks and have to comply with things like the Dodd-Frank Act, a sweeping law that reined in mortgage practices and derivatives trading after the 2008 financial crash, she said. On the other hand, if the regulators lose, she believes their next move will be to protect retail investors.

“We’d see drastic restrictions on what interactions banks can have with crypto, perhaps a total ban on retail deposit-takers having crypto exchanges and stablecoins as clients,” she said. 

“We might also see something akin to a Glass-Steagall Act for crypto exchanges and stablecoins, so that retail deposits are fully segregated by law from trading activity.” By that, she means exchanges won’t be able to lend retail deposits to margin traders or use them to fund speculative positions in crypto derivatives. 

David Gerard: Bitcoiners will get their big boy wish

After years of begging for bitcoin to be taken seriously as a form of money, bitcoiners will be getting exactly what they asked for, said David Gerard, a bitcoin skeptic and author of “Libra Shrugged,” a book on Facebook’s attempt to take over the money. 

This year will see more regulation of crypto, as coiners discover to their dismay just how incredibly regulated real-world finance is, he said. “Just wait until someone sits them down and explains regulatory real-time compliance feeds.”

What does Gerard think about Tether? “I could predict the guillotine will finally fall on Tether, but I predicted that for December 2017, and these guys are just amazing in their ability to dodge the blade just one more day,” he said.

Since 2018, the New York Attorney General has been investigating Tether and its sister company, crypto exchange Bitfinex, for fraud. Over the summer, the New York Supreme Court ruled that the companies need to hand over their financial records to show once and for all just how much money really is underlying the tethers they keep printing. The NYAG said Bitfinex/Tether have agreed to do so by Jan. 15.

Gerard also foresees that there will continue to be no use cases for crypto that absolutely anything else does better. “Everything the Buttcoin Foundation was talking about in 2011 is still dumb and broken,” he said.

Trolly McTrollface: Crypto will go to Mars

Elon Musk says he is “highly confident” that his company SpaceX will be sending humans to Mars in six years. Naturally, Musk wants to set up a self-sustaining city on the red planet. And, come to think of it, the city will need its own crypto, something like Dogecoin or Marscoin. Otherwise, how else will its citizens pay for things?

Pseudonymous crypto blogger Trolly McTrollface has this prophecy for 2021: “Elon Musk creates its own cryptocurrency, and adds it to the $TSLA balance sheet. It ends the year in the top 10 crypto list by market cap.”

Nouriel Roubini: Bitcoin’s bubble will explode

Nouriel Roubini, an economics professor at New York University, doesn’t mince words when it comes to crypto predictions. He simply told me: “The Bitcoin bubble will burst in 2021. Triggers will be reg/law enforcement action.” 

There is good reason to take him seriously. Roubini famously warned of the 2008 financial crisis, a prophecy that earned him the moniker “Dr. Doom.” He is also known for his parties, which leads a few of us nocoiners to believe that bitcoiners’ are fundamentally driven by bitterness over the fact that we have better soirées.

David Golumbia: The insanity will continue—unless it stops

If the past is any prediction of the future, bitcoin and other crypto promoters will continue to deceive the public with outright lies about “investing” in tokens until the big tokens collapse. That’s the view held by David Golumbia, known for writing about the cult of bitcoin. He is the author of “The Politics of Bitcoin: Software as Right-Wing Extremism,” and teaches at Virginia Commonwealth University. 

“I tend to agree with other critics that regulators and law enforcement are going to squeeze the space, especially Tether, at some point,” he said. “And that when this happens the whole thing will deflate. But as anyone with experience in investing knows, predicting and identifying bubbles is a fool’s game.”

What Golumbia finds most interesting is that the rising price of bitcoin and other tokens sustains the lies. “I have to imagine that when the tokens collapse, the motivation to keep lying will go away as well,” he said. 

Examples of those lies include: bitcoin offers an alternative finance system to the real one, bitcoin’s price movement is due to technology, the regular financial system rips people off and bitcoin doesn’t, and so on. 

He continued: “Though who knows—the whole story of bitcoin and blockchain includes the worldwide embrace of conspiratorial thinking that parallels QAnon, antivax, COVID-19 denialism, climate change denialism, flat earth ‘theory,’ etc. 

“None of these seem to collapse no matter what the facts do. But then again, the promoters of these theories often profit only indirectly from them, whereas cryptocurrency promoters usually have a direct vested stake in ‘number go up.’ So maybe there will be a positive development for a more realistic relationship to the world if/when prices collapse.”  

My prediction: Only fools will be left hodling

As for my own predictions, I think bitcoin is on the brink of a stupendous crash. Whales and the Tether/Bitfinex triad are working over time to push the price up higher and higher. As more fake dollars flood the system, real dollars are being siphoned out by the big players.

At some point, as Weaver stated, there won’t be enough suckers left in the wings waiting to buy bitcoin—and when that happens, bitcoin holders will learn the hard way that price charts and market caps are meaningless. 

When the price crashes, dropping back to early 2020 levels—or possibly even lower, the people who will get most hurt will be the retail investors who have been duped into believing they can buy bitcoin and get rich. And that, in turn, will provide justification for tighter regulations that make it difficult for exchanges to list any crypto at all.  

I also believe at some point this year, Tether’s operators will be indicted, although it is hard to say when. As Gerard says, we all thought this nonsense was going to come to a grinding halt in December 2017, but here we are three years later. 

The fact that Bitcoin is getting pushed to ATHs, should be a signal that the end is near for Tether, and the crooks are doing their final looting.  

If you own any bitcoin, you would be best to sell what you can now, or at the very least, sell enough to get back your initial investment. Remember, two thirds of bitcoin investors in the 2017 bubble didn’t get around to getting any of the money back that they had put in—don’t be one of those guys. 

Update Jan. 2: An earlier version of this story stated that bitcoin started 2020 at around $3,000. It started at $7,500.

Update Jan. 4: Edited to clarify that a state supreme court ruled that iFinex should turn over records, not the Supreme Court.

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Posted on by Amy Castor 0

News: Bitcoin’s new crazy god, Tether’s runaway train, Binance sees $1B profits, STABLE Act threatens stablecoins

Crypto has come of age. What does that mean?

Among other things, it means MicroStrategy CEO Michael Saylor has replaced Patrick Bryne as the new crazy god of institutional bitcoiners. And another crypto exit scam has been invented: dying in India. (See Jorge Stolfi’s full reddit post. He is a computer scientist in Brazil.)

All Ponzi schemes eventually implode, even if it takes 25 years like Bernie Madoff’s did. When that happens, you have two choices: turn yourself in or disappear. Gerald Cotten chose to disappear. Of course, many people believe he is really and truly dead. I’m just not one of them.

With that, here is the news that I find interesting from Bitcoinlandia, an imaginary place where people keep insisting bitcoin is not a Ponzi.

MicroStrategy buys more BTC

MicroStrategy continues to funnel its excess cash into bitcoin. The analytics firm bought another $50 million worth of bitcoin, Saylor disclosed in a tweet.

MicroStrategy bought its most recent pile of bitcoins at an average price of $19,427—at the top of the market—and now owns a total of 40,824 bitcoins.

Here’s the thing: Saylor holds 73% of the voting stock of MicroStrategy, so he does not need buy-in from stockholders to make decisions. He is ruler and king, and if he wants his firm to buy more bitcoin, so be it.

Saylor also has a large private stash of bitcoins. I would be very curious to know how much BTC he owned before and after MicroStrategy’s recent purchase.  

If those bitcoin hold their value, all will be fine, Jorge Stolfi said on Reddit. But, if BTC “drops back to $8,000, the other stockholders will be upset, and may have grounds to sue Michael for mismanagement or whatever—even if there are no other shenanigans. If he did sell his coins while the company bought them, it will be worse.”

Guggenheim Partners

Another institutional investor has jumped on the bitcoin bandwagon. In a recent SEC filing, Guggenheim Partners, a leading Wall Street investment firm, revealed that it is looking to invest 10% of its $5.3 billion Macro Opportunities Fund into Grayscale’s Bitcoin Trust.

To be clear, Guggenheim is not buying bitcoin directly. It plans to invest nearly $500 million in GBTC shares. Grayscale itself now owns more than 500,000 bitcoin.

And Guggenheim isn’t taking on any risk. The firm makes money whether the price of BTC goes up or down. The retailers who are invested in the fund are the ones who carry all the risk.

Bitcoin is highly volatile and has no role in retail investor portfolios. As Economist Nouriel Roubini explained in a lengthy Twitter rant:

“Investing in BTC is equivalent to [taking] your portfolio to a rigged illegal casino & [gambling]; at least in legit Las Vegas casinos odds aren’t stacked against you as those gambling markets aren’t manipulated the way BTC is. Instead BTC is manipulated heavily by Tether & whales.”

Tether’s runaway train

On to my favorite topic: Tether—a firm that mints a dollar-pegged stablecoin that’s hugely popular on unbanked exchanges.

On Nov. 28, Tether surpassed 19 billion tethers in circulation. And like a runaway train with no way of stopping, it is fast on its way to issuing 20 billion tether—worth the notional equivalent in US dollars.

So, what is going on with the New York Attorney General’s investigation into Tether and Bitfinex?

The last bit of real news we had was in September when Judge Joel M. Cohen once again ordered Bitfinex and Tether to turn over financials. However, he did not set a deadline. He left that decision to a special referee, according to Coindesk. And we haven’t heard anything on the matter since.

Stepping back, recall that Bitfinex/Tether have been resisting handing over documents since November 2018 when the NYAG—in pursuant to the Martin Act, which gives it broad powers to investigate fraud—first served subpoenas for information stretching back to January 2015.

In April 2019, when the NYAG was concerned that iFinex (parent company of Bitfinex/Tether) was insolvent and Bitfinex was dipping into Tether’s cash reserves, it sought an ex parte order compelling the companies to produce documents and staying further actions pending the ongoing investigation.

iFinex responded with a motion to dismiss. In August 2019, the Supreme Court denied the motion and the respondents sought to appeal, arguing that the NYAG did not have the power to demand documents since Bitfinex and Tether didn’t have sufficient contacts in New York.

In July 9, 2020, a New York state appeals court sided with the NYAG. (Court filing)

As I’m writing up this newsletter, Coindesk’s Nikhilesh De has just pulled up a new court filing in the case from Dec. 4 that is a bit bewildering. At first glance, it appears to be the same filing from July, repeated twice.

Drew Hinks, a lawyer not involved in the case, said the filing is a remittitur—a jurisdictional document that formally ends the life of an appeal by notifying the world that the decision is final.

I’ll update this post as I learn more—specifically why a remittitur is important after the appellate judgment has already been issued and become final. Does this help the investigation going forward?

(Update: I am pretty sure that the remittitur was just a procedural thing that signals that the appellate court is done and has kicked the ball back to the original court—i.e., Justice Cohen.)

Bitcoin sets new all-time high

On Nov. 30, the price of bitcoin reached $19,900 on Coinbase, according to the Block, surpassing its previous all time high (ATH) set on Dec. 17, 2017, by about $10.

After bitcoin reached its new high, it promptly lost 13% of its value.

When you see bitcoin getting pumped like this, what you are seeing is traders cashing out before the bubble bursts. Bitcoin is not a company. It does not create any actual revenue. Cash coming into the system goes to paying the miners, who sell their 900 newly minted BTC per day and earlier investors lucky enough to sell at the right time.

I’m sure the current pump has nothing to do with the NYAG getting closer to exposing Tether/Bitfinex’s inner workings, the recent indictment of BitMEX operators, and Binance’s latest efforts to aggressively block U.S. citizens from using its exchange.

Binance pulls in big profits

The largest tether exchange expects to earn between $800 million and $1 billion in profits for 2020, its captain Changpeng Zhao (“CZ”) told Bloomberg. The Malta-registered exchange also expected $1 billion in profits 2018.

Speaking of Binance, the crypto exchange is suing Forbes and two journalists for a recent report claiming that the exchange had a plan to dodge regulations. (Here is the complaint.) It’s unlikely CZ will get anywhere with this lawsuit because the suit will get torn apart in discovery.

Similar to when Bitfinex threatened to sue prolific critic Bitfinex’ed in December 2017, this is likely more of warning to other journalist: don’t dig too deep, or we’ll come after you.

STABLE Act

The big news of the week is that three congressional democrats are trying to pass a bill that will require stablecoin issuers to comply with the same regulations and rules as banks.

If passed, the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, would require stablecoin issuers to apply for bank charters, get approval from the Federal Reserve and hold FDIC insurance. (The bill, press release.)

Stablecoin issues are like wild cat banks. Back in the 1800s banks would issue their own currency, and nobody knew what was backing the currency. And because these banks were often in remote, hard to get to locations, people often had trouble redeeming their notes for silver or gold or whatever it was that was supposed to be backing them.

Other news

Facebook’s Libra Association has announced a change of name. It is now the Diem Association. (Press release)

Tether skeptic Cas Piancy debates Sino Global Capital CEO Matthew Graham. (Podcast)

PayPal is shilling bitcoin on Facebook and Twitter.

Reggie Fowler owes his defense team $600,000. Lawyers were conned by a con. (My blog)

Joe Biden intends to nominate Adewale Adeyemo as Deputy Treasury Secretary, not Gary Gensler as previously thought. (New York Times)

Bill Hinman, who first spoke of “sufficient decentralization,” served his last day as SEC’s Division of Corporation Finance director on Friday. (SEC statement on departure)

Spotify is looking to add support for crypto payments. The streaming service wants to hire an associate director to lead activity on the libra project and other crypto efforts. (Coindesk)

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Are pixie fairies behind Bitcoin’s latest bubble?

Are the pixie fairies sprinkling gold dust on bitcoin’s market again? By the looks of things, you might think so.

Like in the bubble days of 2017, the price of bitcoin is headed ever upward. On November 18, 2020, it surpassed $18,000 — a number not seen since December 2017 when bitcoin, at its all-time peak, scratched $20,000.

Of course, the market crashed spectacularly the following year, and retailers lost their shirts. But here we are once again, trying to unravel the mysteries of bitcoin’s latest price movements.

Several factors may explain it — Tether, PayPal, and China’s crackdown on over-the-counter desks — but before we get into that, let me reiterate how critical it is for bitcoin’s price to stay at or above a certain magic number. 

Bitcoin miners — those responsible for securing the bitcoin network by “mining” the next block of transactions on the blockchain — need to sell their newly minted bitcoins for real money, so they can pay their massive energy bills.

Roughly $8 million to $10 million in cash gets sucked out of the bitcoin ecosystem this way every day. So, in order for the miners — the majority of whom are in China — to turn a profit, bitcoin needs to be priced accordingly. Otherwise, if too many miners were to decide to call it quits and unplug from the network all at once, that would leave bitcoin vulnerable to attacks. The entire system, and its current $345 billion market cap, literally depends on keeping the miners happy.

Now let’s jump to May 11, an important day for bitcoin. That was the day of the “halvening,” an event hardwired into bitcoin’s code where the block reward gets slashed in half. A halvening occurs once every four years.

Before May 11, miners received 1,800 bitcoin a day in the form of block rewards, which meant they needed to cash in each bitcoin for $5,000. But after the halvening, the network would produce only 900 bitcoins per day, so miners knew they needed to sell each precious bitcoin for at least $10,000.  

But trouble loomed. Just months before the halvening, the price of bitcoin went into free fall. Between February and March, when the world was first gripped by the COVID crisis, bitcoin lost half its value, dropping to a low of $3,858 on March 13 — barely enough to pay the system’s energy costs post-halvening. Miners were likely pacing, wringing their hands, wondering how they would stay in business. Who would guarantee their profits?

That is when Tether — a company that produces a dollar-pegged stablecoin of the same name — sprung into action and started issuing tethers in amounts far greater than it ever had before in its five years of existence.

Tethers, for the uninitiated, are the main source of liquidity for unbanked crypto exchanges, which account for most of bitcoin’s trading volume. Currently, there are $18 billion (notional value) worth of tethers sloshing around in the crypto markets. And nobody is quite sure what’s backing them.

Due to Tether’s lack of transparency, its failure to provide a long promised audit, and the fact that the New York Attorney General is currently probing the firm along with Tether’s sister company, crypto exchange Bitfinex, for fraud, a good guess is nothing. Tethers, many suspect, are being minted out of thin air. 

(Tethers were initially promised as an IOU where one tether was supposed to represent a redeemable dollar. But that was long before the British Virgin Island-registered firm began issuing tethers in massive quantities. And no tethers, to anyone’s knowledge, have ever been redeemed—except for when Tether burned 500 million tethers in October 2018, following the seizure of $850 million from its payment processor Crypto Capital.)

According to data from Nomics, at the beginning of 2020, there were only $4.3 billion worth of tethers in circulation. That number remained stable through January and February and into March. But starting on March 18, just five days after bitcoin dipped below $5,000, the tether printer kicked in.

BTC price and USDT supply. Image: Nomics.com

Tether minted 4.4 billion tethers in April 2020 — crypto’s version of an economic stimulus package. By early June, the price of bitcoin crossed $10,000. Yet the Tether printer kept printing, pushing the price of bitcoin ever skyward and giving bag holders an opportunity to cash out. 

In May, June, and July 2020, Tether issued a combined total of 3 billion tethers. In August, when the price of bitcoin reached $12,000, Tether issued another 2.6 billion tethers. In September, when bitcoin slid below $10,000, Tether infused the markets with another 2.2 billion tethers, although, even that couldn’t lift bitcoin up to $12,000 again. The price just hovered in the $10,000 range. 

And then in October — just after US prosecutors charged the founders of BitMEX, a Seychelles-registered, Hong Kong-based bitcoin derivatives exchange, for failing to maintain an adequate anti-money laundering program — the price of BTC started to soar. What happened?

Tether’s frenzied pumping

One theory is that Tether just kept issuing tethers, billions and billions of them, and those tethers were used to buy up bitcoin. A high demand drives up the price — even if it’s fake money. 

Only unlike in 2017, the effort to drive up bitcoin’s price is requiring a lot more tethers than ever before. (At the end of 2017, before the last bitcoin bubble popped, there were only $1.3 billion worth of tethers in circulation, a fraction of what there are today.)

Nicholas Weaver, a bitcoin skeptic and a researcher at the International Computer Science Institute in Berkeley, is convinced bitcoin’s latest price moves are 100% synthetic.

“The amount of tether flooding into the system is more than enough explanation for the price as it is well more than the amount needed to buy up all the newly minted bitcoin,” he told me. “If it was organic, there would at least be some significant increase in the outstanding amount of non-fraudulent stablecoins.”

What he means is, if real money was behind tether, we’d be seeing a similar demand for regulated stablecoins. But that is not the case. Only one regulated stablecoin has seen substantial growth — Circle’s USDC — but that growth is far overshadowed by Tether, and mainly a result of the growing decentralized finance (DeFi) market — a topic for another time.

Jorge Stolfi, a professor of computer science at the State University of Campinas in Brazil, who in 2016 wrote a letter to the SEC advising about the risks of a bitcoin ETF, which the SEC published, agrees.

“As long as fake money can be used to buy BTC, the price can be pumped to whatever levels to keep the miners happy,” he told me. He went on to explain in a Twitter thread that the higher the bitcoin price, the faster real money flows out of the system — assuming miners sell all their bitcoin for cash. Multiply bitcoin’s current price of $18,600 times 900, and that’s nearly $17 million a day. Investors will never get that money back, he said.

Klyith (not his real name) from Something Awful, a predecessor site to 4Chan, explains Tether this way:

“A bunch of pixies show up and start flooding the parchment market with fairy gold, driving prices to amazing new heights. But when any of the player characters try to spend the fairy gold in other towns or to pay tithes to the king, it turns into worthless rocks.

“If you denounce the pixies to the peasants or start using dispel magic to reveal that fairy gold is rocks, the price of parchments will collapse and the peasants may stop using them altogether. But if you ignore the pixies and keep the parchment economy going, you will end up with more and more worthless rocks instead of gold. The pixies can of course tell the difference between fairy gold and real gold at a glance. So they will quickly drain all the real gold from the whole township if you don’t act. What do you do?”

Still, it is hard to imagine that outside events don’t have some impact on bitcoin’s price. Two other events are being talked about right now as reasons behind bitcoin’s price gains—and they are getting a lot more media attention than Tether.

PayPal’s shilling

One of the biggest companies in the world is now promoting crypto, giving retail buyers the impression that bitcoin is a safe investment. After all, if bitcoin were a Ponzi or a scam, why would such a well-known, respectable company embrace it? I should add that MicroStrategy, Square, Fidelity Investment and Mexico’s third-richest person, Ricardo Salinas Pliego, are also currently shilling bitcoin on the internet.

On Oct. 21, PayPal announced a new service for its users to buy and sell crypto for cash. And on Nov. 12, the service became available to U.S. customers, who can now buy and sell bitcoin, bitcoin cash, ether, and litecoin via their PayPal wallet. 

If you are a PayPal user, you have already gone through the process of proving you are who you say you are. And that removes the hassle of having to sign up with an crypto exchange, like Coinbase in the U.S., and take selfies of yourself holding up your driver’s license or passport.

Of course, there are limitations. You can’t transfer crypto into or out of your wallet, like you can on a centralized exchange. But you can pay PayPal’s 26 million merchants with crypto — although, not really, because what they receive on their end is cash. And the transaction is subject to high fees, like 2.3% for anything under $100, so what is the point? All you are doing is taking out a bet against PayPal that the price of bitcoin is going to rise. 

Stolfi describes PayPal on Twitter as “a meta-casino where you can choose to use special in-house chips with a randomly variable value.”

The broader point is that PayPal makes it easy to buy crypto for people who are less likely to understand how crypto really works or know about Tether and the risk it imposes on the crypto markets. (If authorities were to arrest Tether’s operators and freeze its assets, similar to what happened to Liberty Reserve in 2013, that could lead to a huge plummet in bitcoin’s price.)

If you think Tether doesn’t have that big of an impact on bitcoin’s price, recall that Tether/Bitfinex CFO Giancarlo Devasini (going by “Merlin”) is recorded in the NYAG’s 2019 complaint as having reached out to Crypto Capital to plead for missing funds: “Please understand all this could be extremely dangerous for everybody, the entire crypto community,” said Merlin, indicating what could happen if Tether failed to exist. “BTC could tank to below 1k if we don’t act quickly.”

PayPal this month reached 85% of the volume of Binance.US, the U.S. branch of major crypto exchange Binance. Granted the volume of Binance.US is small in comparison with Binance’s main crypto exchange, but you can see where this is going. 

One thought is that PayPal’s move into crypto is a “death sentence” for bitcoin, and that Tether and the exchanges who depend on tethers are working together to pump up the price of bitcoin to lure as much cash into the system as possible while the going is good.  

China’s crackdown on OTC desks

According to news coming out of the country, China’s bitcoin miners may be encountering difficulty selling their bitcoin on over-the counter exchanges.

Since China banned crypto exchanges three years ago, OTC exchanges — where buyers and sellers go to trade directly — have become the most convenient way for the country’s citizens to on-ramp and off-ramp into and out of the crypto world. It’s also the main way bitcoin miners sell their bitcoin for yuan.

Recently, as part of a move to curtail internet gambling and contain capital outflows, Chinese authorities have been targeting OTC desks. If authorities determine that your counterpart (the person on the other end of your trade) is trying to launder illicit funds, you risk getting your bank account frozen. As a result, miners may be having to take more precautions and cash out less frequently, according to The Block (paywalled). 

There is some speculation that this is making it harder for bitcoin miners to offload their bitcoins, leading to a liquidity crisis. In other words, fewer bitcoin are available to buyers, thus driving up demand similar to if hoards of bitcoin were being bought up by Tether.

But ICSI’s Weaver cautions there is no way to think rationally about bitcoin’s price. “The market is completely loony,” he said.

In a rational world, he believes shutting down OTC desks would have no effect on the price of bitcoin — if the rest of the markets were efficient and honest. OTC desks are really about miners’ paying power and Chinese who want to evade capital controls by trading cash for bitcoin and moving that bitcoin overseas, he said. He added that he could envision China’s crackdown on OTC desks driving up the price of bitcoin if it resulted in fewer OTC purchasers selling their bitcoin on banked exchanges. “But really, that doesn’t make sense either,” he said. “How many banked exchanges are left?”

Meanwhile, Tether keeps up the good work. 

Updated on Nov. 21 to mention that nobody has ever redeemed their tethers, meaning there is no record of anyone having sent their USDT back to Tether and received a bank wire for cash.

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Posted on by Amy Castor 0