News: Michael Saylor buys bitcoin with abandon, Tether reaches $20B, MassMutual jumps on BTC bandwagon

The price of bitcoin is headed back over $19,000 again. What will it take to push it past $20,000—more tethers? More institutional buying? Or maybe, more crypto journalists proclaiming (without evidence) that tethers are fully backed? Here’s the news:

MicroStrategy wants more, more, more

Michael Saylor, the new crazy god of bitcoin institutional buying, continues his bitcoin buying spree. He seems really, really confident the price of BTC will go up.

Saylor’s publicly traded company MicroStrategy currently owns 40,824 bitcoins—because no sense using all that excess cash for buying back a ton of stock or paying a big dividend. Better off to gamble it on crypto.

Now the firm is actually going into debt to buy bitcoin. After completing a $650 million bond offering, MicroStrategy plans to plow all the proceeds into buying more bitcoin. (Microstrategy PR, Cointelegraph)

Citibank isn’t impressed. Analyst Tyler Radke downgraded MicroStrategy (MSTR) from neutral to sell, calling the recent rally—MSTR went up after its first few BTC buying announcements—”overextended” and a possibly “deal-breaker” for software investors. (The Block)

Tether: Ain’t no stopping us now

Tether is now at $20 billion worth of tether—that’s assets, but circulating supply is soon to follow—and there is no evidence whatsoever to conclude that there is $20 billion in real cash behind all those tethers. Why? Because the company has never had a formal audit.  

Still, last month, The Block’s Larry Cermak defended tethers as being “either fully backed or very, very close,” telling folks “everything is in order now.” He based that on conversations he claimed to have had with “third-parties” who told him they had successfully redeemed several hundred million in tethers.  

Cermak is not the only one to buy the Tether line of B.S.

In December 2018, after looking at Tether bank statements, Bloomberg’s Matt Leising also reported that Tether appeared to be fully backed. He was wrong.

Unbeknownst to him at the time, in the previous two months, the DOJ froze five NY bank accounts belonging to Reginald Fowler, who ran a shadow banking service for Tether/Bitfinex’s Panamanian payment processor. And in November, the NYAG, having serious concerns about Tether’s finances, issued subpoenas to Bitfinex and Tether asking for details on their banking. Finally, in April 2019, Tether admitted it was only 74% backed. And that’s before it went off and printed another 17.5 billion tethers. So what’s backing all those?

In a recent blog post, David Gerard explains why Tether is “too big to fail.” Essentially, it’s keeping the entire BTC market afloat. If Tether were to get the Liberty Reserve treatment, the price of bitcoin is unlikely to ever recover.

Thus, “the purpose of the crypto industry, and all its little service sub-industries, is to generate a narrative—so as to maintain and enhance the flow of actual dollars from suckers, and keep the party going,” he said. 

NYAG: Tether documents forthcoming

Meanwhile, there’s been a new document filing in the NYAG Tether probe.

In a letter to the NY supreme court, NYAG says Bitfinex/Tether are cooperating on document production and the parties expect to finalize things “in the coming weeks.” These documents, of course, consist of everything NYAG asked for in its original November 2018 subpoena—information that will shed light on the Tether and Bitfinex’s shadowy dealings since 2015.

A part of me wants to get excited about this news, but another part says, wait a minute. In the past when Tether’s operators said they were going to hand documents over, they simply handed over material that was already public information. They also have a long history of shenanigans, so let’s just wait and see.

How to turn USDT into cash 

Jorge Stolfi, a computer scientist from Brazil, shared on Reddit a “mainstream theory” on what could be happening behind-the-scenes at Tether—specifically, how Tether’s operators could convert USDT into cash for their own personal use. Remember, this is totally unproven. It is just a theory. (The “triad,” by the way, refers to Tether CSO Phil Potter, CEO and man of mystery J.L. van der Velde, and CFO Giancarlo Devasini. They are the same operators behind sister company Bitfinex.)

He writes:

  1. The owners of Tether Inc (which I will call “the Triad”) print billions of USDT without any backing.
  2. The Triad deposits those USDT into Bitfinex (which they own too).
  3. The Triad uses those USDT to buy BTC and other cryptos from other Bitfinex clients, attracted by the better price.
  4. The Triad withdraws the BTC to their private wallets.
  5. The Triad moves all or some of those BTC to other exchanges that handle real currencies, such as USD, EUR, JPY, etc.
  6. The Triad sells those BTC for real money.
  7. The Triad withdraws the real money into their personal bank accounts.

This is a theory. This is not proven. But the point is, when you have no checks and balances in place along with massive loopholes in oversight, anything can happen. We saw this already with QuadrigaCX—the Canadian crypto exchange that went bankrupt after the founder disappeared (aka “died in India”), taking along with him hundreds of millions of dollars in customer funds.

Coinbase loses half critical security team

After NYT reporter Nathaniel Popper reported about discriminatory complaints at Coinbase, new information came out. Among those who recently resigned to protest the exchange’s new internal policies, were four of the seven people on Coinbase’s critical security team—aka the “key management team.”

The key management team is responsible for securing the cryptographic keys to Coinbase’s cold wallets, where the majority of the company’s crypto is held—somewhere in the neighborhood of $30 billion.

“No job is more fundamental to the company’s success,” Popper said.  

Coinbase’s security chief shot back, saying Coinbase’s security team is managed by several teams with redundancy built in. Of course, he wants us to believe everything is fine, but not everyone is convinced.

MassMutual invests in BTC

Bitcoin has a new institutional investor: MassMutual. The Springfield-Mass insurance firm purchased $100 million worth of BTC for its general investment account, which totals $235 billion. (WSJ)

MassMutual purchased the bitcoin through NYDIG, a New York-based fund management company, which has $2.3 billion worth of crypto under management. MassMutual also acquired a $5 million minority equity stake in NYDIG.

The $100 million cash injection into bitcoin sounds like a lot, but it’s small potatoes. That money will cover the network’s operators—the bitcoin miners—for only six days. Remember, bitcoin miners are selling their 900 newly minted bitcoin per day for $17 million, at current BTC prices. Investors will never see that money again. Bitcoin doesn’t make any real profits on its own—just investor money going in one end, out the other.

Other news

Former Ethereum developer Virgil Griffith moves to dismiss his indictment—again. Attorney Brian Klein argues speech is a protected by the constitution. (Reply memo in support of motion to dismiss.)

Law firm Hogan Lovells is requesting to withdraw their representation of Reggie Fowler in a class-action against Bitfinex and Tether in which Fowler is also named. (Motion to withdraw)

Bryce Weiner has written a nice overview of how Tether works in relation to the crypto industry.

Crypto-friendly CFTC chair Heath Tarbert plans to resign early next year. His term was set to expire in 2024. (The Block)

Bitcoin’s right-libertarian anarcho-capitalism fits right in with far-right extremism. Crypto analyst Tone Vays brags on Twitter about spending a night with the Proud Boys. 

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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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News: Virgil Griffith wants charges tossed, MicroStrategy bets big on BTC, Ledger hacked

Things are getting antsy here in the U.S. We’ve got two days till the election, and I’m stocking up on food and alcohol, just in case all hell breaks loose.

Meanwhile, here’s the crypto news for the week, starting with…

“Libra Shrugged” is here!

David Gerard’s book “Libra Shrugged” is available on Amazon starting Monday. I bought a copy, and you should, too.

The book covers everything from how Facebook was lured into blockchain in the first place—even that part is crazy—to how its plans for a world cryptocurrency were slammed down by regulators. There’s even a section on central bank digital currencies, or CBDCs.

You would think that a company as large as Facebook would be savvy enough to know how to prep for regulators, but sadly, no. Read the book. It is fabulous. (I helped edit an early draft.)

Virgil tries to get charges dropped

Virgil Griffith, the former Ethereum developer who was arrested last Thanksgiving and charged with one count of conspiracy to violate the International Emergency Economic Powers Act, is trying to get the charges dropped. Griffith, a U.S. citizen who was living in Singapore at the time, flew to North Korea in 2019 to give a talk at a conference. (The IEEPA prohibits U.S. citizens from exporting goods, services, or technology to North Korea without approval from the Treasury Department.)

The motion, filed by attorney Brian Klein, is moving to dismiss based on grounds the indictment was unconstitutional. Essentially the motion claims Griffith didn’t do anything that horrible, like actually teach the DPRK how to evade sanctions. He simply went to a conference there and gave a general speech based on publicly available information, “like he does almost monthly at conferences throughout the world,” Klein wrote. (Coindesk, Cointelegraph, Decrypt)

I’m no lawyer, but I think trying to get the charges dismissed is a long-shot. Griffith was pretty in-your-face about traveling to the sanctioned country, going so far as posting his visa for North Korea on Twitter and encouraging others to come to the conference with him.

The U.S. takes sanctions “very seriously,” Stephen Rutenberg, an attorney at Polsinelli law firm, told Coindesk in January. “It wasn’t like he was going there to play music.”

Bitcoin hits $14,000

The price of Bitcoin hit $14,000 (briefly) on October 31—for the first time since January 2018, when it was in free fall from the biggest bitcoin bubble to date. Bitcoiners (people who are invested in the popular virtual currency and want you to invest, too) are convinced we’ll have another bull run like 2017, so buy now before it goes to the moon!

It is really, really hard to ignore the correlation between bitcoin’s price and the latest fresh supply of tethers (USDT). Tether issued $500 million worth of tethers in one week and is fast on its way to a total of $17 billion worth of tethers in circulation. Take a look at this graph:

Most of those tethers, by the way, go straight to crypto exchanges Bitfinex, Binance, and Huobi, according to Whale Alert.

MicroStrategy’s bitcoin bet

In its Q3 earnings call, business analytics firm MicroStrategy said it was putting its excess stockpiles of cash into stock buybacks and bitcoin—but mostly bitcoin.

Bitcoin is mentioned 52 times in the call by MicroStrategy President Phong Le and CEO Michael Saylor, who spoke to investors. The publicly traded company purchased approximately 38,250 bitcoins for $425 million during the quarter, for an average of around $11,111.

Saylor also disclosed in a recent tweet that he personally “hodls” 17,732 BTC, which he bought at $9,882 each on average for a total of $175 million. He claims MicroStrategy knew of his personal investments before the company went ahead and bought BTC on its own.

As Wall Street Journal columnist Jason Zweig notes, MicroStrategy stock was hot during the dot-com bubble of the late 90s, but after the SEC accused the firm of accounting fraud in December 2000, its stock never recovered.

To settle the charges at the time, Saylor paid $350,000 in civil penalties to the SEC and disgorged $8.3 million. Two other executives also paid $350,000 to the SEC and returned $1.6 million and $1.4 million to shareholders. They did not admit or deny the charges. (SEC litigation release)

Now, after complaining to the WSJ about the low returns on cash, Saylor said he is willing to take a risk on bitcoin. But what about the company’s stockholders? Is this why they are buying a publicly traded stock? So they can gamble on bitcoin?

“Investors who wish to buy bitcoin could always do so themselves with the proceeds of a dividend or share buybacks,” Zweig writes. “The point of buying a stock is to get a stake in a business, not to take a flier on cryptocurrency.”

Keto dietary hazards

Bitcoiners are famous for their weird dietary habits. Last week, I mentioned Soylent, the dreadful drink that is a meal replacement substitute, which some bitcoiners were investing in—and drinking. And a lot of bitcoiners follow a strict all-meat diet. But at least one has ended up in the hospital.

“After about a month of a 90% strict carnivore diet, and years of a mostly [low carb, high fat] diet before that, I have now been hospitalized since Sunday morning for diverticulitis of the large intestine. I won’t be able to eat anything but soups and mashed things for a while,” bitcoin advocate Knut Svanholm tweeted from his hospital bed.

Ledger hacked

You would think a cryptocurrency wallet—meant to help you safely store your bitcoin—would be big on security right? Think again.

After a hack resulted in a leak of Ledger’s customer emails (and phone numbers, too, apparently), owners of the hardware crypto wallet are being targeted by a phishing attack.

A third-party is sending them emails and text messages that appear to come from Ledger support telling them to download the latest version of the Ledger app. (The Block)

One Ledger customer posted on Reddit a confusing email from Ledger explaining the situation.

Customers are upset because they say Ledger hasn’t been transparent about the breach and what exactly was stolen.

So, if you want to buy bitcoin, but you’re worried about how to safely manage your keys, invest in a hardware wallet—but preferably not one that will lose your emails.