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

Proof of work—the reason behind Bitcoin’s horrendous energy consumption

Any company that supports bitcoin is making one thing clear: they don’t care about the environment. At a time when global warming is a real threat to the planet, bitcoin is one of the worst offenders. 

The global network of computers that “mine” bitcoin consumes an entire country’s worth of energy in their race to win the next block on the blockchain—and get the 6.25 bitcoin block reward, currently worth $300,000. 

Since PayPal, Square, MicroStrategy, and Tesla got onto the game—and started shilling bitcoin on social media—the price of bitcoin has soared to new heights. And the higher the bitcoin price, the greater the lure for people to invest in warehouses full of power-hungry rigs to mine bitcoin for profit.

Digiconomist’s Bitcoin Energy Consumption Index, run by Alex de Vries, a blockchain specialist at Big Four accounting firm PwC, estimates bitcoin’s energy consumption to be 79 terawatt-hours of electricity per year, on par with the entire country of Chile. Per his index, bitcoin also emits 37 megatons of carbon dioxide per year, comparable to that of New Zealand.  

Researchers at the University of Cambridge Judge Business School figure bitcoin’s power consumption to be even higher. According to their Cambridge Bitcoin Electricity Consumption Index, bitcoin consumes 124 terawatt-hours of electricity a year, bringing it inline with countries like Argentina and Norway.

In October, just before PayPal announced it would allow users to buy and sell bitcoin via their digital wallets, bitcoin’s power consumption was 75 terawatt-hours per year, according to the CBECI. Since then, bitcoin’s price climbed from $10,000 to upwards of $50,000, increasing its energy consumption by 40 percent the process.

In 2018, all of the world’s data centers consumed 205 terawatt-hours of electricity, or 1% of all of the world’s electricity. Bitcoin accounts for half of that.

Can the world’s power grids tolerate this added demand for electricity in the midst of global warming? In the U.S., we are already seeing the impact of extreme weather on our power grids—millions in Texas shivering in cold, dark homes this week. And rolling black outs in California last year. In Iran last month, authorities blamed massive blackouts on bitcoin mining.

Coal powered  

And bitcoin’s energy consumption isn’t green either—though bitcoiners like to say that it is. Bitcoin miners are tuned to profits. That means the fastest rigs and the cheapest energy available, mostly in the form of fossil fuels. 

“Coal is fueling bitcoin,” Christian Stoll, an energy researcher at the Technical University of Munich, told Wired magazine a few years ago.  

In a paper published in Joule in June 2019, Stoll and his researchers examined bitcoin mining based on where miners are located and the types of rigs they use. Two-thirds of all bitcoin mining is centered in China, 17% is in Europe, and 15% in North America, the researchers found. 

In China, bitcoin’s mining is spread throughout the country’s sprawling western provinces, Sichuan and Yunnan, and also in the north, in Xinjiang and Mongolia. In the Sichuan province, where about 58% of the world’s bitcoin mining takes place, miners take advantage of cheap hydroelectric power—but only during the rainy season, which lasts about six months. 

Bitcoin is a 24/7 business, however, and when green energy isn’t available—and the price of bitcoin is high enough to reap a profit in the dry season—the miners in Sichuan turn to coal, the country’s most abundant energy source. Sixty-five percent of China’s electricity comes from coal. Bitcoin miners in the Xinjiang province and inner Mongolia also rely heavily on coal-fired electricity. 

Even when bitcoin uses clean energy, that pushes the use of dirty energy elsewhere. A few years ago, HyperBlock, a bitcoin mine in Missoula County, Montana, struck a deal with a nearby dam for cheap renewable power. They thought they were doing it right, until county officials noted that if energy from the dam went to bitcoin mining, the county as a whole would end up using more coal.

That was the end of that. In April 2019, Missoula required all future mines to purchase or build their own renewable power. And soon after the price of bitcoin crashed in March 2020—slipping down to below $5,000—HyperBlock declared bankruptcy because it could not pay its power bills.

Bitcoin mining and proof of work

Why is bitcoin so inefficient? It turns out that the system uses copious amounts energy not by accident but by design.

Satoshi Nakomoto, bitcoin’s pseudonymous creator, had to figure out a way to solve the double-spend problem. We don’t have this problem with paper money. But with digital money, someone could copy the file and use it to spend the funds over and over, rendering the currency useless. 

In a centralized system, a trusted third-party, like a bank, checks the digital money you spend against a central ledger to make sure there’s no funny business going on. But bitcoin’s ledger (the blockchain) is decentralized, which makes the double-spend problem harder to solve.  

The solution Satoshi came up with was a clever hack that involves bitcoin mining and proof-of-work. In bitcoin, mining is the process of adding new transactions to the blockchain, and proof-of-work secures the network so transactions can’t be reversed. You would need more than half of all the computing power on the bitcoin network to double-spend a bitcoin. 

It wasn’t a perfect solution, but Satoshi solved what computer scientists had long thought was unsolvable: how to build a decentralized payment system. The irony is, unless you are collecting payments for ransomware, bitcoin has proven unusable as a payment system. No merchant wants to risk their profit margin on bitcoin’s volatility.

Today, bitcoin functions mainly as a speculative investment, getting scooped up by retailers and venture capitalists—and now big companies and hedge funds—in the hopes the price will go ever skyward.  

Winning the lottery

Bitcoin miners have their eyes feasted on the bitcoin block reward.

Every 10 minutes, the bitcoin network adds a new block to the blockchain, minting 900 new bitcoins a day in the process. That block reward is reduced by half every four years. Prior to May 2020, the bitcoin block reward was 12.5 bitcoins—double what it is now—and the network produced 1,800 new bitcoins per day. And around February 2024,* the block reward will be 3.125 bitcoins.

When you request a transaction on the bitcoin blockchain, your transaction goes into the bitcoin mempool, a waiting area for unconfirmed bitcoin transactions. Miners select transactions from the pool—usually the ones with the highest transaction fees—and package those into a block ready to process as the next block in the blockchain.

Any server can produce a “candidate block,” but if it were too easy to do, the network would be spammed. So there had to be a financial cost to creating a block, hence the work. 

In the case of bitcoin, that work involves solving a hash puzzle; the cost is computing time and electricity. The hash puzzle is very difficult to solve, but easy for peers in the bitcoin network to verify, so they can prove you did the work and the block is valid.

Some people refer to this puzzle as a complex math problem, but it’s really not. Working out a hash is easy, but in bitcoin, working out a hash that meets certain conditions is tricky. Finding the solution is a bit like winning a lottery.

Solving the hash puzzle

A hash is a fixed-length output calculated from a piece of data. Whether you hash Herman Wouk’s “War and Remembrance” or a grocery store list, the resultant hash will always be the same length. And you will always get the same hash for the same string. But if even one letter changes in “War and Remembrance,” the resultant hash will be different.

Bitcoin uses the hashcash proof-of-work, originally developed by cryptographer Adam Back in 1997 as a way to prevent email spam and denial-of-service attacks, and the SHA-256 hashing function, which has been around since 2001.

When you hash a bitcoin block, you also track the hash of the previous block—which “chains” a block to the one before it, and so on down the line to the first bitcoin block ever created—and a random number called a nonce. The idea is to produce a hash that is lower than the numeric value of the network target. (This target changes periodically to adjust the mining difficulty, thereby assuring only one block gets created every 10 minutes.)

When you mine bitcoin, you repeatedly hash the block while incrementing the nonce. Each time you change the nonce, you also change the value of the resultant hash. The number of hashes that a miner makes per second is called the hash rate; the higher your hash rate, the better your chance of solving the puzzle. A single bitcoin mining rig can make up to 14 trillion guesses per second.

If you discover a hash value that is small enough before anyone else does, you win! Your block is then transmitted to the rest of the network, and the other nodes begin work on the next block using the hash of the accepted block. 

Powerful computers

As bitcoin went up in value over the years, miners found faster and faster ways to win the bitcoin lottery. When bitcoin was first introduced in 2009, you could mine bitcoin with the CPU on your own personal computer.

Those days are a distant memory. As bitcoin mining became more profitable, miners switched to graphic processing units (GPUs). And in 2011, they migrated to field-programmable gate arrays (FPGAs). But starting in 2013, the field was taken over by application-specific integrated circuit equipment (ASIC) rigs—which is the only way to make a profit mining bitcoin these days. 

Over the past decade, bitcoin miners have set up thousands of warehouses of computer hardware dedicated to performing trial-and-error computations in a race against each other to win the block reward.

The result is a massively inefficient coal-powered monster that consumes the same amount of energy as a country (Argentina) with 45 million people, all in the name of “number go up,”

*This is an approximation. The next bitcoin halvening event could happen before or after this date.

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Nouriel Roubini: ‘Tether is a criminal enterprise,’ SEC should probe Elon Musk’s bitcoin tweets

Nouriel Roubini, an economics professor at New York University, thinks Tether is issuing fake money. And that nothing short of an audit will prove the $30 billion in USDT the BVI-registered company has spewed out into the crypto markets thus far are even 74% backed. (Stuart Hoegner, the firm’s general counsel, claimed they were three-quarters backed in April 2019 court documents.)

Tether is a “criminal enterprise,” he bluntly told reporters on Coindesk TV. In a 10-minute interview, Roubini predicted Tether’s looming demise, called for the SEC to look into Elon Musk’s bitcoin tweets, and claimed that central bank digital currencies will spell the end for crypto.

Dr. Doom, as Roubini is called, talks quickly, doesn’t mince words, and his face barely changes expression. He has a reputation as a perpetual pessimist. Ask him a question, and he will give you a straightforward, often bleak, answer. Though he might argue, he is simply being a realist.

I am not sure why Coindesk had him on their program. Roubini hates bitcoin and his responses elicited laughter—though it wouldn’t be the first time. Roubini “sounded like a madman in 2006,” when he stood before economists at the International Monetary Fund and announced a crisis of solvency was brewing, IMF economist Prakash Loungani told the NYT in August 2008. “He was a prophet when he returned in 2007.”

Anyhow, I transcribed the talk only because I thought Roubini’s points made sense. He was interviewed by Coindesk’s Lawrence Lewitinn, Christine Lee, and Emily Parker.

Lee: The narrative on bitcoin has shifted from a means of payment to a store of value for some. It is not so much used as a currency as a digital gold. Institutions and public companies are buying this thesis and we are seeing bitcoin hit records as a result. What do you make of this institutional and corporate interest in bitcoin, underlined by Tesla’s $1.5 billion bitcoin investment on Monday? 

Roubini: As you suggested, bitcoin and crypto is not a means of payment. It is not a currency. It is not a unit of account. Is not a scalable means of payment. It is not a single numeraire. Now, people say it is an asset. But think of it. What are assets? Assets like stocks, bonds and real estate give you income or give you some use, like real estate. And, therefore, they give you capital gain. Gold does not give you income but it has other uses,—industrial activity and jewelry—and therefore, has some value. It used to be used as a means of payment. 

In the case of bitcoin, it does not have any income. It doesn’t have any use. It doesn’t have any utility. So the value of it based on what? Based on no intrinsic value and purely a speculative bubble. That is why I argue that bitcoin, like all the other shitcoins, are worth zero. [Coindesk reporters giggle.] 

Actually, negative given the hogging of energy and the environmental cost. If there was a carbon tax on crypto, the value of these assets would be negative. 

So what is the fundamental value? What is the use? What is the utility that justifies the capital gain? None. It is a speculative bubble that is based on pump-and-dump, spoofing, wash trading and manipulation by Tether, which is a total scam. [More giggling from Coindesk crew.]

So, for institutional investors, saying we are going to invest in crypto doesn’t make any sense. You have a failing company that had a flat stock market like MicroStrategy for a decade, and its head was a coke addict who decided to bet the entire house on bitcoin. [CoinDesk crew really losing it.] That is irresponsible behavior. It is not gonna be any corporate head that is going to put his cash, as you point out, into something that is so volatile. You put your cash into something that is stable. 

And for someone like Elon Musk who knows he has a market impact to manipulate to first, take an individual position to bitcoin, pump the price up, and then say that Tesla is invested. And Tesla doesn’t make money yet. It is also irresponsible and it is market manipulation. [Note: Musk was tweeting about BTC, pushing up the price, before Telsa announced it had purchased $1.5 billion worth.]

The SEC should be looking at people that have a market impact that manipulate the price of assets. That is also criminal behavior. It is totally a criminal enterprise. Tether is a criminal enterprise, and a bunch of whales and insiders are manipulating the price of bitcoins and other shitcoins day in and day out. That is a fact.

Lewitinn: Dr. Roubini, always a ray of sunshine, of course. The question about Tether is this: We have known for a while now that it has been backed entirely by dollars. It is something like 70-some-odd percent. That came out a while ago. There have been questions about its backing for some time, for several years. Yet it is still trading on par with the US dollar. Conceivably, they have enough assets at least for a while to keep the peg going with the dollar. How much of a real worry is it for crypto if there is even a small run on tether?

Roubini: First of all, we don’t know if it is backed 70% or not. Their lawyer says 70% but we have no idea. It doesn’t mean any[thing] absolute independent audit of it. [A bit garbled here, but he is saying, outside of a third-party audit, which Tether has never had, there is no way of knowing what’s backing tethers.]

We also know they are really issuing, literally, at an exponential rate, new tethers. In the last year alone, something like 25 billion. And in the last few weeks, a billion per week. So it looks like they are getting desperate, and it is a typical Ponzi scheme, in which you maintain the value of something by issuing more of it and more of it and so on. 

Lewitinn: How different is that from what is going on right now from the money printing happening in Washington? 

Roubini: The money printing in Washington is happening at a rate that is much less than the issuance of fiat by Tether and other shitcoins. If you look at the chart of it, literally, the case of Tether is exponential. Second, central banks, if you know, their assets are matching their liabilities. For every dollar of currency in excess of reserves that are in the central bank balance sheet there is an asset, foreign reserve, or gold or treasury assets. 

So the idea that fiat currencies are not backed by anything is utterly false. If you look at the balance sheet of any central bank, there are assets and there are liabilities. And actually, there is a positive net worth most of the time. But in the case of Tether there is nothing backing it. Again, even 70% is not true. And we know that every fixed exchange rate that is based on not-full-backing and not fully collateralized eventually collapses. 

The entire monetary history, every fixed exchange that is not backed has collapsed. It is only a matter of time. And the trigger is gonna be when the indictments of Tether and Bitfinex are going to occur, and it is only a matter of time this year. Because we know that there are investigations occurring. 

Parker: Let’s move to central bank digital currencies for a moment. We know that China is moving quite rapidly in this area. Do you think that the US dollar will remain the world reserve currency?

Roubini: I think that the Chinese are going to go ahead. [Sweden’s] Riksbank bank is going to go ahead. The [European Central Bank] is going to go ahead. And until now the US was behind the curve, but they realize that the Chinese had a plan to dominate the global financial system. It’s their e-commerce. It is their own platform of private payment systems like AliPay and WeChat Pay and that is going to be the e-RNB. And it is only a matter of time before we are going to phase out cash all over the world. And if the US wants to maintain the role of the US dollar as a major global reserve currency, they will have to move to an e-dollar. 

The problem with that is that people get excited in the crypto world when central banks end up talking about a central bank digital currency. A CBDC, first of all, has nothing to do with blockchain. It is going to be private. It is going to be centralized. It is going to be permissioned. And it is going to be based on a bunch of trusted authority verifying transactions.

It has nothing to do with blockchain. It has nothing to do with crypto. And as a payment system, it is going to dominate, not only crypto, which has absolutely no payment services, but also any private form of payment system that is digital, from credit cards to bank deposits to AliPay to WeChat pay to Venmo to Square to PayPal, and so on. Because it is going to be cheap, it is going to be instantaneous clearing and settlement. It is going to be a system that is going to dominate any form of private money

If and when a central bank currency is going to be introduced, the problem is going to be that any form of private digital payment system is going to be crowded out, starting with crypto, which doesn’t have any payment service in the first place. 

Lee: Dr. Roubini, it sounds like you believe that the technology underlying bitcoin is at least sound and that governments and central banks around the world will adopt it, and if that is the case, what happens to privacy? And you also mentioned something about negative rates becoming the norm. Tell us about that?

Roubini: First of all, I said the opposite of the technology. The central bank digital currencies will not be based on blockchain. They are going to be private, not public. They are going to be centralized, not decentralized. They are going to be permissioned, not permissionless. They are going to be a bunch of central banks and private banks that are trusted verifiers of the transaction, rather than being trustless. So the technology is not going to be blockchain. It is not going to be crypto. That is my point. 

Secondly, the advantage of having a central bank digital currency is that right now, if there is a very severe economic recession, central banks cannot go very negative with the policy rates. That is why they do quantitative easing. They do credit easing. Because if you go lower than, say, 75 basis points, people are going to switch their excess reserves into cash if there is a nominal zero interest rate. So they are not going to pay the tax. 

However, if you phase out cash, then you have no option than to keep your money in the digital form. And then the negative policy rate in a severe recession or depression can go to minus one, minus two, minus three, minus four, minus five, whatever you want it to be. So if and when that happens, and if there is a recession that is severe enough, central bank digital currencies are going to allow you to have much more [of an] easing monetary policy with much more negative policy rates. That is the direction we are going to go. 

Lee: Is there anything that can happen that would change your mind about bitcoin? 

Roubini: So far, no. As they say, it is not a unit of account. It is not a means of payment. It is not a single numeraire. It is not a stable store of value. And with proof-of-work, you get five transactions per second. And if it was to be adopted as a means of payment, you would have deflation. Because the quantity of it is limited in the long run. If you want to create a digital currency that actually works as a means of payment, its growth has to be the growth of nominal GDP, so that the demand can be satisfied by supply that increases as much as nominal GDP, meaning the inflation target plus the growth of the economy. Otherwise, you are going to get permanent deflation on every price in goods and services, so it’s fundamentally flawed even from that point of view. 

Update: In an earlier version of this story, I mentioned Musk had deleted some of his BTC tweets. So far, I haven’t found any hard evidence of that, so I removed my comment.

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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: BTC moons, Reggie Fowler stiffs lawyers, OKEx withdrawals still frozen, Binance gets piles of USDT

Bitcoin broke $16,000 on Thursday. That’s up from $10,000 in early September. And yet, with all the media outlets rabidly covering the latest “Bitcoin bull run,” the only one mentioning the billions and billions of dollars worth of tether (USDT) entering the market was Cointelegraph

In particular, none of the mainstream press has bothered to mention tether in their writings about BTC’s recent price rise. This is worrisome because retail folks — the ones most vulnerable to risky investments — have little understanding of tether and the risk it imposes on Bitcoin’s price. 

Instead, most media pointed to the election, PayPal’s recent embrace of crypto and huge BTC investments by MicroStrategy and Square as the reasons for BTC’s moon. Mainstream adoption! Institutional money! The truth is, crypto markets are easy to manipulate. And when BTC goes up in value like this, the main benefit is so early investors can cash out. 

In other words, BTC gets passed on to the next bright-eyed, bushy-tailed dupe who hopes the price will continue skyward. History has shown, however, these bubbles are generally followed by a crash, and a lot of people getting hurt, which is exactly what happened in 2018.

Trolly McTrollface (not his real name, obvs) points out in a tweet thread that Tether went into hyperdrive in March to stop BTC from crashing. BTC had dropped to $5,000, losing half its value from two months prior. In fact, March is when BTC entered its current bull run phase.

Remember, if the price of BTC falls too low, the network’s miners — who are responsible for Bitcoin’s security — can’t make a profit, and that puts the entire network in danger.

Trolly believes the current price pump is a coordinated effort between Tether — which has now issued a jaw-dropping $18 billion worth of dollar-pegged tethers — and the exchanges.

Let’s talk about some of those exchanges.

OKEx withdrawals still frozen

Withdrawals from OKEx, one of the biggest crypto exchanges, have been frozen ever since the news came out that founder “Star” Xu was hauled away for questioning by Shanghai authorities more than a month ago.

Xu’s interrogation appears to be part of a broader crackdown on money laundering in China, though OKEx denies any AML violations. 

OKEx is registered in Malta, but retains offices in Shanghai and Beijing, where it facilitates peer-to-peer—or “over-the-counter”—trades. The exchange acts as an escrow to reduce counter-party risk in fiat-to-crypto trades, so you don’t have to worry about someone disappearing with your cash before they hand over the BTC you just bought from them.

As Wolfie Zhao explains for the Block, these OTC trades are the only fiat on/off ramp for Chinese crypto traders—and have been ever since September 2017 when the country banned crypto trading on exchanges.

Effectively, the government made it so the exchanges could no longer get access to banking in the country.

P2P allows two people to transact directly, thus bypassing the Chinese ban, as long as the trades are small in scale. All Chinese crypto-to-fiat is OTC, while crypto-to-crypto trades are still done via a matching order book. (A Chinese citizen simply needs to use a VPN to access Binance, for instance.)

Currently, the OTC desk is the only trading desk that remains open at OKEx All of its exchange trading activity has been ground to a halt. The exchange claims Xu has access to the private keys needed to access its funds, and until he is free, all that crypto sits locked in a virtual vault.

As a result, according to blockchain analytics firm Glassnode, there are currently 200,000 bitcoin stuck on OKEx. The exchange insists all funds are safe, and says, essentially, that everything will be fine as soon as Xu returns. But its customers remain anxious. Did I mention OKEx is a tether exchange?

Huobi, another exchange in peril?

Like OKEx, Huobi is another exchange that moved its main offices out of China following the country’s 2017 crackdown on crypto exchanges.

Huobi, now based in Singapore, continues to facilitate fiat-to-bitcoin and fiat-to-tether trades in China behind an OTC front. (Dovey Wan does a nice job explaining how this works in her August 2019 story for Coindesk.)

Since earlier this month, rumors have circulated that Robin Zhu, Huobi’s chief operating officer, was also dragged in for questioning by Chinese authorities. Huobi denies the rumors.

Meanwhile, since Nov. 2—the day Zhu was said to have gone missing —$300 million worth of BTC has flowed from Huobi to Binance, according to a report in Coindesk. (I still don’t have a good explanation as to why Huobi is doing this. If anyone can fill in the gaps, please DM me on Twitter.)

What’s up with Binance?

If you follow Whale Alert on Twitter, like I do, it’s hard to ignore the enormous influx of tether going into Binance multiple times a day.

Here’s an example: On Friday, in four separate transactions, Tether sent Binance a total of $101 million worth of tethers. The day prior to that, Tether sent Binance $118 million in tethers, and the exchange also received $90 million worth of tethers from an unknown wallet. And on Wednesday, Tether sent Binance $104 million in tethers.

That’s over $400 million worth of dubiously backed tethers—in three days.

Like Huobi and OKEx, Binance also has roots in China. And it has an OTC desk to facilitate fiat-to-crypto trades. Is it a coincidence that the top tether exchanges originate from China? And that China controls two-thirds of Bitcoin’s hash rate?

Reggie Fowler’s lawyers wanna quit

Reggie Fowler, the Arizona businessman in the midst of the Crypto Capital scandal, is running low on cash. His lawyers have decided they don’t do pro bono work, so now they want to drop him as a client.

Last month, Fowler’s legal team asked the court to change his bond conditions to free up credit. But apparently, that isn’t working. Unfortunately, all this is happening just when there was a possibility of negotiating another plea deal. (Read my blog posts here and here.) 

Quadriga Trustee releases report #7

EY, the trustee handling the bankruptcy for failed Canadian crypto exchange QuadrigaCX, released its 7th Report of the Monitor on Nov. 5.

According to the report, EY has received 17,053 claims totaling somewhere between CA$224 million and CA$290 million—depending on what exchange rate EY ends up using to convert the USD and crypto claims to Canadian dollars for disbursement.

EY has CA$39 million ready to distribute to affected Quadriga users, who submitted claims. But none of that money is going anywhere until the Canadian Revenue Agency finishes its audit of the exchange. (Ready my blog post for more details.)

Gensler goes to Washington

Gary Gensler has been picked to lead President-elect Joe Biden’s financial reform transition team. As Foreign Policy notes, Gensler, who was the head of the CFTC during the Obama years, is an aggressive regulator.

He is also well familiar with the world of crypto. He taught a course on blockchain at MIT Sloan. He suspects Ripple is a noncompliant security, and he told me in an interview for Decrypt that the SAFT construct—a once-popular idea for launching an initial coin offering—will not spare a token from securities laws. (He also thinks 99% of all ICOs are securities.)

Libra Shrugged author David Gerard said in a tweet that Gensler was excellent in the Libra hearing last July. Gensler also “helped clean up the 2008 financial crisis, he knows literally all the possible nonsense,” said Gerard.

Clearly, this is good news for bitcoin.

Nov. 15 — Before I said that OKEx offered the only fiat-to-crypto on/off ramp in China. That is inaccurate. P2P OTC exchanges *in general* are the only fiat on/off ramps for crypto traders in China and have been since Sept. 2017.

Nov. 16 — Previously, this story stated that Quadriga’s trustee has CA$30 million available to distribute to claimants. It’s been updated to correctly reflect that EY has CA$39 million (US$30 million) to distribute.

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.