News: Tether printer on hold, China’s crypto crackdown, the world hates Binance, El Salvador’s Chivo wallet

In case you missed my tweet, I ended up sick at the end of June. I was chatting with a friend over Zoom when he noticed that I was tilting over in my chair. Was I drunk? No. Should he call an ambulance? I’m fine.

I ended up in the ER the next day on IV fluids and hooked to monitors. Turns out I had Anaplasmosis from a tick bite. Doxycycline did the trick, and I was on my feet again within 48 hours. 

Apparently, this is the price you pay for walking blissfully unaware through grassy fields and woodsy trails. 

I mentioned earlier I was writing a book on NFTs. While I did a lot of research on the subject, I’m putting the book on hold for now. My concern is, who would read it? NFTs seem to have been a fad, slipping out of fashion. 

If you are interested in the topic, check out my recent notes on NFTs and money laundering. I also wrote for Business Insider on how Metakovan was pumping Beeple NFTs months before he bought Beeple’s $69.3 million NFT at Christie’s. 

I think we can all admit that the art behind almost every NFT is absolute garbage, which the author of this blog post does a fine job of pointing out. 

China’s crackdown on crypto

The People’s Bank of China has hated crypto since 2017, when it initially kicked the crypto exchanges out. 

In recent months, the country has gone after crypto with a renewed vengeance, banning FIs from providing services to crypto firms and forcing bitcoin miners in the country to take their hardware offline. 

Up until recently, most of the world’s bitcoin mining (~ 65% to 75%) took place in China. The country’s crackdown on mining caused more than 50% of the bitcoin hashrate to drop since May.

The hashrate dropped faster than bitcoin’s difficulty algorithm could keep up. Every 2,016 blocks, the difficulty adjusts to account for how many miners are on the network. 

On July 3, bitcoin experienced a record 27.94% drop in mining difficulty, according to BTC.com, meaning now, bitcoin miners will have an easier time finding blocks. (CNBC)

Beijing even told companies they are no longer allowed to provide venues, commercial displays, or even ads for crypto-related businesses. On Tuesday, the PBoC said it had ordered the shutdown of Beijing Qudao Cultural Development, a company that makes software for crypto exchanges. (Reuters)

Why does China loathe crypto? Some people say the PBoC is trying to make way for China’s CBDC, but I doubt that has anything to do with it. The most likely reason is the country wants to stem capital outflows. According to a Chainalysis report last August, $50 billion in crypto assets moved from China to other regions in a 12-month period. 

Why has Tether stopped printing?

Tether is currently at 62.7 billion tethers, and it’s been stuck there for more than a month. Tether had several big prints at the end of May and now, crickets all through June and into July. The printer has totally stopped. 

Nobody is really clear on why Tether has put its printing presses on hold, but the timing seems to correlate with China’s crackdown on crypto.  

We have three theories for why Tether stopped printing

Theory #1 — Less demand

The China crackdown has created a reduced demand for tethers. When bitcoin’s hash rate dropped precipitously, so did the number of newly minted BTC per day — at one point it was down to 350 new BTC per day, as opposed to the 900 BTC per day the network should be producing.

Binance and OKex have mining pools, so bitcoin miners can mint bitcoin directly to their own exchange accounts. Since there is no way to cash out directly, miners convert BTC to tethers (USDT). And then convert USDT to RMB on unregulated over-the-counter platforms, such as Huobi and CoinCola.

With the exodus of miners from China, there was less demand for tethers. 

Theory #2 — Chinese junk debt

Another theory floating around is that Tether may have been getting Chinese junk debt to issue tethers, and now that is no longer possible due to the risks. 

Tether’s latest composition report showed that 50% of the assets backing USDT were unspecified commercial paper. In the US commercial paper market, that would place Tether among the likes of fund managers like Vanguard and BlackRock, which seems unlikely. (FT)

So maybe it’s holding Chinese paper?

“If Tether is holding Chinese commercial paper, the issuer can default on those debts with impunity. What is Tether going to do? Sue in Chinese courts?,” Tether whistleblower Bitfinexed said in a tweet.

He revealed in a DM that the info comes from a “reliable source.”

Theory #3 — USDC is picking up the slack

While the tether printer stopped, the USDC printer appears to have picked up speed, issuing 10 million USDC since May 8. 

As of July 5, there are 25.5 billion USDC stablecoins in circulation, so maybe USDC is stepping into Tether’s shoes?

In other news, Tether is working hard to shine up its tarnished image. The company is hiring a Reputation Manager, to “advocate for the company in social media spaces, engaging in dialogues and answering questions where appropriate.” 

If you want to fight the FUD spread by salty nocoiners like myself, this job could be for you. (Teether, archive)

Binance vs the world

The UK, Singapore, Japan, Germany, Canada and now the Cayman Islands are all moving against Binance, the world’s largest crypto exchange. I wrote a blog post detailing Binance’s pariah status. 

The bad news keeps getting worse. Following the FCA banning Binance in the UK on June 26, Barclays says it is blocking customers from using their debit and credit cards to make payments to Binance. (They will let you take money out, but they won’t let you put money in.)

Binance “talks a big game on anti-money laundering and know-your-customer” rules, but was “resistant to throwing human resources at compliance issues,” an executive at a payments company that helped connect Binance to the broader financial market before cutting ties with the group, told the (FT)

And worse still — on Tuesday, Binance told its customers that it will temporarily disable deposits via SEPA bank transfers. Binance said the move was due to “events beyond our control.” (FT)

Binance founder CZ says it’s all FUD.

Binance’s organizational structure

Binance has a lot secrets. The company refuses to say where its headquarters is located. And it’s tight-lipped about its organizational structure, too. 

On May 1, Brian Brooks, former Coinbase chief legal officer and former acting head of the Comptroller of the Currency, took over as CEO of Binance.US, replacing Catherine Coley. (WSJ)

In a Coindesk interview in April, he said he reports to the board of directors, yet he wouldn’t name who was on the board. 

Coindesk: “Brian, what is the reporting structure with Binance US. Who do you report to?”

Brooks: “I have a board of directors, which I will be a member of, and I will report to that board.” 

Coindesk: “Who else is on the board?”

Brooks: “The board is obviously the founder of the company and another person. It’s a private company, so we don’t necessarily go into the governance structure…”

Later when Coindesk asks him where Binance.com is located, Brooks dances around that question as well. He did say, however, that Binance keeps its US customer data separate from Binance.com. 

Binance.US also just brought onboard Manuel Alvarez, a former commissioner at the California Department of Financial Protection and Innovation, as its new chief administrative officer. (Coindesk)

FATF releases 12-month review 

The Financial Action Task Force, a Paris-based global anti-money laundering watchdog, published its second 12-month review of its revised standards for virtual assets and virtual asset service providers, or VASPs

VASPs include crypto exchanges, bitcoin ATM operators, wallet custodians, and hedge funds. 

When the FATF published its guidance in 2019, it recommended full AML data collection by VASPs — and Rule 16, also known as the “travel rule.” 

The travel rule requires VASPs to disclose certain customer data and include that data with a funds transfer, so that the info “travels” down the funds transfer chain.  

Of FATF’s 128 reporting jurisdictions, 58 have implemented the revised FATF standards. The other 70 have not. And the majority of jurisdictions have yet to implement the travel rule.

“These gaps in implementation mean that there is not yet a global regime to prevent the misuse of virtual assets and VASPs for money laundering or terrorist financing,” the FATF said. 

The FAFT plans to publish its revised guidance by November 2021 with a focus on accelerating the implementation of the travel rule as a priority. (Forkfast)

Kaseya ransomware  

The REvil ransomware operation is behind a massive attack centering on Kaseya, a company that develops software for managed service providers. MSPs provide outsourced IT services to small and medium-sized businesses that can’t afford their own IT department. 

Between 800 and 1,500 businesses have been compromised by the global ransomware attack, including schools in New Zealand and supermarkets in Sweden. 

The REvil gang has offered to decrypt all victims for $70 million in Monero (XMR), a cryptocurrency that is harder to track than bitcoin. The immediate ransom demand is $45,000 worth of XMR, rising to $90,000 after a week.

Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, wrote a story for Lawfare breaking down the Kaseya ransomware attack. 

He also wrote an earlier story for Lawfare titled “The Ransomware Problem Is a Bitcoin Problem,” where he explains why getting rid of crypto is a great idea. “The ransomware gangs can’t use normal banking. Even the most blatantly corrupt bank would consider processing ransomware payments as an existential risk.”

El Salvador, bitcoin and Bitcoin Beach

Who is the San Diego surfer who brought bitcoin to El Zonte? A white evangelist named Michael Peterson. I wrote about him and his Bitcoin Beach project at length in a recent blog post. 

Peterson read my story. He says it’s full of “glaring inaccuracies” and “plagiarized pieces of other bad reporting.” When asked to substantiate his defamatory accusations, he never replied back. 

Does he use these same bully tactics to get people in El Zonte to use bitcoin? 

David Gerard wrote up a detailed blog post explaining the latest developments on bitcoin and El Salvador. 

Here are some notes, if you want to catch up quick:

  • Nayib Bukele, El Salvador’s president, has announced a government wallet — the Chivo wallet — that will be available for download in September. (Youtube)
  • The Chivo (slang for “cool”) wallet will hold both USD and bitcoin balances. 
  • Salvadorans who sign up for the mobile app will get $30 in bitcoin, but they have to spend it. They can’t sell their BTC for cash — which makes you wonder if Bukele is simply planning to issue new dollars under the guise of bitcoin. (I also recommend you read Gerard’s piece in Foreign Policy on this topic)
  • The technical details of the Chivo wallet are totally unclear. Is Jack Mallers, the CEO of Zap and the remittance app Strike, going to develop the wallet? We don’t know.  
  • Originally, Mallers said Strike was using tether for remittances. (My blog post.) Now, he says Strike is no longer using tethers, and the folks in El Salvador receiving remittances on his app will receive actual dollars. (What Bitcoin Did)
  • How will this happen? Mallers said in his What Bitcoin Did interview that his company has local banking relationships in ES, but we don’t know what banks, where. 
  • Here is a direct quote from the transcript of the interview: “So, I was like, ‘Well, fuck, I don’t know then how I’m going to pull this off!’ So, what I did is, we built Tether into Strike, which was the equivalent of the Chase bank account in America, and it at least gave us some MBP basic functionality, where I can go and just observe and listen and see how people used it and see if it was helpful. But now, we’re already integrating with the top five banks in the country.”
  • Mallers tends to be long on plans and short on details. When the media reaches out to him with questions — like Decrypt did when they learned Zap is not licensed to operate in most US states — he generally just ignores them. 
  • Despite what Mallers keeps claiming, sending remittances via Western Union from the US  to El Salvador isn’t really that costly, to begin with. Steve Hanke, Nicholas Hanlon, and Mihir Chakravarthi point this out in their paper: “Bukele’s bitcoin blunder.”
  • Jack Maller’s company Zap (the parent company of Strike) got $14.9 million in fresh funding in March from “Venture Series – unknown,” on top of a $3.5 million seed round a year prior. Nobody seems to know who is behind the funding. (Crunchbase)
  • Athena, the company that Bukele ordered 1,000 new bitcoin ATMs from, installed a new bitcoin ATM machine — the country’s third installed machine! — in La Gran Vía shopping center. They had a ribbon-cutting ceremony and everything.
  • Unfortunately, the machine was located in front of an upscale department store owned by the Simán family, Bukele’s arch enemy. Worried that the ATM would draw foot traffic to his rival’s business, Bukele had the machine relocated next to the toilets, where it sits unplugged. (Twitter) 
  • The US State Department named 14 El Salvadorans, many associated with the Bukele regime, as corrupt or undemocratic actors. (US State report)

Robinhood’s planned listing

Robinhood had plans to go public in June, but the SEC has some questions about its cryptocurrency business, according to Bloomberg.

The company also agreed to pay FINRA $70 million to settle allegations that the brokerage caused customers “widespread and significant” harm on multiple different fronts over the past few years.

Specifically, FINRA’s investigation found that millions of customers received false or misleading information from Robinhood on a variety of issues, including how much money customers had in their accounts, whether they could place trades on margin and more.

In its SEC S-1 filing, which dropped on July 1,  Robinhood notes that a “substantial portion of the recent growth in our net revenues earned from cryptocurrency transactions is attributable to transactions in Dogecoin. If demand for transactions in Dogecoin declines and is not replaced by new demand for other cryptocurrencies available for trading on our platform, our business, financial condition and results of operations could be adversely affected.”

Robinhood currently supports seven different cryptos. When you trade crypto on Robinhood, you don’t ever hold the keys to your own crypto. Robinhood itself buys the actual crypto and maintains custody, so you can’t move your coins onto or off the platform. You’re stuck in there.

Bitcoin mining turns NY lake into a hot tub

The Greenidge Generation Bitcoin mining plant, owned by private equity firm Atlas Holdings, sits on the shores of beautiful Seneca Lake in New York. 

The tagline on its website reads, “Green Power for Generations to Come.”  

The firm uses lake water to cool its 8,000 computers used to mine bitcoin within the gas-fired plant. Greenidge’s current permit allows it to take in 139 million gallons of water and discharge 135 million gallons daily, at temperatures as high as 108 degrees Fahrenheit in the summer and 86 degrees in winter.  

Locals want the mining facility gone. They have been staging protests. They claim the plant is polluting the air and heating the lake, thanks to its use of fossil fuels.

“The lake is so warm you feel like you’re in a hot tub,” said one nearby resident. (NBC) (Arstechnica)

RSA Conference’s blockchain moment

Over the weekend, the RSA Conference gave infosec and computer science Twitter a bit of a shock when it suggested replacing the entire internet with — a blockchain. 

The tweet quickly disappeared, but not before being archived. The blockchain is immutable! I wrote about the event in a blog post.

(Updated on July 8 to note that Brian Brooks replaced Catherine Coley as CEO of Binance.US.)

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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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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 Wednesday morning, 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, sliding to $5,000 — 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 $1.9 billion worth of tethers in March, and another $1.5 billion worth in April — crypto’s own version of an economic stimulus package. The price of bitcoin rose in tandem back up to $10,000, just in time for the halvening. 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, Tether issued a combined total of $6 billion in tethers. In August, when the price of bitcoin reached $12,000, it spun out $2.5 billion in tethers. And in September, when BTC slid to $10,000, Tether infused the markets with another $2 billion in tethers, although, even that couldn’t lift bitcoin up to $12,000 again. It 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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