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

News: Tether prints $1B at a time, Tesla buys bitcoin, Roubini calls Saylor a cokehead, scammers hijack QuadrigaCX website

We are midway through February. Tether has surpassed $32 billion in tethers and appears to be quite proud of the fact. BTC is scratching $49,000 and ETH is over $1,800. There is so much craziness now in the crypto markets with shitcoins pumping galore, and big companies getting in on the bitcoin Ponzi.

In the meantime, I am concerned crypto is going retail again. Friends are calling and asking about bitcoin. One of my friend’s offspring was talking up dogecoin on Facebook. And I am overhearing conversations about crypto in grocery stores and parking lots—flashbacks of 2017, but this is worse. Retailers are going to get hurt all over again.

Another reminder, I have a Patreon account. If you want to support my writing, please consider subscribing. I’m currently making $572 a month on Patreon, which is fantastic because I can now buy decent bottles of wine. But at some point, I would love to bring that up closer to $2,000 or find a way to make a living doing this.

Tether: We’re done with the baby prints

On Thursday and again on Saturday, Tether issued $1 billion in tethers. These are the biggest single prints of USDT ever—and there were two in a row. Previously, the biggest prints were $600 million, which was rare. Normally, bigger prints were $400 million, and if Tether needed more, it would simply issue several in a row. But that’s clearly not enough to feed the monster now. 

By monster, I mean this snowball is getting so big, Tether is struggling to manage it. Seventy percent of bitcoin is traded against tethers, and as real money keeps getting siphoned out of the system, Tether needs to create more and more fake dollars to fill the ever-widening chasm. Tethers are counterfeit. They are not real dollars, but they are treated as such on offshore exchanges.

You can’t have a system built entirely on fake money. Eventually, it will collapse under its own weight. We saw this with QuadrigaCX. As soon as enough people tried to cash out, the exchange’s founder Gerald Cotten flew to India and pulled off what appears to have been one of the most bizarre exit scams in history—unless you believe he is really dead.* I’m still getting calls from reporters and filmmakers wondering what the hell happened.

Tether CTO Paolo Ardoino says the $1 billion prints were for replenishments and chain swaps—wherein a customer sends in tethers and gets them reissued on a different blockchain. If it were a chain swap, you would see a corresponding burn. But we aren’t seeing any burns, meaning those tokens went almost immediately into circulation.

Luca Land tracked the first 1 billion print and found that the entire amount—previously, I said “majority,” but Luca says all of it—went to Bitfinex, Huobi, RenrenBit, Binance, and FTX.** The largest recipient was FTX, followed by Binance. Those of us who follow @whale_alert are accustom to seeing tethers flying off to “unknown wallets.” Luca thinks those unknown wallets serve as intermediate wallets to throw us off the trail.

The Block published a story on Thursday, right after Tether’s first monster print, with lots of quotes from Ardoino, who explains that big companies are buying USDT from over-the-counter desks and high-frequency trading firms. This explains the demand for all these tethers, he claims.

“When clients of these firms want to buy bitcoin, they send USD, and then these firms convert USD to USDT to bitcoin. This method is faster and most convenient,” he told The Block. 

Why would someone go to the trouble of converting cash to USDT to buy BTC when they could simply buy BTC directly with cash on a regulated exchange? That makes no sense—unless it involves money laundering and capital flight. Tether does have a big market in Asia, Ardoino said.

Another explanation is that Tether is printing USDT out of thin air, using those to buy bitcoin with alias accounts on unregulated exchanges and cashing out via banked exchanges and OTC trading desks. Or else, they buy BTC and hold onto it as a way to make the markets more illiquid and easier to manipulate. (If they sold all the bitcoin they were buying with tethers, they would crash the markets, so until a new influx of cash comes into the system, they have to hold onto it.)

Coindesk interviewed Nouriel Roubini on CoindeskTV. Of course, he gave it to them straight, calling Tether a criminal enterprise and Michael Saylor a cokehead. The three reporters broke out into giggles. The questions they asked were naive, for instance, how is Tether printing tethers different from what is going on in Washington with all their dollar printing? Roubini made important points and predicts Tether will be dead within the year—read the transcript on my blog.

NY AG Tether investigation update

Tether has agreed to hand over a slew of documents to the NY attorney general showing how they issue tethers, what’s behind tethers, and so on. The original deadline was Jan. 15, but they needed another 30 days and the NY AG was okay with that. We are looking for another court filing to drop at some point after Feb. 15.

Don’t expect miracles anytime soon, though. The NY AG will still need time to take a position on what she has received. I’m sure her office is working with the Department of Justice in their investigation—and passing all the material along to them.

Someone was asking me on Reddit, what can the NY AG actually do to Tether? Answer: She has sweeping investigatory and prosecutorial powers, and she can issue a cease and desist. But ultimately, the U.S. Department of Justice and Homeland Security will be instrumental in taking Bitfinex/Tether down.

To put things in perspective, Tether has been in operation for six years. It took seven years and the coordinated effort of law enforcement in 17 countries to bring down Liberty Reserve. (ABC News)

Tesla buys BTC with clean car credits

The big news of the week was Tesla purchased $1.5 billion of bitcoin, as revealed in its 10-K filing. Here you have a company dedicated to clean energy buying one of the filthiest assets in the world. The bitcoin network requires the energy of a small country like Argentina, Norway or the Netherlands. Musk doesn’t give a hoot about the planet. (My blog)

Just to be clear, $1.5 billion is peanuts. It will support the bitcoin miners for about a month. Of course, on the news of Tesla buying bitcoin, the price of BTC shot up from 39,400 to 48,000 in less than 24 hours. The higher the price of BTC, the faster real money exits the system when the miners sell their 900 newly minted BTC per day.

Michael Burry, the investor from “The Big Short,” said in a series of deleted tweets (apparently, he routinely deletes tweets) that Musk bought BTC to distract from Chinese regulators looking into quality complaints with Tesla vehicles. Burry is shorting Tesla and has called on the electric-vehicle company to issue more stock at its ridiculous price. (Business Insider)

But wait! It’s green energy!

Most of the world doesn’t realize that bitcoin uses a country’s worth of electricity. They think it’s mainly used for ransomware and by criminals to buy drugs and such, so when they learn about bitcoin’s horrendous CO2 production, they become alarmed.

As a result, bitcoiners are desperately scrambling to declare that bitcoin consumes renewable green energy. Most of what they are spouting is blithering nonsense with no facts to support their claims. They are also trying to say that bitcoin consumes less energy than the rest of the financial system, which is simply dumb, as Frances Coppola points out.

Other interesting newsy bits

Gerald Cotten may be dead and buried—or more likely, sipping cocktails on a beach somewhere—but QuadrigaCX sprung to life again! However, it turns out scammers set up an imitation Quadriga website to lure in potential victims. EY, the trustee for the failed exchange, sent out a warning notice. The website has since been taken down. (EasyDNS)

India is set to ban cryptocurrency investments completely. Investors will be given a transition period of three-to-six months after the new law goes into force to liquidate their investments. (Bloomberg Quint)

Crypto Capital money mule Reginald Fowler has three more weeks to find new counsel after he stiffed his previous attorneys. (My blog)

Dogecoin has been pumping thanks to r/wallstreetbets and Musk and others tweeting about it for the lulz. David Gerard wrote a wonderful piece on dogecoin explaining its unique history. (Foreign Policy, paywalled)

Apparently, Elon Musk was tweeting about DOGE for the lulz back in April 2019. (Financial Times)

Dogecoin creator Billy Markus said on Reddit that he sold all his dogecoin in 2015 after he got laid off. He wanted dogecoin to be a force of good, and he is disappointed to see the nonsense “pump and dumping, rampant greed, scamming, bad faith actors.”

The Sydney Morning Herald did a feature on Australian-born-and-raised Greg Dwyer, one of the founders of Bitmex, who was indicted last year for violating anti-money laundering laws, but is still at large. “As recently as July, social media posts suggested Dwyer was in Bermuda, and enjoying all it had to offer.”

Miami Mayor Francis Suarez (R) wants municipal workers to get paid in bitcoin. Aside from the legal and tax ramifications and all the difficulties in setting this up, I’m sure employees will be so happy to wake up and find their paycheck lost 30% of its value whilst they were sleeping. No, this is a terrible idea. (The NY Post)

BNY Mellon, the world’s largest custody bank, said it will hold, transfer and issue bitcoin and other crypto on behalf of its asset-management clients. The bank will begin offering these services later this year. Because they are a state-chartered bank, they can do this in NY without a BitLicense. (WSJ, Coindesk)

Mastercard is planning to support crypto natively on its network. However, it’s only going to support cryptocurrencies that meet certain requirements—including stability, privacy and compliance with anti-money laundering laws. The problem is that no cryptocurrencies meet Mastercard’s criteria. (Arstechnica, Mastercard announcement)

BitPay’s bitcoin cards can be added to Apple Wallet, giving crypto holders a new way to spend via Apple Pay. BitPay converts your bitcoin to cash, so it’s no different than selling your BTC first, and merchants won’t know the difference. (Business Insider)

This Valentines Day, consider giving that special someone a CryptoFlower! It will only set you back 4 ETH ($7,200). Each flower is genetically unique and immutable. And they don’t need water or sunlight because they live on the Ethereum blockchain. (FT)

Last but not least, the CBC QuadrigaCX documentary is coming soon! It was nearly a year ago that David Gerard and I met in Vancouver for the filming. It was also one of the last times I enjoyed a meal inside a restaurant sitting next to people.

*Update, Feb. 14—Someone on Reddit was giving me a hard time, arguing that I can’t say Cotten pulled off an exit scam unless I explain that he might actually be dead. I won’t believe he is dead until someone exhumes the body and proves it’s him. See my Quadriga timeline for details.

**Update, Feb. 15—The unidentified tether customer in Luca Land’s diagram turns out to be FTX.

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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Tesla spent $1.5B in clean car credits on bitcoin, the filthiest asset imaginable

Tesla bought $1.5 billion worth of bitcoin, the company said in a regulatory filing on Monday, effectively putting nearly all of the money it earned on clean car credits towards the world’s filthiest asset.

Where to begin? Let’s start with the firm’s SEC filing. As of January 2021, the Silicon Valley-based company updated its investment policy to allow it more flexibility in diversifying its returns on cash. Those changes allow Tesla to buy bitcoin and other cryptocurrencies, which it immediately did.

“Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.”

The filing does not say how Tesla bought the bitcoin or how they are custodying it. It also does not tell us how many bitcoin it purchased or for what average price. We only know Tesla bought bitcoin sometime between Jan. 1 and early February, when the price was between $30,000 to $41,000. 

Tesla says its customers will be able to buy its vehicles with bitcoin. However, “liquidate upon receipt” means that if you purchase a Tesla with bitcoins, the company is likely to sell those bitcoins for cash immediately, something that is usually done by sending the funds through a payment processor first.

This is what most large merchants do when they say they are accepting bitcoin. They convert it to cash, so they don’t have to deal with bitcoin’s wild volatility. So if you buy a Tesla with bitcoin in the future, it will likely be the same as selling your bitcoin for fiat and then handing the cash over to Tesla.

Clean car credits for bitcoin

Tesla earns tradable credits under various regulations related to zero-emission vehicles, greenhouse gas, fuel economy, renewable energy, and clean fuel. It then turns around and sells those credits to other automakers when they can’t comply with auto emissions and fuel economy standards.

In 2020, Tesla reported making $1.58 billion in selling these tradable credits it received. And here is the important bit: without those tradeable credits, the company would not have been profitable. Tesla would have lost money. So what does it do with that money? It turns around and buys bitcoin.

Bitcoin is an environmental disaster. The bitcoin network currently burns around 116.87 terawatt-hours (TWh) per year, according to the University of Cambridge’s Centre for Alternative Finance. To give you an idea of how devastating that is to our climate, that is as much energy as a small country or seven nuclear power plants.

Keep in mind, bitcoin’s energy consumption increases right alongside the price of bitcoin. As bitcoin goes up in price, more people want to mine the virtual currency for profit, leading to greater energy consumption as they pile more money into power-hungry ASIC rigs.

Bitcoin is not only filthy for its energy waste but also because it is the currency of choice in underground economies. Ransomware would probably not exist if it were not for bitcoin.

And bitcoin fits the very definition of a Ponzi scheme. It has no intrinsic value—any money new investors put into the system immediately goes out via bitcoin miners selling their 900 newly minted bitcoin per day. Tesla’s massive influx of cash will fund the bitcoin miners for about a month and a half, at most.

Elon Musk shilling crypto

Two years ago, Musk and Tesla paid a combined $40 million penalty to the SEC after Musk’s cryptic tweets about taking Tesla private led to stock fluctuations. The regulator charged him with securities fraud. As part of the settlement, Musk agreed to step down as chairman of the company, although he continued to hold the title of CEO.

Apparently, Musk has learned nothing from that experience. Last month, presumably around the time Tesla was buying up hoards of bitcoin unbeknownst to the general public, Musk caused the price of bitcoin to go up 20% when he changed his Twitter bio to include the word “bitcoin.”

Soon after changing the bio, Musk said in a tweet: “In retrospect, it was inevitable.” In retrospect, that tweet looks like an early hint that Tesla was funneling money into the digital asset.

Will Musk get into trouble for his bitcoin tweets?

It is unlikely, Columbia University Law Professor John Coffee, Jr., told the Wall Street Journal, especially given that a federal judge rebuked the SEC when it sought to hold Musk in contempt in 2019. “I don’t think the commission would dare push it that far,” he said.

The latest Tesla news caused bitcoin to spike 18% this morning, sending the price to over $44,000, and setting a new all-time high.

Updates Feb. 8: Bitcoin topped $44,000 on Monday, even higher than the $43,000 I mentioned earlier. I added that in the SEC settlement Musk agreed to step down as chairman of Tesla. And I added the Coffee quote from WSJ.

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