Investors Pour Money Into Bitcoin As The Dow Drops, But Will The ‘Tether’ Break Anyway?


On Monday, The Dow plunged over 1100 points (4.6%), the largest one-day point drop in the index’s 132-year history but thankfully not the largest percentage drop (which would be the 22.61% drop on Black Monday in 1987). Cryptocurrency markets also provided a wild ride on Monday, with initial heavy losses after news that the major credit card companies would no longer allow cryptocurrency purchases on credit (oddly enough, they don’t want to provide collateral-free, unverified margin accounts). But crypto rallied after 3 p.m. EST when investors timid about stocks losses looked for something else to buy.

As Business Insider reports, “the entire crypto market cap jumped 7% from its low of $310 billion, to $335 billion by 4 p.m. ET.” Bitcoin was up 6% from its intraday low, while other popular cryptocurrencies like Ethereum and XRP fared better (12% and 11%, respectively). So why has Bitcoin been taking such a beating lately? The answer may lie in something called Tether.

Tether is a cryptotoken that is pegged to the U.S. dollar and purportedly keeps real dollars in a bank account somewhere to back up their currency. Since it’s backed by real dollars, it can be used by Bitcoin buyers and sellers to quickly buy and sell Bitcoins. The problem (or “kerfuffle monsoon”) Bitcoin is facing is three-fold.

First, there are $2.2 billion worth of Tether tokens now in existence, but no evidence the company actually has $2.2 billion in US dollars in reserve. Tether hired an auditor (Friedman LLP) to prove they have the cash on hand, but then they “dissolved” their relationship with the auditor.

Secondly, Bloomberg reported last week that Tether and cryptocurrency exchange Bitfinex were subpoenaed by the US commodities trading regulator last December. We’ll get back to Tether and Bitfinex in a moment, but it’s worth noting the two companies have the same CEO, Jan Ludovicus van der Velde.

The third problem comes from an anonymous report which estimated the possible value of Bitcoin if Tether had never influenced the price. Between April 2017 and January 2018, Bitcoins price rose about 48.8% within two hours after each new issuing of Tether coins on the Bitfinex exchange. “It is highly unlikely that Tether is growing through any organic business process, rather that they are printing in response to market conditions,” the report’s author opines.

If 48.8% of Bitcoin’s growth is due to Tether, and Tether turns out to not have $2.2 billion cash in reserve, that suggests one Bitcoin is worth $3320.19 instead of the price of $6484.75 at this writing.

But it may be even worse. If the effects of Tether amplified other rallies in Bitcoin prices, the report’s author believes it may have accounted for 70% of the price, making the value $1296.95.

The author also extrapolated what would happen if Bitcoin prices had followed a linear trend-line (not likely) for the price just before most of Tether began being issued. That scenario would place Bitcoin at $2,000 at the end of January 2018. The author recommended an audit of Tether’s claimed cash reserves.

There is one detail in Bitcoin’s favor. $2.2 billion is still only around 1.3% of Bitcoin’s total market cap, and part of Bitcoin’s recent price drops may be due to Tether news, meaning the damage is already done. It’s hard to say. Bitcoin is already incredibly volatile — 600% more volatile than gold in 2017 — so don’t expect jokes about its volatility to end anytime soon. But we’ll see who’s laughing when we’re rolling in vapetokens and bananacoins…

(Via Tether Report, Bloomberg [1, 2], Business Insider, Quartz, Inverse, CoinDesk, Chris Burniske, Jon Hendren, and Zack Bloom)