Is Tether a Scam That Will Crash the Bitcoin Price by 80%?

The price of Bitcoin briefly dipped below $10,000 Tuesday morning on news that The U.S. Commodity Futures Trading Commission (CFTC) had subpoenaed Tether and Bitfinex on December 6th. The irony of the U.S. government subpoena-ing a private company about the realness of their reserves is not lost on us. The gold that is supposedly at Fort Knox has not been audited since the 1950's. And the fact that Tether has continued issuing USDT since that subpoena was issued probably suggests this story is overblown.

Tether is a "stablecoin" which aims to maintain a value of one US dollar per tether. It it connected to Bitfinex and created by officers from the company, one of the largest cryptocurrency exchanges in the world. Tether Limited claims that Tether is backed by reserves of U.S. dollars on a one-to-one basis.

But some are claiming that Tether is not backed by dollars and is created out of thin air in order to pump the price of Bitcoin higher. They claim that Tether is a scam that will implode and cause the Bitcoin price to crash by 80%.

Here are some scary quotes from recent articles critical of Tether:

"Bitcoin could crash up to 80 per cent if it turns out the price has been artificially pumped up by controversial cryptocurrency tether, analysts have warned."

"Tether, a so-called "stablecoin" which aims to maintain a value of one US dollar per tether, has been described as the "ticking time bomb" of the cryptocurrency world which could trigger the next "bloodbath" similar to the 2014 collapse of the Mt. Gox exchange."

"While Japanese exchange Coincheck on Friday confirmed it had lost up to $530 million in a hack worse than the $US450 million Mt Gox theft, it's the "tether situation" which has the market on edge."

"Everyone in crypto is very worried about the tether situation, and if these really count as dollars."

They are certainly ratcheting up the fear with this visceral and incendiary language. 80% crashes, bloodbaths and ticking time bombs, oh my! It seems like an emotional plea designed to shake weak hands from their positions.

Perhaps this is part of a wider attack against Tether and the crypto space in general by the big banks. Tether's primary banks in Taiwan were being blocked by U.S. correspondent banks, including Wells Fargo. Bankers hate competing currencies as it threatens their business model and power structure. So, it should come as no surprise that banking insider and government shill, Nouriel Roubini would pile on critical comments. "Dr. Doom" is a researcher/advisor to the International Monetary Fund (IMF), the Federal Reserve, World Bank, and Bank of Israel and recently commented:

"Indeed tether/USDT is used to manipulate bitcoin prices," he wrote.

"Without this bitcoin price would collapse by 80 per cent. Regulators asleep at the wheel while $US2 billion of fake $ created, half of it since December. Not even North Korea created so many fake $ backed by nothing."

This isn't the first time Dr. Doom took a shot at the cryptocurrency world. He previously said that: "Gold is another scam with scammers peddling it all day long on Fox TV commercials to clueless retails investors - grandpas & grandmas - & charging them prices above market + gouging fees. And now all the fanatic lunatic gold bugs have become Bitcoin bugs. Gold & BTC: two scams."

While he is partially correct about scammers peddling high-premium gold coins to clueless investors, this does not make gold itself a scam. It has been money and retained its value for thousands of years. Gold is one of the few asset classes that looks vastly undervalued at the current time, but banksters like to steer investors away from real assets with limited quantifies that they can't easily control or leverage. Luckily for both gold and bitcoin holders, Roubini has been wrong and anyone listening to him would have missed out on enormous investment opportunities.

Of course, I can't know for sure if Tether is backed 100% by dollar reserves. And unless they work in the finance department for Tether Unlimited or Bitfinex, neither can the fear-mongering authors cited above. And this is undoubtedly part of the problem. Tether has not completed a full audit yet and they recently severed ties with the accounting firm that last verified their bank account balances.

"We confirm that the relationship with Friedman is dissolved. Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame. As Tether is the first company in the space to undergo this process and pursue this level of transparency, there is no precedent set to guide the process nor any benchmark against which to measure its success."

The company remains "committed to the process," the spokesperson added.

This seems irresponsible and I encourage the folks at Tether to calm the nerves of market participants by releasing a full audit as soon as possible. It is certainly odd that they haven't yet, as it could put some of the FUD (fear/uncertainty/doubt) to rest.

Let's take a quick look at some of the arguments by those that claim Tether is a scam whose unraveling could crash the price of Bitcoin by as much as 80%.

Fraud Claim #1: The blogger critical of Tether makes a big deal about the amount of Tether increasing when the Bitcoin price dips. But of course there would be an increased interest and flow of funds into a stablecoin like Tether when the Bitcoin price is correcting. This is precisely when most people look to move to safety and reduce exposure. As a contrarian investor, I believe this is precisely the wrong time to be selling, but I don't view it is evidence of fraud.

Fraud Claim #2: An anonymous analyst backed up those claims in a report titled "Quantifying the Effect of Tether", which concluded that it was "highly unlikely that tether is growing through any organic business process, rather that they are printing in response to market conditions."

This seems like another unsubstantiated claim. After all, why wouldn't Tether be experiencing organic growth? The entire cryptocurrency sector is growing very rapidly so it just makes sense that Tether would be growing rapidly too as more investors enter this space. Coinbase has been adding roughly 50,000 new users per day and at times they were adding over 100,000 new users per day. In fact, the pace of growth at cryptocurrency exchanges has been so fast that multiple exchanges had to stop accepting new accounts in order to upgrade their back-end to handle the influx.

Perhaps the Bitcoin price advance has a much simpler explanation: rapidly increasing demand and limited supply. This is what happens to a currency when you don't print massive amounts of it every year and inflate away the value to pay off debt, fund wars, enrich your member banks/political donors and engage in deficit spending.

This is what happens to the value of a currency that is superior to fractional reserve fiat paper money in every way. This is what happens when people have the freedom to use something other than government-mandated funny money that loses value every year. The price goes up through simply supply and demand.

But it seems some would like you to ignore all of that and simply believe it is counterfeit Tether that has caused the majority of Bitcoin's price advance.

Bitfinex is one of the largest exchanges in existence, doing roughly one billion in trading volume per day! They literally make millions per day in fees, so it doesn't make much sense for them to risk their entire operation, reputation and trust within the community. All for what? An elaborate scheme to prop up the price of Bitcoin with Tether coins that aren't properly backed with dollars?

Tether also profits off the dollar reserves that it holds. Like a currency board, it can earn interest income by holding some of its dollar-denominated assets in interest-bearing form. The Tether white paper reveals that Tether's dollar reserves are currently held in accounts at two major Taiwanese commercial banks: Cathay United Bank and Hwatai Bank.

While we can't rule out the possibility that Tether is an unbacked scam to prop up the Bitcoin price, it seems a little far-fetched.

Also consider that Bitcoin has a market cap of $200 billion versus just $2 billion for Tether. They would have to be minting a significant amount of new Tether every month for it to impact the price of Bitcoin. To be fair, the market cap of Tether has gone up by a factor of 5x over the past 3 months from around $450 million to $2.2 billion today. This equates to roughly $500 milion in new Tether per month in recent months. But Bitcoin has averaged over $13 billion in daily volume over the past three months or around $400 billion in volume per month. This is nearly 90x the volume of new Tether created.

Furthermore, this assumes that all of the newly minted Tether is going into Bitcoin alone and not the hundreds of other popular cryptocurrencies. If we apply the BTC dominance figure of 33%, then only $165 million in new Tether per month is going into a pool of $400 billion worth of Bitcoin trading volume. If my math is correct, this would account for just 2% of BTC trading volume.

Is that enough to move the market significantly or cause the Bitcoin price to crash by 80% even if Tether is a scam?

>As you can see from the chart above, Tether has held its value around $1 fairly well. If anything, deviations have been to the upside with price spikes. If people were losing faith in Tether, would the value continue to hold at $1 per coin?

The fear-mongering articles also quote Julian Hosp, co-founder of cryptocurrency payment service TenX. He has listed tether as one of four big risks, with a 10 per cent likelihood of a crash this year which could pull the market down by 15 per cent. But the market has already corrected by over 35% in the past month and still remains up over 3,000% in the past year. If another 15% correction is one of the biggest risks to the market in 2018, the current FUD over Tether is being blown wildly out of proportion.

For it's part, Tether has categorically denied the fraud claims:

"We have also read online about many outlandish conspiracy theories suggesting that tether is not backed 1:1 by currency on deposit with banking institutions," the statement said. "Any such claim is unequivocally false, and the audits will bear that out.

"The company considers all tethers outstanding to be liabilities for presentation on the balance sheet for which there is always an equivalent amount (or greater) held in assets to back those presented liabilities. Full stop."

In December, Bitfinex threatened legal action against Bitfinex'ed.

"To date, every claim made by these bad actors has been patently false and made simply to agitate the cryptocurrency ecosystem," the company said in a statement at the time. "As a result, Bitfinex has decided to assert all of its legal rights and remedies against this agitator and his associates."

During September, Tether hired the accounting firm Friedman LLP to confirm that Tether had a USD balance to match their outstanding Tether in circulation. Friedman is headquartered in Manhattan with locations throughout New Jersey, Long Island, Philadelphia, and Beijing has been serving the accounting, tax and business consulting needs of public and private companies since 1924.

While it was not a complete audit, the memorandum stated that as of September 15th, 2017, Tether Limited had three bank accounts with cash totaling $442 million. This corresponded with the 442 million Tether coins circulating at that time. A screenshot from the report can be seen below or you can download the report here: https://tether.to/wp-content/uploads/2017/09/Final-Tether-Consulting-Report-9-15-17_Redacted.pdf

All of this being said, I would like to see a full and current audit from Tether as soon as possible. It does not inspire confidence that they are dragging their feet and delaying the audit for so long. Critics have a right to be concerned, but the language they are using to scare cryptocurrency investors suggests they have an angle. Until the audit is released, the claims of fraud are just speculation.

The tactic of not backing a currency with anything tangible and creating large amounts out of thin air is the domain of central banks and their partners in government. I hope that Tether is not taking a page from the Federal Reserve play-book, but even if it was revealed that Tether is not 100% backed by dollars, I do not believe this would be enough to crash the Bitcoin price. Even assuming zero backing, which seems highly unlikely given the past memo from Friedman LLP, Bitfinex probably makes enough in fees in a single year to back the entire outstanding balance.

If weak hands fear that Tether is a scam and dump their Bitcoin causing the price to dip, I believe this will simply be a buying opportunity. While it would not be good for the cryptocurrency sector, even a full implosion of Tether will not be significant enough to derail the growing popularity and rising valuations of cryptocurrencies.

Also, keep in mind that if people want to exit their Tether on this controversey, the only way out would be to buy Bitcoin or other crypto with it. Increased buying pressure should result in higher prices, not lower prices.

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