The Crypto Implosion

It’s different this time. The history of volatile bitcoin declines is that at every bottom, bitcoin rises from all the negativity to reach new, unimagined highs. Eventually, the price of bitcoin is destined for a million dollars—or something like that—according to maximalists. 

It really is different this time. Bitcoin’s potential has shifted from global fiat disruption to another suspect, speculative asset with limited utility. If a decentralized digital currency is going to disrupt fiat, 13 years of massive technological innovation and capital infusion is enough time for someone to create a use case for actually buying an everyday good or service with it. Crypto proponents now pretend that functional currency was never a Bitcoin design, despite the Bitcoin White Paper stating categorically that currency is a primary function. Instead of a functional currency, Bitcoin has spawned a nonfunctional fraudulent ecosystem. A case in point is Tether.   

Tether is the backbone of the entire crypto space. At its height before the most recent crypto collapse, $83 billion of tethers existed, which provided the majority of liquidity for all crypto pair trading across exchanges. In theory, $83 billion of dollar assets backed the issued tethers. Initially, Tether claimed one US dollar backing each tether. That changed to a claim of some combination of dollar assets backing each tether. Tether has never produced an audit to verify its reserves. Instead, they did produce a one-page pie chart of their alleged reserves in settlement with the NY Attorney General over fraud charges. Tether is Madoff-level fraud.

How Tether maintains the scam is a head-scratcher. It’s an offshore company with a handful of employees, a never seen CEO, a history of unbroken fraudulent mishaps, no oversight, and no access to established banking, yet it somehow grew to $83 billion of assets and became the financial backbone of a trillion dollar crypto ecosystem. It seems that Tether became too big to fail despite its fraudulent history. Tether is a 3D view of a crypto Potemkin village that everyone pretends is a 2D front-look at a thriving, legitimate main street. The only question is how long the pretense can continue.

In October 2019, serious academics exposed Tether as a fraud. Since the damning 2019 report, Tether increased its supposed assets from $4.3 billion to a high of $83 billion. The total crypto market cap increased likewise in tow. Tether provides no audited explanation of its finances, so there is only supposition about how the “created” tethers grease the crypto backbone. The most likely explanation is that Tether creates its stablecoin out of thin air, with a substantial portion of them going to shady, unregulated exchanges (likely with Chinese roots). Tether records the loans as commercial paper. The exchanges then use their tethers, for example, to buy bitcoin, which backs their loans. See here for a more detailed explanation. As long as bitcoin’s price goes up with the creation out of thin air of ever more tethers, it all works.

Layered onto the tether-induced rise in bitcoin’s price is the promoted narrative that it’s all organic because Bitcoin is the revolutionary disruptor of the fiat system—despite the blatantly obvious recognition that no one uses bitcoin for the purchase of any actual goods and services. But hey, price of bitcoin go up, all is good. Until it isn’t.

Most accurate reporting on Tether and its crypto fallout comes from internet sleuths and independent journalists. That is true across the board today for reliable reporting on any subject. There are supposedly multiple investigations into crypto frauds by relevant agencies. By its bureaucratic nature, government is always far behind any curve and the slowest to act. The DeFi paean has always been about disrupting regulated centralized control. Now that it is imploding, expecting the same centralized control to bring financial order to the crypto space when one’s investments and savings are at risk reeks of DeHy—decentralized hypocrisy.

Whether DeFi participants want it or not, regulatory control of crypto is on the way. It is inevitable. Unregulated DeFi by offshore entities running Madoff-like schemes can last only so long. It was always a matter of crypto achieving a large enough economy of scale that made it worthwhile for the government to want its take and act in the “best interests” of their constituents.

Lummis, Gillibrand Introduce Landmark Legislation To Create Regulatory Framework For Digital Assets.

The proposed Lummis-Gillibrand legislation appears to create common sense, needed crypto regulation. It defines crypto as a commodity or security, assigns regulatory authority, provides regulatory oversight of stablecoins, creates consumer disclosure requirements, and structures taxation, among other investigatory directives. It remains to be seen how this legislation evolves, but legislation will happen. The shady practices of the current crypto implosion are too visible to ignore. 

The $45 billion May 10th overnight collapse of Terra Luna started the crypto house of cards tumbling. In its wake are a series of insolvent crypto lending platforms that required prices to go up to keep their yield farming Ponzi going. A short list of suspect crypto entities under financial stress is Terra, Celsius, Finblox, Babel Finance, Solend, Hoo exchange, AEX exchange, Bancor, BlockFi, Voyager, Vauld, CoinFLEX, Nexo, 3AC, Genesis Trading, Maple Finance, and Invictus Capital. The common denominator of the collapsing cryptos is contagion.    

The price of bitcoin has stabilized around $20k since the collapse of Terra and the resultant fallout. A drop below $17k will result in further contagion and more bitcoin selling. How the traditionally volatile bitcoin price can stabilize in a narrow $20k trading range for months while large market cap cryptos continue to fail is a mystery. It further suggests there is no broad organic liquidity market for the crypto space, only manipulated trading. 

What is different this time is that regulated digital currency, CBDC, will eclipse Bitcoin’s remaining utility. A speculative asset can only last as long as the mania. Bitcoin’s success was that it gave the world the blockchain. Its failure was to facilitate the blockchain and democratize money with a corresponding stable decentralized functional currency. CBDC will adopt the blockchain while centralizing currency control far beyond fiat’s limits. Despite its initial benign intent, the coming crypto regulation will pave the path forward to BIS General Manager Augustin Carstens’ stated CBDC control.     

1 Comment

  1. Jonathan Doyle

    Another great post Mike! I spent some time a few months ago on training runs listening to a deep dive into Tether. I kept thinking it was beyond belief something like this could actually happen in the real world. It seemed almost like a college prank or dare that got out of hand. Keep up your good work.

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