Behind the Bitcoin bubble – WSJ

At the time, Tether’s total value was around $ 2.7 billion, and its website claimed, “Each tether is still backed 1 to 1 by the traditional currency held in our reserves.” So somewhere there should have been $ 2.7 billion in real money – this is how a stablecoin is supposed to work. In November 2018, New York State Attorney General Letitia James invoked the Martin Act to open an investigation into iFinex, which owns Tether and the Bitfinex cryptocurrency exchange, “in connection with ongoing activity. who may have defrauded New York investors ”. The company disputed the attorney general’s allegations, denied misleading customers, and said it would fight any action. An appeals court last year dismissed its challenge to the investigation.

Bitcoin peaked at the end of 2017 at $ 19,000 and collapsed the following year at $ 3,200. Well, they are baaack! Elon Musk was the last to pump Bitcoin on Friday, which briefly hit nearly $ 38,000. And there are now some $ 26.4 billion in USDT tokens, of which $ 18 billion has been created since March 2020. Why the increase? No one has a good explanation.

All that glitters is not gold. In 2019, Tether subtly updated its claim that reserves “may include other assets and receivables from loans made by Tether to third parties.” Tether even admitted that it only has 74% of the cash or cash equivalents to back up its stablecoin. Hmmm. Basically not supported.

In October 2019, a separate lawsuit was filed against Bitfinex, claiming that the alleged market manipulation of the stock exchange “probably exceeds $ 1.4 trillion”, which Bitfinex denies. Yes that’s a trillion with a Bahamas-based Deltec Bank & Trust, where Tether has an account, recently claimed that “every link is backed by a reserve and their reserve is more than what’s in circulation.” OK, but it turns out the “reserves” may include an $ 850 million loan to Bitfinex. Is it hot air? Oh, and the reserves can also include bitcoin. Audit, anyone?

Don’t be careful: “Momo” investors have taken the plunge anyway. Bitcoin has gone from $ 7,000 in January 2020 to nearly $ 42,000 on January 8. But bitcoin bulls and bears are fighting. On Medium a few weeks ago, a poster named Crypto Anonymous (for what it’s worth, know your client) dug in and found that up to two-thirds of bitcoin purchases on any given day were purchased with a tether, although the crypto bulls insist Chinese crypto investors are using Tether to buy bitcoin. Try to verify this! The graph of bitcoin issuance versus tether issuance appears to correlate well, but a study published in the Center for Economic and Policy Research found no correlation. And I should note that wallet provider Coinbase, the largest holder of Bitcoin, says it “doesn’t support USDT”. Do they know something?

Meanwhile, more than two years later, the New York attorney general’s office may get the documents it needs. Hopefully that includes an audit of Tether looking for the $ 24.5 billion in cash right now, or even $ 19 billion if it’s 74% backed. I doubt all that money exists. The attorney general claimed in a press release that fish money, perhaps $ 850 million now part of Tether’s reserves, had been taken from Tether to cover Bitfinex’s losses. Yikes.

I contacted the attorney general’s office to ask them about the progress of the investigation and the information they received. I was shown the original file regarding the scope of the investigation. It includes an accounting of all Tether transactions. On January 19, a letter from iFinex’s attorney stated that she had “largely completed production of the document” and that she “would contact the court in about 30 days” with an update on her status. So we’ll know something soon.

Meanwhile, lo and behold, around the same time as this letter, Tether has temporarily stopped creating more currency. This could explain the rapid drop in the price of bitcoin in mid-January from $ 42,000 to less than $ 30,000. If fraud is discovered, look below.

Normally, I don’t care. Bitcoin is nothing, it’s steam, a concept of an idea. Transactions using Bitcoin are rare. It is not a store of value – anything that drops 30% in a week cannot play this role. But we have stories from Bloomberg Wealth saying, “Newbie Bitcoin investors tell us what made them buy at record prices.” Many people who cannot afford it can be seriously injured. Robinhood curbed some crypto purchases on Friday.

So all crypto eyes are in mid February. The power of summons is strong. I have no idea what the New York attorney general will find. She could close the investigation and continue on her way because there is no crime, or uncover a fraud that could make Bernie Madoff look like he’s stealing from a lemonade stand. We know what happens to bubbles when hot air is exhausted.

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