What Happens When the Tether Shit Hits the Fan?

#21 July 2018 : If crypto markets enter a new cycle then there will be a rush to open accounts at the popular exchanges. You can open accounts with these links and in most cases benefit from reduced fees: Binance, Bitmex.

The Tether Problem

A simple Sheet with Traffic Lights indicating the current status of the Tether problem as perceived by the market.

Green means relax. Amber means prepare to exit all of the crypto markets. Red means we’re all screwed.

Source: Blocklink.info

The Supply of Tethers at 27 November 2017 is $675 million. There are three questions.

A. Are these Tethers fully backed? i.e. Does Tether possess $675 m. of reserves?

B. If so, from where did they get these reserves? Because they sure as hell did not receive them from retail clients in payment for Tethers. Have the exchanges paid 675 m. actual dollars for 675 m. Tethers? If so they are horribly exposed to brutal losses.

C. If Tethers are not fully backed, what happens when the market discovers this and Tethers collapse?

TL DR

1. Confidence in Tether is as fragile as the plates in the picture. The cupboard door might open any moment, or stay closed for a long time.
2. When the market loses faith, Tethers will gradually lose a bit of value and then suddenly become worthless. (Hemingway: “How did you go bankrupt?” Two ways. Gradually, then suddenly.”) The USDTUSD exchange rate at Kraken will collapse, meaning a single Tether will buy just a few cents. (Kraken is the only exchange to offer a market for this pair.)
3. The phony USDT price of Bitcoin (and alts) at Exchanges using Tether will explode to ridiculously high prices. Noobs will think they are millionaires until they learn they are rich in Tethers but poor in dollars.
4. The genuine USD price of Bitcoin (and alts) at exchanges that have not integrated Tether will fall as experienced investors flee crypto into USD.
5. There will be a flight of Bitcoin from Tether-integrated exchanges to non-Tether exchanges with fiat off-ramps. Exchanges running fractional reserves will be exposed.
6. The Exchanges might slam the doors shut on Withdrawals.
7. The Exchanges own large balances of Tether (those figures include Tethers owned by their clients), especially Bittrex, Poloniex and Bitfinex, and they might become insolvent and many clients will suffer losses.
8. The Bitcoin market will take a massive hit. But this process will be a lancing of the boil and Bitcoin will emerge, eventually, cauterised and stronger.
9. Select and test your fiat off-ramp for getting fiat out of the system now, don’t wait for the crisis. Kraken is recommended for withdrawal of Euros which usually arrive in 24 hours.
10. How to trade this: Watch the Tether price at Kraken. Watch the Bitfinex Cold Wallet balance and flows. Watch for an emerging premium in the Bitcoin price at Tether exchanges. Watch the Bitfinex USD lending rate (is it spiking to disincentivise withdrawals?). When these indicators show the first traces of shit hitting the fan: Move BTC and Alts out of Tether exchanges if you have crypto there. Sell everything for USD. Move the fiat to your bank. Short Tether at Kraken.

Tether Exchanges refers to Bitfinex, Bittrex, Poloniex, Binance.

Non-Tether Exchanges refers to Kraken, GDAX, Gemini, Bitstamp, CEX. (Kraken trades Tether but crucially all assets are traded vs. fiat and clients can hold USD and EUR balances.)

Tether Will Fail

Almost every statement on the Tether website is false. The stated modus operandi is to create a Tether for every dollar deposited with them. At the time of writing (27 November 2017) there are 678 million Tethers circulating supply, so to be fully-backed Tether the company must possess $678 m. of reserves in its bank accounts. If it has less than that balance then it is running a fractional-reserve scheme. The moment the market concludes collectively that that is the case the value of Tethers will fall hastily.

A. Are these Tethers fully backed? i.e. Does Tether possess $675 m. of reserves?

B. If so, from where did they get these reserves?

It has been impossible for retail clients to deposit USD at Tether since 7 April 2017.

(In that Reddit thread User AtlasRand1 is Bitfinexed. User MrChrisJ is a Bitfinex guy.)

It is still impossible, on 23 November 2017, for retail clients to deposit USD to the Tether client bank account and buy Tethers and cause the issuance of Tethers because Tether refuse to reveal their USD bank account details. This is stated in their announcement on that date.

This is Alice in Wonderland stuff. I mean Kraken have their client bank account details published on their website like any regular business.

If Tether was kosher the Supply of Tether should have been frozen at a value of $55 million, its value on 7 April 2017.

Tether themselves stated the Tether Supply would be frozen in April 2017:

However the Supply of Tether has increased more than tenfold to $674 million with no corresponding deposits of dollars from retail clients. There have been substantial USD deposits to Tether bank accounts, as shown by the September 15 audit by accountants Friedman LLP ( **@**friedmanllp on Twitter) which testifies to a balance of $443 m. on that date. Report here.

Where the fuck did this this money come from? Is it from the OTC sale of Tethers to the Exchanges? (In which case the exchanges are highly exposed to a Tether collapse.) Is it unofficial loans from Bitfinex?

Kevin gets it.

Re-Visiting April 2017

How do I know what will happen when the Tether shit hits the fan? Because it has happened before, in April 2017.

Tether became untethered.

Tether was stable at parity to the dollar from its inception in March 2015 to April 2017. The Cato Institute made fools of themselves here.

When Tether and Bitfinex lost their Wells Fargo banking, I made this prediction on 18 April.

It crashed five days later on 23 April to 90 cents. (JP Koning is an eminent monetary economist and historian.)

The price of Bitcoin at Exchanges using Tether will explode to ridiculously high prices

As confidence fell in Tether, a premium in the price of Bitcoin emerged at Tether-integrated exchanges Bitfinex and Poloniex over non-Tether exchanges like Bitstamp, GDAX, Gemini..

The reason why seems obvious in retrospect. Anyway this guy explained it with great clarity on Reddit.

Andrew Hires, a brain surgeon, also spotted this:

Prices at Tether exchanges will go crazy like this:

There will be a flight of Bitcoin from Tether-integrated exchanges to non-Tether exchanges

This happened in April and it is happening again after the Nathaniel Popper article in the NYT.

Check out the Bitfinex Cold Wallet in April. Its holdings fell by 50% as people ran for the exit. The balance of BTC (blue line) fell by 50% from 141,000 BTC to 74,000 BTC.

Check it out right now!

How to Trade this?

Short Tether at Kraken.

Who is to Blame?

Your material wealth in crypto is likely to take a heavy hit when Tether implodes. Brock Pierce is responsible:

Read my Ten Rules for Trading Bitcoin, Ethereum and Other Cryptos