Monday, January 18, 2021

Of Tether, Bitcoin, Fraud and HOLY HELL

This morning the FT's Jamie Powell did the Further Reading post at FT Alphaville and put a "must read" note next to the first item.

I don't usually respond well to "must read", there's something about the imperious assumptive exhortation that makes me want to rebel (a little). So I moved on to a couple of his other suggestions, had a croissant, thought about crushing Google, Facebook and Twitter, the usual.

Then I circled back to Further Reading and,

From Crypto Anonymous at Medium, January 15:

The Bit Short: Inside Crypto’s Doomsday Machine

This is the story of a Bitcoin trade — the most financially impactful trade I’ve ever made in my life. It’s also the story of the deep-yet-frantic investigation of the crypto ecosystem that led me to make that trade. And it’s the story of what’s really going on in crypto — and what we should do about it.

If you own meaningful amounts of cryptocurrency or you’re considering buying some, you’re the reason I wrote this. Please do read to the end.

Prologue: Tether & company

Before I begin this story, there’s a bit of background you need to know first.

There are things in crypto right now called Tethers. To simplify a bit, Tethers are issued by a crypto company called Tether Ltd. — meaning that if Tether Ltd. says you own a Tether, then you do.

Tether Ltd. also says one Tether is worth exactly one US dollar. Can they do that? Well they say they can, because they hold $1 worth of assets for each Tether. But are those assets actual dollars? No, they are not. So what if the assets go down in value? Don’t worry; they will not. Okay, but can we at least see the assets? No, you may not.

Who in their right mind would use something like Tether? Well, the short answer is that many people use Tethers to buy Bitcoin and other cryptocurrencies. The long answer, though, is astounding — but more on that later.

Because Tether sounds exactly like a currency fraud, it may not surprise you to learn that Tether Ltd. is currently under investigation by the Office of the Attorney General for the Southern District of New York. That investigation was announced to the public on April 25th, 2019.

The trade

Now fast-forward one year. In March of 2020, I bought a large amount of Bitcoin. At the time, I saw a market dislocation and the likelihood of significant dollar inflation due to the US Government’s likely response to the unfolding pandemic.

I suspected Bitcoin would be inflation-resistant because of its enforced scarcity. To the extent that I thought about Tether at all, I remembered the OAG’s investigation, assumed Tether was now old news and would surely have been pulled from the markets, and dismissed it as a factor in my buying decision.

That was a huge mistake.


For the rest of 2020, my inflationary thesis looked right. Unrest in the United States, combined with anticipated high levels of lending and consumer spending post-pandemic, seemed likely to fuel substantial USD inflation in real terms through the end of 2021. During the same period, Bitcoin was becoming increasingly scarce on a secular basis.

The market appeared to agree with my thesis. My Bitcoin position doubled in value, then doubled again. By the end of the year I was sitting on a 600% gain, and decently wealthy in nominal dollars.

I had intended to hold my Bitcoin for the very long term — it never even crossed my mind to sell it, regardless of its day-to-day price variations.

And then, in early January, a forum post caught my eye.

The shock

On January 8th, I saw this post on Hacker News about Tether manipulating the price of Bitcoin. That shook me: I’d assumed Tether had been purged from the crypto markets, yet apparently it was still around. But how much Tether could there really be in the crypto markets? Surely not that much.

Still, I took a look. The answer, I was surprised to see, was a lot:....


Jamie just made up for a lot of his sins in prior lives. Must Read.