Bitcoin is a Bubble

There is not a year in it’s existence that BTC has not spent time below $4k and I honestly think that 2021 will be no different. But will it go to $0 this year? Probably not – will it go to $0 at some point in the near future… unless there are some fundamental changes to it’s protocol and reward economics almost certainly chain death will eventually consume it and the skeptics will be proven correct.

The trouble for people making these calls though is the same one that John Maynard Keynes noted back in the day:

the markets can remain irrational longer than you can remain solvent.

There are many reasons why I think BTC is a fraud in terms of what it promises versus what it delivers, most center on the differences in ‘use case’ between what was described in the original BitCoin White paper versus the ‘digital gold’ narrative that dominates discussion today. Discussing these differences isn’t the point of this post, I’ll save that discussion for another day. While the validity of the use case fundamentally effects any question as to whether there is any inherent value in BTC or not, they are imho a much smaller factor in BTC’s current price today than the role that the stable currency ‘Tether’ plays.

Around $10 billion dollars worth of Tether has been printed since the 15th of January taking total issuance to around $35 billion – this is just under 1/3 of all the Tether that has been minted, and it was done over the past 30 days.

Why is the 15th of January note worthy? This was the date at which Tether had to submit certain documents in the NY AG case. This case is between the NY Attorney General and the Bitfinex group of companies of which Tether is one of the participants. Again, the details of this case are probably worth an entire comment or post on their own, however I won’t bother expanding on it beyond saying that part of the the NY Attorney General’s case is an accusation that Tether is being used to manipulate the price of BTC.

The NY AG case also included some some interesting BTC history involving MtGox and the infamous “Willy bot” which is very relevant to what is happening in the crypto space today:

99. Between 2013 and 2014, Mark Karpeles, the owner and operator of the failed cryptocurrency exchange Mt. Gox, implemented the Willy Bot to successfully manipulate bitcoin’s price from about $150 to over $1,000 in less than 3 months.

100. Before its collapse, “Mt. Gox was the biggest trading platform for bitcoin” and “was handling 70% of all bitcoin trading” worldwide.97 Mark Karpeles was its sole owner and operator.

101. On May 25, 2014, an anonymous trader posted a report titled, “The Willy Report: proof of massive fraudulent activity at Mt. Gox and how it has affected the price of Bitcoin.

102. The Willy Report provided detailed analysis of Mt. Gox’s leaked trading logs and concluded that someone had programmed a bot to buy 10-20 bitcoin every five to ten minutes*. The report concluded that this “enormously” affected the price of bitcoin and played a key role in its rise to $1,000.

*[Stewie: Willy Bot was actually discovered because MtGox went down for a period of time during a DoS attack. During this period of time no one could access or trade on MtGox, however during this time they forgot to turn off the bot and throughout the whole period the only trades being done were these automated buys.”]

104. The researchers observed that the “Willy account became active on September 9, 2013” and continued to trade until their data cutoff on November 30, 2013. Because Karpeles owned and operated the exchange, “Willy” never actually had to pay for bitcoin, but nonetheless bought “around 268,132 for just under $112
million” during that time period
. One passage captures their findings particularly well:

Separating the days on which Willy was active from those he was not, reveals a dramatic difference: In the case of Mt. Gox, the average USD/BTC rate increased by $21.85 on the 50 days Willy was active; it actually fell (by $0.88 on average) on days when Willy was not active. The same dramatic difference holds for the other exchanges as well. These results are striking and suggest that Willy’s activity could have caused huge jumps in the exchange rate on all of the exchanges.

106. The Willy Bot scheme underscores how control over an exchange and the opportunity to make trades with non-existent money allowed a single individual to dramatically influence cryptocurrency prices, even without sophisticated manipulation tactics like wash trading, match trading, and spoofing. The simple power to acquire cryptocurrencies with non-existent U.S. dollars interferes with the natural price discovery process and misleads market participants.

I’ll take that final statement again, “The simple power to acquire cryptocurrencies with non-existent U.S. dollars interferes with the natural price discovery process and misleads market participants.

This is the nub of the issue with Tether, the Bitfinex companies have the power to create no-existent USD dollars via their Tether proxy, that provides the liquidity to support and inflate, or more accurately, manipulate the price of EVERY asset within the crypto complex. Without true USD liquidity, there can be no true price discovery.

Since that chart was produced in November 2020, the supply of Tether has more than doubled from 16b to 35b and the price of BTC has….

Finally here is a weekly chart of BTC vs USD

Oops! That was actually a chart from the last Tether bubble back in 2017 – here is the current BTC chart.
Hard to tell them apart isn’t it

Edit: A final word of caution for this week:

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bjw678

My main point of contention with this article is you are firing at bitcoin when tether is the problem.
Bitcoin may have an inflated price but blaming that on bitcoin is the equivalent of complaining that someone stole all the gold from the Reserve bank, sold it and spent the proceeds inflating the price of the sharemarket and claiming the sharemarket is the problem. The gold should have been secured in the first place.

Frankly I find tether a rather curious concept that I see no use case for at all. It provides the ability to transfer $$ electronically, an ability I have had for decades and is now ubiquitous from my point of view within established banking system, but introduces a whole heap of additional third party risk of being able to redeem tether back into $$ at the agreed parity rate.

At least with a floating coin everyone understands what they are getting into. I suspect many really don’t understand the risk associated with tether.

Peachy

That gold theft analogy is a good analogy, bjw.

But it does still leave open the possibility that tether is nonetheless being used to pump Bitcoin (such that Bitcoin is in a bubble, through no fault of bitcoin’s).

On this possibility I did some very fancy quant analysis, which I presently attach forwith. On those numbers I’m not inclined to be persuaded that tether is doing much bitcoin pumping.

29BF4342-30AD-4731-8361-050E914DE8CF.png
Last edited 5 months ago by Peachy
Peachy

All this being said, by the way, I do feel like now might be a good time to take some profits.

bjw678

That is a sentiment I couldn’t argue with, but at the same time I wouldn’t sell all of it either.

Peachy

Oh and PS – I know that prices are set at the margins, etc, so it’s possible for a small set of transactions to have an outsized effect (one house sale revalues the whole street)…. but it just seems unlikely to me in these circumstances.

If it’s in a bubble, it’s in a bubble for other reasons.

bjw678

Tether is, in my honest opinion, actually a radically innovative idea – it is effectively the template of how CBDC will appear. 

Central bank digital currency or a legally accepted proxy has existed for decades. My salary has been paid in electronic AussieBankTokens my entire working life. They even have a convenient electronic exchange network that lets you extract honest to god physical AUD at a predefined fixed exchange rate, and another that allows easy transfer of these tokens to other citizens or shopkeeps.

A CB is by definition Centralised and therefore has no need of a decentralised system.

bjw678

Have you looked into the cost of maintaining a secure blockchain? These costs are hidden for the current blockchains but why would anyone be interested in running the CB’s chain for them?

bjw678

Buying hash is relatively easy compared to processing transactions, you just need to buy a more expensive Ant miner. Processing gigabyte transactions requires far more hardware and specialized software.

Wherever you got that idea from, it’s complete BS.
How many transactions do you think are processed currently in the EFTPOS system? Paypal? VISA?
The entire banking/eftpos system was processing on 90’s level computer hardware, probably a significant part of interbank stuff in the 70’s.
Listing transactions is the easy part of a blockchain. Making it so that they can’t be altered in the future is the hard bit, and is what the hashing is used for.

while crypto appears to be the wild West and it is in the interests of the BTC moon boys to promote that narrative, the fact is the miners live in the real world and are subject to legal enforcement.

Whose legal enforcement? International law really isn’t a thing. Individual countries could ban it but that is about the extent of what could be done. The US banning online gambling didn’t see online gambling stop.

bjw678

The issue with transactions on BTC blockchain is that it is a PERMANENT RECORD. Every transaction needs to be stored everywhere for all time. If you process 10,000 transaction a second on the block chain it becomes unmanageably large very quickly.
At current transaction rates the blockchain is 330Gb. What do you think all that data is?

The specialized hardware that existing transaction processors have is STORAGE SPACE, the one thing a public blockchain will always have serious limitations in.

bjw678

btc could easily achieve those processing speeds now, it is the size of the resulting chain that is the limiting factor, you trade one for the other.
At current transaction rate it chews up a large portion of a desktop computers drive, at 10x current rate it probably wouldn’t fit on a current desktop machine. That isn’t very practical for a public ledger.

Bitcoin’s Scaling Test Network (STN) broke it with block #14287 on February 3rd, 2021, which also happened to be almost 3.15 GB in size.

3Gb X 144 blocks per day = 432 Gb per day
x 365 days a year = 157,680 Gb per year.

Where are you planning on storing the blockchain?

Peachy

Ahem….

Say the blockchain is 400gb…. how much security would be sacrificed by taking only the last 100gb & building on top of that?

(Assume we are dealing with BTC, so a chain that attracts a lot of computing power)

Is that a brilliant Peachy Plan or what?

bjw678

Reasonably good plan, but imagine if there was some centralized server system that could process all these transactions and keep track of them, and then tell you if your transaction was valid or not when you asked, like say the banking system has been doing for the last 30+ years?
The ONE benefit blockchain technology provides is no requirement for a central authority. In any other case existing technology is a far better choice.
If the blockchain is too big for you to ever download and verify it is completely irrelevant what tech is running on the authority you trust to manage the transactions.
Most of the changes applied in the newer coins* are a solution desperately scrambling to find a problem.

*I don’t actually pay much attention in this area, as most seem to be people trying to justify some early adaptor gains for themselves in increasingly tenuous ways**.

**They probably could have still got BTC early adaptor gains for themselves if they hadn’t been so intent on proving how much smarter than satoshi they were***.

***I’m taking the p!ss now…

bjw678

Say the blockchain is 400gb…. how much security would be sacrificed by taking only the last 100gb & building on top of that?

For someone only interested in transactions relevant to them, rather than take the last XGb, you can store only blocks containing transactions relevant to the addresses you care about. This still requires you examine all blocks in the chain, and know the addresses you care about before examining blocks containing transactions on that address.
Doing this is no longer secure though and requires maintaining the whole chain in parts of the network to ensure integrity of the chain.

Edit: To clarify, If an address has transactions more than XGb ago then you would have no way to know if it existed at all or what it’s state was.
The blockchain is literally a list of transactions:
2 coins transferred to A from B.
1 coin transferred to A from C.
0.5 coins transferred from A to B.
You need the whole chain to obtain a valid picture by running all these transaction to the current state.
Something like say, a database that maintains a list of transactions as well as the current state of every address is a much more efficient way to store the data, if you trust the entity storing it.

Last edited 5 months ago by bjw678
stagmal

i genuinely dont understand bitcoin. so what utility does it have beyond being a speculative investment vehicle? do people buy drugs with it on the dark web?

Peachy

It’s like Monopoly money – tokens. But tokens that have been implemented using fancy technology that enables them to be sent online and their veracity guaranteed without any central authority.

There is a thousand other crypto tokens out there now, which may be technically better. But bitcoin was there first and is the best known, which is a big advantage.

bjw678

What utility does gold and silver bullion have, in the vast majority of cases?
Bitcoin gives you that in a much easier to store and transport package.
At least potentially depending on acceptance. Though if everyone stopped believing gold was valuable it too would become mostly worthless.

Coming

I don’t believe it has much utility either (small industrial and jewellery uses which are mainly irrelevant to the price)

It’s purely faith-based value

Which doesn’t make any sense, and doesn’t have to (see my religion example from yesterday)

But I don’t really see how you can effectively trade something that is completely illogical

bjw678

What utility does a piece of paper or plastic or metal with a number on it have? OR an entry in a Database run by a bank?

They all make it far easier to trade goods with others, assuming you can all agree on something.
Frankly I find the sharemarket bordering on illogical.
Why would you want to pay someone for their company if they no longer think it worth owning?

Coming

We’ve been through this before

Money is a manifestation of the power of the state

Taxes and fines are paid in money , which is what creates a demand

It is backed by the state’s monopoly on violence (don’t pay your taxes, go to jail)

The state chooses deflation or inflation through policy decisions of its central banking and treasury apparatuses

But it is always in control of which one happens

Coming

I think tether certainly was a scam, though it might no longer be

If you are creating USDT out of thin air to pump an artificial bubble , eventually the fomo infects people with actual money and they push the price up organically
Then tether can sell some of the BTC they bought with their printed money , and recapitalise and reestablish a 1:1 peg

In any case, why would one even bother to use tether to pump the price when all the exchange trades happen off the blockchain ?
It’s completely opaque, and the exchanges are completely unregulated
So there’s no reason why they couldn’t just record fake trades on the “ticker” that never actually happened (since there is no record on the blockchain of any coin changing hands)

I remember in the first bubble 2017 there was an amazing statistic from JP Morgan that only a tiny amount of actual money entered the crypto space but because of the relatively thin volumes it had a disproportionate effect on prices/market cap

I would love to see the current stats but can you tell me who actually buys fresh USDT ?
When they mint a billion or several hundred million a day who is allegedly transferring that money to tethers bank account ?
I’m sure it can’t be Elon musk or big investment funds who must surely have more efficient ways to buy
Is it Chinese who are banned from crypto ?

Last edited 5 months ago by Coming
Peachy

I’m guessing that *in theory* a whole bunch of people transfer (say) $10k from their bank accounts to their respective exchanges and buy tether (for whatever they need it for). Over time the exchange accumulates a bunch of USD (say $100m) and sends it to TetherCo in exchange for newly minted Tethers.

As some speculation:
There’s probably an aggregation/batching/netting mechanism that results in big round lumps being printed.

There are also probably kickback schemes for participating exchanges (reverse seigniorage?) whereby it probably only takes $99m of client money to get $100m of Tether issued too then…

Coming

I don’t trade crypto so I don’t know how most real money gets on-ramped

But I don’t see the advantage of using USDT to do so, when most of the exchanges have real world bank accounts

And when I’ve poked around I don’t know how a retail investor would actually go about buying from tether directly (which would be the only legitimate way for them to create new tethers)

From what I can vaguely gather , they only deal directly with “institutional clients” but that smells like bullshit

Peachy

There are some exchanges that are purely crypto-to-crypto, so you need to first buy something like tether to get into those.

Agree that “institutional clients” seems a lot like the curtain behind which the great wizard sits…

I also don’t like the sense that TetherCo has brought the banking business model into crypto-world. Then again, banks have existed for a long time, so it may be naive to expect them not to at least try to colonise the crypto space.

bjw678

There are some exchanges that are purely crypto-to-crypto, so you need to first buy something like tether to get into those.

The first question that pops into my head regarding those is “Why don’t they have bank access?”

Peachy

Why don’t they have bank access?

Suspect it’s much easier/quicker to launch an exchange without bank access (and take a spread on crypto-crypto transactions) than it is to build something that interacts with the banking system.

bjw678

That is certainly true,
But is that a positive or a negative?
Especially if you intend on giving them 10’s of thousands or 100’s of thousands of $$$ or equivalent you’d like them to give back at some point.

bjw678

So there’s no reason why they couldn’t just record fake trades on the “ticker” that never actually happened (since there is no record on the blockchain of any coin changing hands)

No, but if your exchange is offering more than other exchanges people will start arbitraging and selling coins at that price on your exchange. So either you buy it at that price, or real buyers buy it at that price, or the price drops back to the “real” price very quickly.
In the first 2 instances that is a real price, whatever the motivations of the buyer, and the last is obvious.

Coming

On the flip side, why would anybody sell on an exchange with a lower price ?

I don’t think markets would work like that
The arbitrage will compress the spread , not increase the profits for those doing the arbing

bjw678

exactly, but the exchange is trying to extend the spread with fake transactions.
Unless arbitrage is not possible those fake transaction really can’t extend the price very much, and they end up losing money on real transactions or the spread collapses.

Peachy

Looks like there was a very good sale on BTC in the last 12 hours.

I caught myself thinking whether Stewie’s post had perhaps slayed the mighty bull?! 😅