Tether
Guys, I've been telling you that if Tether (USDT-USD) were to collapse, it could bring a Bitcoin (BTC-USD)(COIN)(OTCQX:GBTC) Black Friday. Well, it looks like this is happening right now, so I want to explain what's happening.
First, Tether adds liquidity to the market, but it's based on a lie. They're supposed to have $2.5 billion in the bank, but do they? These funds are how they control the price of Tether, keeping it pegged to the US dollar. In other words, Tether should always be worth $1.00.
But, that is no longer the case.
Image Source: Coinmarketcap.com
The question many are asking is, "If Tether is collapsing, why is the price of Bitcoin suddenly going up?"
That is a great question, let's dig in.
Bitfinex
Dubious exchange Bitfinex is the largest shareholder (the owner) of Tether. Bitfinex does not force KYC/AML. They are hiding behind a shell corporation offshore so they can avoid having to follow these rules. However, there are still people in the USA using the exchange.
Let's suppose you are one of these people and play a little game. You trade on Bitfinex, which does not let you deal in US dollars. Instead, they give you Tether, their own form of digital cash which is supposed to be backed 1:1 by dollars.
You're trading away when you notice that the Tether price starts to drop. It's gone from $1.00 to $0.98 over the last couple days. People are getting nervous, and meanwhile, Bitcoin starts going up in price on Bitfinex. Then you get an email about "possible restrictions on withdrawals for some users." In other words, you might not be able to get your money out. What do you do?
The answer you should have arrived at is just dump your Tether for Bitcoin! And that's exactly what everyone on that exchange is doing, which has caused Bitcoin to trade at a $500 premium on Bitfinex over the price people are paying everywhere else.
Image Source: Cryptowat.ch
After I created this image, the price premium spiked to over $1,000 for a single Bitcoin.
That exchange called "GDAX" is now re-branded as Coinbase Pro (COINB). Look at the premium, yeesh!
Some users are reporting that they are able to withdraw funds but think about the implications of this. If people sell their Tether, then the amount in circulation should decrease, right? Because there's supposed to be a 1:1 dollar backing, and if you dump your Tether, you get $1 back, right?
Well, it turns out the number of Tether in circulation had dropped by almost 600,000,000 in the last eight days!
Image Source: Coinmarketcap.com
While all this is going on, the primary Bitfinex cold storage wallet has seen massive draw downs over the last month. Nothing says "cash crunch" like massive asset liquidations.
Image Source: bitinfocharts
It's not just withdrawals of Tether on Bitfinex that are having issues, even withdrawing on Binance is not an option.
Image Source: Bitfinex'ed on Twitter
And guess what? Bitcoin is trading at a premium on Binance, too!
Image Source: Cryptowat.ch
Since the time I wrote about this, operations on Binance (BNB-USD) seem to have returned to normal. But I know many people were very apprehensive during this time. Crypto investors are on edge, and this certainly didn't help.
Mt. Gox, anyone?
In the days leading up to the final collapse of Mt. Gox, Bitcoin was trading at a hefty premium on the site. This collapse kicked off the 15-month bear market starting in late 2013 and early 2014.
You can still withdraw fiat from Mt. Gox, you have to withdraw as yen though since they can't get USD banking." - 2013
Bitfinex's Banking Dilemma
Bitfinex lost their relationship with Wells Fargo back, but that's old news now. As they hop from bank to bank trying to stay afloat, it is already being reported that their relationship with HSBC is done after just about one week!
Apparently, a new bank has taken the stage from Hong Kong, called "PROSPERITY REVENUE MERCHANDISING LIMITED." Does anyone care to bet on how long this relationship will last?
Oh, and this new bank... it's four months old.
Source: Bitfinex'ed
Conclusion
Get ready for the dip guys, it's coming! Make sure you keep your crypto in cold storage and don't use shady exchanges. If you're on Bitfinex, get out now (if you can). If you own Tether, run for the hills.
Cheers,
Hans
This article was published first in Crypto Blue Chips.
Disclosure: I am/we are long BTC-USD, ETH-USD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
