- Why Bitcoin has a thorny road to the bright future.
- Recognising the Lehman Brothers moment in crypto.
- Is Tether too big to fail?
By Gregory Klumov, CEO of STASIS
The new decade started with the hard promise of cryptocurrency domination. Digital assets have become more accessible and as a result, they’re no longer just for professional investors, but available to anyone who fancies their luck. However, such popularity brings considerable risk. Despite the huge army of professional developers, financial analysts, and legal experts, nobody really knows how to evaluate this new class of emerging assets. There is a vast difference between traditional finance and the crypto world: a lot of extensive tools and methods are available in the first case, such as multiplier methods in stocks, methods of cash flow discounts, and more. Then again in crypto, the market movements are mostly set by the global influencers and fuelled by the media headlines, so the higher the price goes, the more people join this rat race. There are no blueprints in this area, and no precise forecasts can be made. In circumstances when some assets accumulate an enormous amount of value, risks tend to multiply. It’s worth remembering the history of the last global market collapse to realise what may lie in store for crypto if we’re not careful.
The history of financial market decay
The ultimate juncture that led the world to significant financial decline during the first decade of the XXI century was undoubtedly the bankruptcy of Lehman Brothers back in 2008; the infamous climax of the mortgage crisis. The collapse of the 158-year-old Wall Street investment bank remains the largest bankruptcy in U.S. history, involving more than $600 billion in assets.
Back in the day, Hank Paulson, former secretary of the U.S. Treasury, called it “an economic 9/11.The world-wide bankruptcy triggered a 4.5% one-day drop in the Dow Jones Industrial Average, clearly signaling the point beyond the ability of the state to effectively manage the crisis and ignited a global financial panic afterward.
Within a couple of months of Lehman’s bankruptcy, though, a new groundbreaking technology debuted almost unnoticed - an unidentified individual or a group going by the name Satoshi Nakamoto published the Bitcoin white paper to a cryptography mailing list.
More than a decade after these events, after a year plagued by this global pandemic, a threat of a new global crisis is looming. We’re almost back to the baseline. However, many retailers and corporates have already been armed with new technologies to empower the struggle.
Beyond the system of the downfall
Very few people actually realise the benefits of distributed ledger technology and the defense mechanisms associated with it, so any rumor about “hacking Bitcoin” and the infrastructure around it will trigger a profit-taking panic. In the classic stock market, this is called weak hands, but it is mostly associated with the short-term credit lines on which speculation is carried out there. And in digital assets, FOMO provokes these “weak hands” to sell - since most of them do not fully believe in technology or understand it at a basic level. To put it bluntly: you have to be a network engineer and have a bachelor’s degree in cryptography to fully recognise the technology ins and outs.
In cryptocurrency markets, the rate fluctuations are extremely attractive for traders, however it is very problematic to catch the desired rate in trading even with today’s extensive set of tools.
The most popular asset - Bitcoin- enjoyed skyrocketing success in Q4 of 2020. This was thought to be driven by institutional investment flows and not retail like years prior. A popular and global delusion. But what’s the truth?
Corporations, big Forbes list firms, and high-net-worth individuals indeed joined the BTC adopters club - one can hardly miss the flashy daily headlines. But while many looked for the rising or decreasing figures, they missed seeing that this success is driven by some more stablecoin solutions, which is really far from stable actually.
It's common knowledge that Tether is the most used and a highly-controversial stablecoin at the same time. The largest currently USD-backed digital asset has on many occasions been labeled a scam throughout history and was even predicted to fail. It seems the time has come again.
Back in late 2020, it was recognised as a security under the Martin Act in a New York State appeals court order. Many cryptocurrency adopters, users, and journalists began making claims back in 2016 about controversial trading volumes and that reserves were being fabricated. By now, these insights have turned into a fully-fledged investigation by the US Commodity Futures Trading Commission and charges by the New York Attorney General. At the same time, the company faces accusations of using the coin to manipulate the price of Bitcoin.
Tether, so far, has proven impervious to these marks against it. At the time of writing, its daily trading volume exceeds $120 billion, its market capitalisation is almost $30 billion, and it has even beat Bitcoin as most-traded coin. Therefore, are there real grounds for rumors and despair?
DYFS licensed several stablecoin operators to issue their versions of dollars on-chain backed by the fiat dollars in custody. Definitely, it could be a misleading or controversial decision. If Tether is a security, then definitely USDC and PAX are securities as well, and everyone dealing with them should have a securities license too!
It’s safe to assume that panic selling of USDT will happen once the company behind it starts losing assets. Nobody knows what Tether is collateralised with currently - is it cash or crypto and in what proportions and how much is accessible to them now. Once the market realizes that there are not enough chairs in the room, everybody will rush to an exit while the music may stop. But it has to come from prosecutors taking over custody accounts of whatever Tether holds to back their tokens.
In addition to the blockchain's credit risk - a technological one, there is also a systemic risk: many products begin to work exclusively through Tether. When most of the derivatives will be backed by USDT - it turns out the Black Swan and this can have a significant impact on the crypto market - pretty much just like Leman Brothers in its time.
There are currently many connecting links whose risks are multiplied. Tether is currently becoming implemented in more and more blockchains and cross-chain swaps and an increasing number of derivatives around Bitcoin and Tether - which are not regulated - point to the rising probability of unfortunate events.
Is there any real risk that Tether tokens may "be removed'' from the cryptocurrency market soon? If anything happens, Tether is definitely too big to fail for cryptomarkets, for the only reason there is no transparency with its reserves. Maybe USDT is backed by Bitcoin - if it's not fiat, if it's crypto collateral, then there may be massive liquidation in crypto assets in all parts of the world. However, if anything happens to Tether, one should stay away from the cryptocurrencies for a while.
Shielding from the double risks
What’s clearly happening in the digital asset space right now is a systematic rise of risks. Many derivatives are packed in the very risky, volatile instruments such as Bitcoin and some altcoins, creating a double-risk situation. If such entities remain on the market, they should diversify their portfolios to different assets.
Transparency and audits are the key points to look for. Eventually, there will be not many players in this field. Since the advent of stablecoins, many world teams have been dedicated to this task. Most of them failed at the end of the day due as Stable Report data indicates that more than 150 stablecoins are either inactive or dead.
Many heavyweight players nowadays invest in Tether as a seemingly reliable stable asset. The concept looks too big to fall for the market. However, our latest history has proven that high excessive concentration of some value anywhere is dangerous. In modern market conditions, it leads to the current power balance situation, Cryptocurrency markets are entering a danger zone - when one asset becomes the backbone of the entire industry. No doubt, it's vital to distribute the risks rather than focus on them. More transparent stablecoins in the crypto are required to prevent possible issues in the future and prevent the collapse of the whole industry.
Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
By Gregory Klumov
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