Is the bitcoin exchange rate even on something?
In January of this year, the cryptocurrency Tether (USDT), “tied to the rate of national currencies such as American dollar, Euro and Japanese yen”, as it defines the Issuer has experienced the peak of an existential crisis. Many months before in the media and on forums have circulated rumors and suspicions about something fishy. Tether Limited, the company that issued the token, swore that on each released coin is one full dollar in the vault. However, in August 2017 on Hackernoon.com blogger under the nickname Bitfinex’ed began to ask uncomfortable questions about whether or not all the coins Tether provided dollars. If not, it came out that the coin is not tied to anything in principle.
In response, the Tether Limited has published a document, issued by a company that specializes in accounting, and confirming that all the coins issued secured cash. 27 Jan way Tether and auditor parted. And three days later Bloomberg reported that the activity of the Tether and an affiliated exchange has become the subject of investigation of the Commission on trade commodity futures (CFTC). The purpose of the investigation is to ensure that the manufactured Tether on market coins-provided dollars. (Still no charges had been filed.)
The attention of the regulator and the public to the cryptocurrency would not be as important, if not the system the importance of the Tether.
For currency, a competitive advantage which is the reliability, all these doubts became a reason enough investors pulled out.
But then something funny happened, namely there has been no-th-th.
Fuelled by the unwavering faith of cryptoendoliths, Tether continued on the path hand in hand with the dollar. The day when the Tether Limited refused the services of its auditor, the company issued coins for $600 million, increasing capitalization by almost half.
“If Tether everything was going well, then hell, they would have refused the services of the auditor wrote then Bitfinex’ed. — Because the effect of the dismissal of the auditor is quite serious. Interestingly, they still fired, but it turned out that nobody cares”.
The attention of the regulator and the public to the cryptocurrency would not be as important (some would say that it is typical for the industry as a whole since its inception), if not the system the importance of the Tether.
Now it is 10th largest by capitalization of cryptocurrency, but this fact hardly reflected its influence on the market. Tether is more than a cryptocurrency; it is the basic unit in which is calculated the rate of other currencies, including bitcoin. Pouring since mid-2017, on the market Tether is considered one of the factors that caused last year’s rally in the cryptocurrency market.
In June on the website Social Science Research Network published a study of professors of the University of Texas John Griffin and Amin Shams. The authors concluded that over half of the growth rate of bitcoin should be thanking poured into the market Tether. Models constructed on the basis of publicly available data on trading, “cannot be explained by investor demand”, they claimed. Professors believe that “Tether has been used for support and manipulation of cryptocurrency”.
The assumptions of Griffin and Shams – which no one has managed to refute, lead to a shocking conclusion: the basis of the entire cryptocurrency ecosystem, which now depend on the billions of dollars – not what it seems.
Investors learned that they just delegated Tether the right to print money, as does the Treasury of the United States, but without any kind of accountability. “If Tether could produce tokens that are not provided with Fiat reserves, it is, in fact, they just print $ cryptocracy”, — says the researcher of the University of Queensland’s Wong Chu Wei, who also studied the effect of the Tether on the cryptocurrency market. “If this is indeed the case, then Tether Limited authority no less than that of the Central Bank the power to increase the money supply and increase the price of the assets.”
To understand why Tether plays an important role, need to understand what place it occupies in the world of cryptocurrency. The blockchain allows traders to easily move the cryptocurrency between exchanges, without disclosing your personal data. Terrorists and criminals like this option, governments and regulators — did not like, so they develop and implement rules that increase transparency. As a result, now there are two types of cripture: some follow the stringent rules, others remain faithful to the old model, where everything happens faster and easier.
The first type, let’s call them “bankanytime” exchanges, maintains relations with the world of traditional Finance. Example — Coinbase, located in San Francisco, and allowing US citizens to buy bitcoins and other popular digital tokens, paying with a credit card, or exchanged for Fiat currency. Under the requirements of the Federal legislation, known as the “know your customer” (KYC), Coinbase requires verification of the identity of the user, the procedure involves downloading copies of the documents proving the identity.
“If you want to convert bitcoins into US dollars, without the traditional financial system you can’t do,” says Tyler Moore.
Of the exchange not associated with the banks, that is unregulated, ask less questions to the users and so most banks refuse to work with them. Bittrex, located in Seattle, allows users to exchange cryptocurrencies 274, but only available cryptocurrency pair. If you want to convert the crypto to Fiat, you need to translate it to the exchange, working with the banks, and sell it there to then withdraw money in dollars.
“If you want to convert bitcoins into US dollars, without the traditional financial system can not do,” says Tyler Moore, a Professor of cyber security University of Tulsa, studying of fraud involving cryptocurrency. This is the root of the contradictions between the world of traditional Finance, accounting, control and regulation and unlimited freedom characteristic of unregulated kryptomere. “These exchanges as black boxes, says Moore. — It can be argued that these markets we do not fully understand”. Hence the abundance of suspicions in various stock fraud and market manipulation.
Tether appeared in 2014 as a bridge between the wild world of cryptocurrencies and the usual and strict world of Fiat currency. It was assumed that its price will be stable due to the binding to the Fiat, but while being a cryptocurrency, the Tether will be able to penetrate to the farthest corners of the world economic system. Suppose you are trading on some obscure exchange in Kazakhstan and wish to maintain your profits in something stable, you can buy Tether. Then the Tether can be easily exchanged for any other currencies, then convert it to a regulated exchange to convert to Fiat and withdraw into the account.
What you probably will not be to do with the Tether, so it consider it as an object of investment. Unlike any other cryptocurrency, the explosive growth Tether does not Shine. It is designed in such a way as to not generate any profit. Buying Tether for $2.5 million last year, today you remain a happy owner of a Tether in the amount of $2.5 million Buying bitcoins a year ago for the same money, you could sell them at the peak, generated $18 thousand But even if you missed out this time and still own bitcoins, then sell them at the current rate, you will still get more than two times more than spent on their purchase.
The amount of Tether in circulation started to rise in early 2016, and by may capitalization grew to $2 million By the end of July reached $7 million.
Therefore, it is not clear why Tether Limited, Bitfinex or their investors to increase the number of coins Tether in circulation. Regular customers kryptomere can easily convert to Tether any cryptocurrency or leave it. But the appearance on the market of new coins Tether suggests that someone put in the vault the dollar, guaranteeing its value. The greenback is on account of without movement, without bringing any profit is in fact not even Deposit with some interest! Of course, they can use the collected coins Tether to invest in other cryptocurrencies. But Tether as such it does not need.
Sarit Markovich, Professor of strategic Department at the Kellog school of management at northwestern University, says that does not understand the motives for the creation of new coins Tether. “I don’t understand their business model,” she admits.
While Tether was growing rapidly. For the first year after its inception in 2014 it was a relatively small coin, virtually invisible on the radar, with a market capitalization between $1 million and the Number of Tether in circulation started to rise in early 2016, and by may capitalization grew to $2 million By the end of July reached $7 million and Then there was a long pause in the six months ending in early 2017: in February, the capitalization increased to $25 million, and in April has doubled.
Then began complexity. Company Wells Fargo has stopped cooperation with a Tether, making the 22 April statement, which said the following: “All incoming international transfers to the address of the Tether blocked… under the circumstances, we believe that the number of coins Tether did not significantly increase until these difficulties are not addressed”. Despite adjustments to the business plan, capitalization continued to grow exponentially, from $50 million in April to $440 million in September. Today it reached almost $3 billion.
Anyone outside of the office Tether is not known, provided this growth with investor dollars in the vault, or the company simply stamps the coin from the air. Analyst in the field of cybersecurity Tony Arcieri inclined to the second option. “Tether is used to create the visibility of existence of hundreds of millions of nonexistent dollars,” he said.
Tether responded, sending a magnificent letter: “We can confirm that the coins Tether is fully provided with allowance of US dollars.” On 20 June, the company released a report, compiled by the Washington law firm Freeh, Sporkin & Sullivan (FSS). The report stated that “the unencumbered assets of the company Tether as at 1 June 2018 exceeds the amount secured USD Tether coins in circulation”. However, the report was important caveats: “the FSS is not ready to assert that given to it by the company information — comprehensive” and “FSS is specializing in the accounting firm, and have not tested the above data in accordance with generally accepted accounting standards”.
However, let’s assume that the Tether does hold somewhere in the vaults of the $2.7 billion Where did the money came from?
Such reservations raise new questions. Whitepaper the company requires regular audits. Without them, anyone who buys a Tether, just take it on faith that the coin is provided. And the market would like to obtain credible assurance that the issued in the amount of $2.7 coins provided.
However, let’s assume that the Tether does hold somewhere in the vaults of the $2.7 billion Where did the money came from? The most harmless variant of the answer – some wealthy investors who decided to invest in cryptocurrencies, not bought the crypt directly for dollars, and decided to purchase a Tether to then buy the cryptocurrency.
Why they did that is unclear. As noted on Lawfareblog.com researcher computer science at the University of California, Berkeley, Nicholas weaver, “is just to believe in it, despite the fact that these unregulated exchanges many times was hacked, and users lost their funds.”
There is one answer – let’s say that these investors who invested in the Tether, due to some reasons could not buy crypt for dollars at a regulated exchange, for example, because their income was derived from criminal activity. Good old money laundering.
However, the worst for captainvalor answer is to assume that a company manufactures coins unsecured. That is, the Tether is used to buy cryptocurrency on it, then sell it, forming at the expense of profit reserves. This is assuming that the reserves actually exist.
In a sense, however, is not so important, are these dollars in the vault or not. The user agreement Tether in black and white that the company “does not guarantee that the “tesera” will be redeemed or exchanged for money”. That is, even if in the vault are money, buyers Tether to claim they can’t.
So, how much should one Tether? At the stage of formation of the new cryptocurrency, the answer was obvious: one coin is worth one dollar, and if you want you can easily exchange one for the other. Now circumstances have changed and you would expect that the rate of Tether will gradually change, like the Argentine peso, broken loose from the dollar and let in a single voyage. But this is not happening. Even when hundreds of millions of new “tetherow” poured into the market – a phenomenon of our own day rather humdrum – price Tether still tied to the dollar.
Looking unshakable stability of the Tether is critical to the stock market, because together with the increase in its capitalization and the growing volume of transactions in the cryptocurrency. Omnipresent Tether plays a key role in shaping the course of bitcoin. The course is formed as a weighted average bitcoin price on all markets where the transactions are done with him. Since the volume of transactions in the pair bitcoin Tether exceeds the volume of transactions in the pair of bitcoin dollar three times, it turns out that the final bitcoin price on the three parts formed by Tether and only one – thanks to the dollar.
The confusion and complexity of pricing of the cryptocurrency alarming investors, experts say.
And all would be nothing if the Tether was indeed the cryptocurrency equivalent of the us dollar. However, functionally it is a totally different currency. Dollars and Tether are traded on different exchanges and there is no apparent connection between them. There is no reason to consider them equivalent to each other. The only exchange where traded and the dollar, and the Tether is Kraken. However, Bloomberg not so long ago suspected that the crypto currency exchange fraud.
What CoinMarketCap has in mind when pointing the rate of Tether approximately $1 per coin? Fasten your seatbelts, we will now delve into the jungle.
USDT course, like any other coin or token on the website, is a weighted average based on the volume of trading on all the markets, says Luke Wagman responsible in CoinMarketCap for the content. Because the Tether, available in turnover, trading in pairs to bitcoin and other cryptocurrencies, the only way to Tether rate to the dollar is to divide its price in bitcoin on the exchange rate of this crypto-currencies to the dollar. However, the rate of the majority of crypto-currencies to the dollar itself, in turn, is derived from transactions in pairs with other cryptocurrencies in the first place with a Tether.
If you are a little confused… well, Yes, of course, confused. If we were in a room full of mirrors. The price of cryptocurrency is determined largely deals with the Tether, the price of which, in turn, is derived from transactions with the cryptocurrency, the price of which is mainly formed at the expense of transactions with Tether.
The confusion and complexity of pricing of the cryptocurrency alarming investors, experts say. “When we do not know for sure how is the price, it paves the way for manipulation,” says Rosa M. Abrantes-Metz, a Professor at new York School of business Leonard stern, studies the behavior of markets.
The formation rate of the Tether would be entirely self-referential process in which the Tether would be arithmetically determined as equal to himself, if there were no exchange crypt for dollars (and other Fiat currency). The fluctuation of exchange rate of bitcoin to these markets, without an accompanying change of exchange rate of bitcoin to Tether, I pushed the course last from the dollar. So when someone says that Tether is a dollar really mean that the price of bitcoin Tether on the unregulated exchanges corresponds to the price of bitcoin in dollars on exchanges adjustable. But there is no obvious mechanism to support this parity simply does not exist.
“As far as I can tell, the Tether is no built-in (in the code of the blockchain) stability mechanism,” — says authoritative researcher, who asked not to mention his name.
“This parity seems to me something very mysterious, as there are no reasons why the price should remain the same, agrees Professor Abrantes-Metz. – Under free trade the only way to maintain parity in price – to make regular intervention.” However, it is unknown who does it, and how.
Before that day comes, many will be happy with the influx of liquidity into the market, which provide large amounts of Tether. Not to mention the support of bitcoins and other cryptocurrencies.
“It seems a balance that depends on faith – says the same anonymous researcher. – You believe that you will always find someone who will buy you Tether a dollar per coin. If you believe it is, then, for you Tether costs $1 and that is the price you expect to get for it. This balance collapses as soon as people stop believing in the possibility of such exchange.”
David Weisberger, SEO provider company of data on the cryptocurrency market CoinRoutes, agree that the basis of parity Tether and the dollar is the faith that others believe in it. “It’s a self-fulfilling prophecy. Know it sounds silly, but the way it is. While this model works, people continue to use it, and while they use it, it works. While we have no opinion regarding the support Tether, but if it is not fully provisioned, and it becomes known the effect will be devastating. Those who will be on hand Tether, will lose”.
Before that day comes, many will be happy with the influx of liquidity into the market, which provide large amounts of Tether. Not to mention the support of bitcoins and other cryptocurrencies.
Skeptics believe that sooner or later Tether collapses, either due to the fact that the authorities get ahold of the authors of this model and the Bitfinex team, either because market participants lose faith in the Tether. For the realization of the second scenario will take time, says Sarit Markovich from school of management, Kellogg. “As soon as the first people ceased to trust Tether, others will follow, and so on to the point where everything will collapse”.
How bad could it be? Here is one of possible indicators: before tokens Tether poured into the market in early 2017 year, bitcoin was worth less than $1000. “If the market will panic, we will back to the price that they were before, admits Markovic. And it can affect all cryptocurrencies”.
If bitcoin will return to the levels preceding the period of rapid growth, it will lose up to 5/6 of their capitalization, i.e. the market will lose about $90 billion.
But things can be even worse. Many economists and experts in the field of cryptocurrencies are convinced that the market has evolved in such a bizarre way that no estimate of capitalization does not reflect its true state. The words of Brazilian scholar Jorge Stolfi in his letter to the Commission on securities and stock exchanges of the USA, “the price of bitcoin is completely fictitious”.
The original text in English here.