Bitcoin - An 'Untethering' In The Offing?
No smoke without fire, they say. And if recent reports are to be believed, Bitcoin is all set for its big 'moment of reckoning' - owing to, as it turns out, another cryptocurrency called 'Tether'.
Having witnessed a baffling rise to nearly $ 20,000 a month and a half ago on the back of rather obscure theories, the mysterious cryptocurrency has now pulled back more than 50% from its highs, dipping below $ 10,000 as I write this. A month ago, I wrote on why it's critical that Bitcoin settles into a more non-volatile price rhythm in order to become effective as a currency.
Back to Tether, then. In layman's terms, Tether is what you'd call a 'stablecurrency' - a type of cryptocurrency that's less akin to a roller-coaster ride and more like a fiat currency. Tether is pegged to the USD, effectively making it non-volatile - and hence, a lot more practical to buy and sell stuff with in the Crypto world.
Unlike banks which operate under the mechanism of 'fractional reserve', Tether's promise is (was?) that each Tether would be backed by an equivalent amount of USD held in reserves. On paper, this gave Tether holders the assurance that they could freely exchange their Tether's for an equivalent quantum of USD, whenever they so desired.
As it turns out, this may not be true after all. Word on the street is, Tether Inc. doesn't quite have USD 2.2 Billion in its reserve to match the total number of Tethers in circulation. Adding fuel to the rumours is the fact that Friedman LLP, the auditor appointed to verify these claims, has recently 'severed ties' with the company. Oops.
How does all this loop back to Bitcoin? In the form of an interesting hypothesis. Apparently, there's a direct correlation between the issuance of Tethers and the recent dips in Bitcoin prices. $850 Million worth of Tethers were issued in January 2018 alone. In other words, experts are now speculating that Tethers were 'printed' out of thin air, with no equivalent Dollars to back them up, to fulfil the ignoble purpose of artificially propping up Bitcoin prices. Another big oops!
To make mattes more interesting, it seems that the world is now debating whether Bitcoin is a 'currency' or a 'store of value'. To me, it seems a little late in the day to be doing that. After all, the cryptocurrency has risen 10X in the past year (even after its precipitous drop). And now we sit around trying to build theories on "why it's going up"? This looks like an extreme and dangerous example of curve-fitting to me. What if, just maybe what if, it is neither of the above?
If Tether does turn out to be a big old Ponzi scheme, it'll undoubtedly shake the Cryptocurrency world. At the very least, it'll have a very large section of Crypto enthusiasts questioning the basis of the recent rise in Bitcoin prices. What's going to happen next is anybody's guess, but I don't think it'll be too pretty. Right now, Bitcoin's fate hangs in the balance as the world awaits more clarity on the so called 'stablecurrency'. According to recent reports, the US Commodity Futures Trading Commission has subpoenaed Tether.
Bitcoin (BTC) one-year price chart
In the absence of clear fundamentals for Bitcoin, wannabe investors can attempt to draw inferences from technical trends which, as the chart above shows, don't look too rosy at the moment. In the presence of significant headwinds, the cryptocurrency seems to be making lower highs and lower lows since the start of the year. The trend could continue. Investors would be making a wise move by sitting on the side-lines and waiting for more clear trends to emerge.
