The Truth About Tether & The Question Nobody’s Asking

Overview:

The negativity surrounding Bitfinex and Tether is in the “news” on a daily basis.  This has definitely put fear into investors, and has many analysts calling for a collapse.

I was reading one analyst’s concerns about Tether and then he lost me with his Bitcoin to $15 call.  Ok folks, let’s not get carried away here. 

The Truth is there are several red flags concerning Tether and Bitfinex to say the least.  To be painfully clear I am not an accountant and do not claim to be, so this is just my personal opinion.

The Audit:

The term “audit” is thrown around loosely when most of us are speaking in general.  To make it simple, there has been no independent 3rd party “audit” of Tether or Bitfinex for that matter.  At least that I am aware of.  Why does this matter?

Let’s say I am selling a business.  I provide my businesses tax returns to the buyer and their accountant looks at the numbers, checks the bank account, things match up we are good right?  NOPE! 

This type of “audit” does not provide a high level of “assurance” that the business is actually making the money I say it is.  This is pretty much taking my P&L at face value and does not provide any level of “assurance” that I did not “cook the books”.

Having an accountant go through two or three years of books, comparing deposits, payouts, receivables, and bank statements provides a much higher level of “assurance” that what I submitted on my Profit and Loss statement is accurate.  In simple words, this type of audit provides a higher level of “assurance”. 

We have NOT seen a level of “assurance” with Bitfinex or Tether.  So we can NOT be “assured” with a high degree of confidence that USDT is backed one to one with the US dollar.  PERIOD!

The Friedman LLP review was not an “audit” that provided “assurance” and they were clear about this in their disclaimer.  In the restaurant industry we call this a “Greek Audit”.  You are pretty much taking the word of the business owner that what is shown is correct.  No detailed review of statements, transfers, etc.     

What’s at Risk?

The top 25 exchange have a daily volume of about 4.7 billion.  This does not include the other hundred or so exchanges or the OTC market not to mention CBOE and CME futures contracts. 

There are also numerous large banks and brokerage firms entering the space and 400 or so Crypto Funds.  This does not inlcude a potential BTC ETF that eventually will come to fruition, nor the numerous mainstream exchanges like Fidelity that are entering the market.

Bottom line there is just too much at stake for the future of the space.  Too many large players have too much money at risk now.  It is not in the best interest of anyone to see Tether unravel the markets.  Imagine the fallout from a market collapse due to Tether.  Does this imply it will not happen?  No it does not.  We could see a collapse so this can not be ruled out, but there are some solutions.

Solutions:

1)  Expose Tether for being a fraud, and pretty much collapse the crypto currency space.  Wait we just said this was not a feasible solution. Interestingly enough I have not heard anything about the  CFTC subpoenas and the investigation seems to have gone on the low n low.

2) It is highly possible there are some closed door meetings.  We could see a bank like JP Morgan, GS or collaboration of banks and exchanges “buy Bitfinex out” cover the Tether, and operations resume as normal.  After all the CFTC has a reason to insure stability since Bitcoin Futures trade on the CME and CBOE.  A lot of connections between the CFTC the SEC and GS.   

3) Through market engineered trades slowly pull Tether out of the market retiring the currency.  Market engineered trades happen in regulated markets, so to think it does not in unregulated markets would be naive.  A very small percentage over a period of months would resolve the issue.

4)  IF there is adequate USD to back Tether it would be in Bitfinex’s best interest to keep up the conspiracy and buy back Tether at a discount.  Since Tether is trading at a 3-6% discount they would be buying back USD 94-97 cents on the dollar.  Two and a half billion at a 2% discount would be 50 million. Not bad for keeping the FUD going.

However if this is their intent, they can not keep the FUD going too long, as they would eventually lose traders as we saw recently.

Evidence:

Do we see evidence of any of these solutions?  Bitfinex recently purchased 680 million in USDT transferring it to the Treasury reducing the supply by about 30%.  Now sure they can use this for a pump and dump, but that falls right into engineering market trades.  

There was nearly 85 billion in trading volume the past month between the top 5 Tethered exchanges.  Very feasible to engineer trades to trim out 5% from the market.   This would more than cover the market cap of Tether.  Done over a couple three months this is reduced to around 1.5% a month or about half the fees they collect on trades.

The challenge is getting it converted to USD.  Well maybe this is not an issue.  They could simply retire or shred the USDT and Poof no more Tether issues.  After all we already see the emergence of Paxos, Gemini, USD Coin and several other USD pegged coins churning into the market.  They are already being used by many of these exchanges that depend on a coin pegged to the USD.  Interesting how fast they were integrated and how quick USDT is being retired to the Treasury, “allegedly”.  

Putting it Together:

IF Tether is a fraud, the bankers and exchanges have much to lose.  This starts with Bitfinex and Binance and goes to the heart of guys like Goldman Sachs and Pantera.   There is no incentive to let Tether fail, and all the incentive to make it work or bury it sand.  Eventually transfer it to the Treasury and retire it as at this point it is no risk to the market.

IF Tether is not a fraud, then Bitfinex is cashing in at a 3-5% discounted rate.  Why would there be any incentive for an audit if you are buying it back at a discount?

Now sure there will be someone that points out, that is not possible, this happened, blah blah blah.  Bottom line does anyone NOT think there is incentive to resolve a Tether issue?  In the end how they resolve it does not matter, that there is incentive to resolve it and that it gets done is the only thing that matters. 

The Truth About Tether:  There is a Vested interest in Resolving the Issue if There is One

Nobody knows whether Tether is a ghost or Bitfinex has the money in a bank somewhere.  We are simply making assumptions in a market that is unregulated and easily manipulated.  Quite simply there is no hard proof either way. 

Now this does not imply Tether can not be a house of cards.  It just might be.  However the top 12 exchanges use Tether for trading and it reaches farther than just them.  I would think they have a vested interest in the stability of the market in general.

I’m sure there are numerous other ways to resolve the issue, if there are issues, so Tether regardless does not have to be a House Of Cards.

The Real Question:

We could debate days on end about the liquidity of Tether.  Does a real bank account exist, who did what, what bank where, this wallet that wallet, and from this make, make invalidated assumptions.  It is like a bunch of Sherlock Holmes that want to know the Truth, but is this really helpful?  In my opinion, the important question that nobody is asking, is “IF THIS IS AN ISSUE CAN IT BE RESOLVED WITHOUT COLLAPSING THE MARKET?”

In my humble opinion, the answer is YES.  I mentioned several ways, and I am sure there are several more.    Do I have an opinion on whether there is 2.3 billion or zero cash backing Tether.  Sure like everyone else I do.  My personal opinion is it is likely somewhere in between.  They have some fractional reserves but not all of it.  

With that said I am not foolish enough to hold Tether here.  Why risk keeping your hard earned money on any exchange with exposure to a Tether collapse?  This is why I have personally moved coins off these exchanges and into my private wallet or Coinbase.  In the end it is always better to be safe then sorry.  I am willing to hold through a market collapse and at $15 I am a buyer.  

Bitcoin $15?  Get real!

5 Responses
  1. jlhequities

    If one considers all that has went down when it comes to the US shakedown of frauds, manipulation, investor protections etc etc. with the bitcoin market. And believe that high level officials in the US don’t know the situation of Bitfinex and an assumed 2.5billion dollar fraud would be not thinking clearly. I am pretty sure with the resources of the US govt, they probably know without a doubt the exact financial position Bitfinex is in with no accountant needed.

    1. Andrew Gonci

      Fair point yet the only things the US can do is freeze money transfers which may be the issue. They really have no jurisdiction over the company itself, just USD money transfers. With that said the point of the article was IF there is an issue with Tether, there are more reasons than not to resolve it. Do not forget the head of the CFTC SEC and Treasury are all GS guys. Mario Draghi is a former GS guy. GS has a lot of interest in the stability of Bitcoin and we never know what goes on behind closed doors. So I agree with you, and it is likely the reason for the subpoenas. Remember every fraud case starts with a subpoena. After the subpoena Wells Fargo dropped Bitfinex. This is why they likely used shell companies to access US banks. Unless it is cold hard cash the only way to hold USD in a foreign bank is through a US bank.

  2. jlhequities

    Then to assume the FBI and CIA or whoever inside the US govt are going to just sit back and allow a fraudulent 2.5 billion scheme to continue when Baakt is scheduled to come online is again not thinking clearly

    1. Andrew Gonci

      Thanks Yan for the comment. It is difficult to say, but I believe there will be multiple USD backed coins. There could easily be 3-4 coins that are market leaders, and as long as Tether is backed by USD and has a real audit it is clearly the leader and would likely remain.

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