{"id":67392,"date":"2021-05-31T06:53:12","date_gmt":"2021-05-31T10:53:12","guid":{"rendered":"http:\/\/stateofthenation.co\/?p=67392"},"modified":"2021-06-08T08:28:59","modified_gmt":"2021-06-08T12:28:59","slug":"bitcoin-the-biggest-pyramind-ponzi-fraud-in-world-history","status":"publish","type":"post","link":"https:\/\/stateofthenation.co\/?p=67392","title":{"rendered":"

BITCOIN<\/span>: The Biggest Pyramid-Ponzi Scheme in World History<\/strong><\/h1>"},"content":{"rendered":"

The Bit Short: Inside Crypto\u2019s Doomsday Machine<\/strong><\/h1>\n

By Crypto Anonymous<\/p>\n

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This is the story of a Bitcoin trade \u2014 the most financially impactful trade I\u2019ve ever made in my life. It\u2019s also the story of the deep-yet-frantic investigation of the crypto ecosystem that led me to\u00a0make<\/em>\u00a0that trade. And it\u2019s the story of what\u2019s really going on in crypto \u2014 and what we should do about it.<\/p>\n

If you own meaningful amounts of cryptocurrency or you\u2019re considering buying some, you\u2019re the reason I wrote this. Please do read to the end.<\/p>\n

Prologue: Tether & company<\/h1>\n

Before I begin this story, there\u2019s a bit of background you need to know first.<\/p>\n

Ther<\/span>e are things in crypto right now called\u00a0Tethers<\/strong>. To simplify a bit, Tethers are issued by a crypto company called\u00a0Tether Ltd.<\/a>\u00a0\u2014 meaning that if Tether Ltd. says you own a Tether, then you do.<\/p>\n

Tether Ltd. also says one Tether is worth exactly one US dollar. Can they do that? Well they say they can, because\u00a0they hold $1 worth of assets for each Tether<\/a>. But are those assets\u00a0actual<\/em>\u00a0dollars?\u00a0No, they are not<\/a>. So what if the assets go down in value?\u00a0Don\u2019t worry; they will not<\/a>. Okay, but can we at least see the assets?\u00a0No, you may not<\/a>.<\/p>\n

Who in their right mind would\u00a0use<\/em>\u00a0something like Tether? Well, the short answer is that many people use Tethers to buy Bitcoin and other cryptocurrencies. The long answer, though, is\u00a0astounding<\/em>\u00a0\u2014 but more on that later.<\/p>\n

Because Tether sounds exactly like a currency fraud, it may not surprise you to learn that Tether Ltd. is\u00a0currently under investigation<\/a>\u00a0by the Office of the Attorney General for the Southern District of New York. That investigation was announced to the public on April 25th, 2019.<\/p>\n

The trade<\/h1>\n

Now fast-forward one year. In March of 2020, I bought a large amount of Bitcoin. At the time, I saw a market dislocation and the likelihood of significant dollar inflation due to the US Government\u2019s likely response to the unfolding pandemic.<\/p>\n

I suspected Bitcoin would be inflation-resistant because of its enforced scarcity. To the extent that I thought about Tether at all, I remembered the OAG\u2019s investigation, assumed Tether was now old news and would surely have been pulled from the markets, and dismissed it as a factor in my buying decision.<\/p>\n

That was a huge mistake.<\/p>\n

The HODL<\/h1>\n

For the rest of 2020, my inflationary thesis looked right. Unrest in the United States, combined with anticipated high levels of lending and consumer spending post-pandemic, seemed likely to fuel substantial USD inflation in real terms through the end of 2021. During the same period,\u00a0Bitcoin was becoming increasingly scarce on a secular basis<\/a>.<\/p>\n

The market appeared to agree with my thesis. My Bitcoin position doubled in value, then doubled again. By the end of the year I was sitting on a 600% gain, and decently wealthy in nominal dollars.<\/p>\n

I had intended to hold my Bitcoin for the very long term \u2014 it never even crossed my mind to sell it, regardless of its day-to-day price variations.<\/p>\n

And then, in early January, a forum post caught my eye.<\/p>\n

The shock<\/h1>\n

On January 8th, I saw\u00a0this post<\/a>\u00a0on Hacker News about Tether manipulating the price of Bitcoin. That shook me: I\u2019d assumed Tether had been purged from the crypto markets, yet apparently it was still around. But how much Tether could there really be in the crypto markets? Surely not that much.<\/p>\n

Still, I took a look. The answer, I was surprised to see, was\u00a0a lot<\/em>:<\/p>\n

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Source: Coinlib\u00a0BTC<\/a>.<\/figcaption><\/figure>\n

The left-hand side of this chart shows which currencies are flowing\u00a0into<\/em>\u00a0Bitcoin (that is, are being used to buy Bitcoin) across all crypto exchanges. The right-hand side shows which currencies are flowing\u00a0out<\/em>\u00a0of Bitcoin (that is, that Bitcoin is being used to buy). The chart is showing typical numbers for early January 2021.<\/p>\n

The upshot: over two-thirds of all Bitcoin \u2014 $10 billion worth of it \u2014 that was bought in the previous 24 hours, was being purchased with Tethers.<\/p>\n

What\u2019s more, this pattern wasn\u2019t unique to Bitcoin. I saw the same thing for all the other popular cryptocurrencies:<\/p>\n

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Source: Coinlib\u00a0ETH<\/a>,\u00a0LTC<\/a>,\u00a0ADA<\/a>, and\u00a0BCH<\/a>.<\/figcaption><\/figure>\n

It seemed I\u2019d been wrong to dismiss Tether. Tether wasn\u2019t just\u00a0in<\/em>\u00a0the crypto markets \u2014 Tether\u00a0was<\/em>\u00a0the crypto markets.<\/p>\n

The panic<\/h1>\n

This worried me. Most of my wealth was exposed in the form of Bitcoin, and Bitcoin seemed like it might be exposed to Tether. And Tether\u2019s issuing company was under active investigation. I urgently needed to find out if this risk was real.<\/p>\n

I cleared my schedule and started digging. Right away it was obvious that if Tether flows were partly or wholly fraudulent, that would have a significant effect on the correct market price of Bitcoin. (Even though $10B of Tether flows only constitutes 1.4% of Bitcoin\u2019s $700B nominal market cap, all that really matters is what fraction of Bitcoin\u2019s\u00a0daily buying volume<\/em>\u00a0Tether accounts for \u2014 and\u00a0that<\/em>\u00a0number is closer to 70%.)<\/p>\n

How could I find out if Tether was fraudulent? One quick proxy might be what kinds of exchanges it traded on. I knew that some exchanges, like\u00a0Coinbase<\/a>, used solid due diligence to curb money laundering, while many other exchanges weren\u2019t as well-run. Was there a pattern to which exchanges supported Tether and which didn\u2019t?<\/p>\n

There was. Here\u2019s how crypto trades flow through Coinbase Pro in a typical 24-hour period:<\/p>\n

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Source: Coinlib\u00a0Coinbase Pro<\/a>\u00a0data.<\/figcaption><\/figure>\n

Notice that the money going\u00a0into<\/em>\u00a0crypto is almost all dollars, Euros and British pounds \u2014 currencies that are subject to rigorous controls by their countries\u2019 respective authorities.<\/p>\n

And here are the flows of crypto trades through\u00a0Binance<\/a>,\u00a0Bit-Z<\/a>, and\u00a0HitBTC<\/a>\u00a0\u2014 the\u00a0three biggest crypto exchanges<\/a>\u00a0in the world by nominal volume:<\/p>\n

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Source: Coinlib\u00a0Binance<\/a>\u00a0data. (Note: Excludes\u00a0Binance US<\/a>.)<\/figcaption><\/figure>\n
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Source: Coinlib\u00a0Bit-Z<\/a>\u00a0data.<\/figcaption><\/figure>\n
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Source: Coinlib\u00a0HitBTC<\/a>\u00a0data.<\/figcaption><\/figure>\n

The pattern was obvious. Practically\u00a0all<\/em>\u00a0the crypto sold on these three exchanges was being bought with Tethers. None at all was being bought with USD.<\/p>\n

And the volumes were huge. Coinbase Pro is\u00a0responsible<\/a>\u00a0for around $4B in crypto trades each day. But Binance\u00a0alone<\/em>\u00a0accounts<\/a>\u00a0for over\u00a0$50B<\/strong>\u00a0worth of crypto volume, and\u00a0each<\/em>\u00a0of the other two exchanges is bigger than Coinbase.\u00a0Most of the crypto that gets bought each day, is getting traded for Tethers on those three exchanges<\/em>.<\/p>\n

Binance, Bit-Z and HitBTC are \u201cunbanked\u201d exchanges. That means they don\u2019t have direct access to the US financial system \u2014 most likely because no US institution is willing to serve as their\u00a0correspondent bank<\/a>\u00a0domestically. (Binance US<\/a>, an affiliate of Binance, does allow dollar purchases. But its daily volume is only\u00a010%<\/a>\u00a0that of Coinbase \u2014 and less than 1% that of its offshore counterpart \u2014 so its effect on the crypto markets is negligible.)<\/p>\n

It\u2019s hard for crypto exchanges to get banked, but Coinbase, Bitstamp, and several other high-quality exchanges manage it by maintaining strong know-your-customer (KYC) and anti-money-laundering (AML) controls internally.<\/p>\n

But what I found most alarming was that\u00a0neither<\/em>\u00a0of the two most reputable USD-banked exchanges \u2014 Coinbase and Bitstamp \u2014 supported Tether trades\u00a0at all<\/em>. If Tether was on the level, there\u2019d be no reason for them to forego the fees on that trading pair \u2014 unless their risk and compliance departments had deemed the token too much of a liability to carry.<\/p>\n

The deep dive<\/h1>\n

By now, I was concerned that my Bitcoin position might be too risky to hold. But I still needed more evidence before I unwound such a big trade.<\/p>\n

I had to get more context on Tether \u2014 context that was as free of marketing distortion as possible. I found what I was looking for in the\u00a0case docket<\/a>\u00a0for the New York OAG\u2019s ongoing investigation of Tether Ltd. (Note that the inquiry\u2019s respondent is listed as \u201ciFinex Inc., et al\u201d rather than \u201cTether Ltd.\u201d on the docket, for reasons that aren\u2019t worth getting into here.)<\/p>\n

I\u2019ll skip most of the content \u2014 I strongly urge you to review the files for yourself \u2014 and just list the three biggest takeaways that jumped out at me:<\/p>\n