Translations: German 🇩🇪
Audio by @DelioPera
Is Tether backed? Is it a scam?
Are they running a fractional reserve?
Will its value go to zero?
Will Tether be regulated out of existence?
All these questions have one answer when related to Bitcoin adoption and demand – “I don’t care”. They can all be true, and I will explain how it’s irrelevant.
To do this, no data or research is required, because I’ll assume the worst: “Tether is created out of thin air and has no US dollar backing.” Ultimately I am assuming that in addition to the trillions of dollars created out of thin air via fractional reserve lending, and “printing” by The Federal Reserve, some more billions of dollars were created via a derivative, Tether.
And we’re going to assume that ALL of the new Tether created was used to purchase Bitcoin and “artificially increased demand”.
You would agree that counterfeiting money and purchasing bitcoin is effectively theft, right? Who loses? The people who sold their bitcoin for fake dollars (Tether) haven’t lost anything until the moment the Tether they’re holding is no longer spendable (I’ll come to that later). If they spend the Tether, then they will be unaffected – whoever is holding the Tether when it collapses is the one that loses.
What about the thief? They acquired something valuable – bitcoin. They are either going to hold it, or sell it – and the two scenarios, plus another, need exploring.
- The thief sells the bitcoin
If the “stolen” bitcoin is sold for dollars, then that is an equal-and-opposite force to the “fake demand” people are complaining about. The price would have been pushed up with Tether, but then back down when sold by the thief. This partially debunks the criticism of fake demand. But there is an alternative situation, next:
- The thief keeps the bitcoin
In this scenario, bitcoin has been purchased with fake money, pushed the price up, and then not sold, so the price has maintained the increased level. The price stays high because the thief VALUES bitcoin, and is choosing to keep it instead of acquiring dollars. It is a LACK OF SUPPLY, which, economically has the same impact on price as DEMAND.
- What about the people who bought “stolen” bitcoin with Tether?
Here, the original thieves (Tether company) sold Tether tokens for US dollars to the public. So really, the bitcoin they end up purchasing came from dollars (real demand). The thieves are now holding stolen dollars and either kept the Tether, or even purchased bitcoin. Ultimately, wealth has been taken from everyone who uses dollars (inflation) and given to Tether company (counterfeiting).
“But there’s more money in the system and that’s why the price of Bitcoin has increased”
Correct! Inflation of the money supply, USD (unbacked) or Tether (assume unbacked) is why bitcoin, a money with a fixed supply, will increase in price against fake money. Remember that Tether is a tiny drop in the ocean compared to dollars in existence (also fake money).
The contribution of Tether to the increased USD price of bitcoin is not how much bitcoin was purchased (stolen), but what fraction of Tether exists compared to dollars. Some sources say the US dollar market cap is 80 trillion. And some sources say the Tether market cap is 65 billion. So, mathematically:
…the force, at equilibrium, that Tether applies to the dollar-bitcoin exchange rate is 0.08125%. “Show your working”:
= [65B/(65B+80T)]x100
= [65,000,000,000/(65,000,000,000+80,000,000,000,000)] x 100
= 0.08125%
This value is lower than the spread, and trading fee, on most Bitcoin exchanges.
“When Tether collapses, Bitcoin will crash because the fake demand will disappear”
The existence of Tether is not current demand – it is just “paper” wealth held by some people. You can argue it was created earlier and pushed up the price of bitcoin, but I explained that the price should come back down when the thieves liquidate the stolen goods for dollars, and if they haven’t sold, then they value, or demand, bitcoin – that demand is not fake.
When Tether collapses (it’s inevitable), that does not mean that the stolen bitcoin is going to be dumped (it might, though). The thieves who hold bitcoin, or anyone who acquired Tether and bought bitcoin will continue to own that bitcoin. They don’t necessarily automatically have the incentive to sell just because some people lost their “money” – although, with any bad news, gambling on fear can push the price lower temporarily.
If that’s hard to accept, think about this – When the US dollar collapses, will bitcoin be worthless because the “fake US dollar demand” disappeared?
On-chain or Lightning