Tether, the world’s most popular stablecoin, has boosted volume. Since January, $ 4.7 billion worth of tethers have been ushered into the Bitcoin ecosystem. Now there are nearly $ 9 billion Tethers in circulation.
Nearly half of all Tether released since October 6, 2014, when the dollar sign first emerged, has been created in the past five months. (If you look at a line graph of Tether issuance early this year, it will start to look like a jagged staircase, marked by small plateaus and vertical lines winding straight up.)
So what’s going on? Why do we need all these Tethers, and why such an apparent urgency?
The Bitcoin skeptic
A Bitcoin skeptic sees it as an ominous sign that real dollars in the crypto ecosystem – the network of exchanges, over-the-counter trading desks and other ways people trade crypto – are starting to disappear, being steadily sucked away by Bitcoin miners who pay monstrous electricity bills.
Miners “must sell BTC for real money,” Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, said, Decrypt. “Tether is a great real money substitute for those who play on the counterfeit stock market simulation, but cannot replace paying utility bills.”
Weaver, who considers the popular cryptocurrency primarily as a tool for criminal elements, has been investigating Bitcoin since 2011. His work is largely funded by the National Science Foundation. Last year he scolded crypto in a lecture called “Burn it with fire” at the Enigma security conference in California.
He also regularly tweets his criticism of BTC. “The problem is that miners don’t need $ Tether to pay utility bills, so the past few months have been a huge sucker because Tether replaced $,” he tweeted recently. “If $ goes to 0, the system will collapse.”
By collapsing, he means that the price of BTC falls to the point where “51% attacks become so cheap that Bitcoin is no longer usable”.
Tether is a virtual token pegged to the US dollar for the uninitiated. Exchanges, usually those with no links to traditional banking, use it instead of real dollars as a way to bring liquidity to the crypto markets and hedge against volatility.
A few things – more than a few – make Tether controversial. One is that it is operated by Bitfinex, a popular cryptocurrency exchange operating from Asia.
But the main bottleneck is Tether’s claim that Tethers (USDT) is 1: 1 backed by the dollar. No one is sure what is behind Tethers. No one ever said they were able to redeem Tethers, who is an I.O.U. for real dollars. (At least that was the original deal. Send them dollars and they would send you Tethers; return the Tethers and you’ll get your dollars back.)
The rules of the game changed over time. In April 2019, Bitfinex’s general adviser Stuart Hoegner admitted judicial documents that Tether was only 74% supported by “cash and cash equivalents”, which the theory that Tethers are increasingly beaten out of thin air. (Bitfinex is is being investigated by the New York Attorney General’s office.) He made that claim when there was only $ 2.8 billion in Tether in circulation.
Now that’s three times that amount.
Neither Stuart Hoegner, nor Tether’s communications department, nor Bitfinex responded to requests for comment.
What we don’t know
One of the most important numbers in crypto is undoubtedly how much cash is floating around in the system. That number is just as important as the number of Tethers. Both offer liquidity, making it easy to buy and sell BTC. Both help determine the price of Bitcoin. But only real dollars can afford the cost of running the network.
Of course, the number is almost impossible to determine. Crypto exchanges with banking (they are directly connected to banks or they use a shadow banking service, such as Crypto Capital Corp) are reluctant to share the information.
And over-the-counter trading desks, which trade crypto in large quantities, often operate behind the scenes. And that doesn’t even count near 8,000 Bitcoin ATMs on the planet, where individuals can buy Bitcoin for cash, often anonymously, in places such as cigar shops or convenience stores.
What we know
However, we can get an idea of Bitcoin’s cash situation by considering what we know.
We know how much new Bitcoin is entering the offer, based on the block reward. We know that the price of Bitcoin is determined by the total number of dollars in the system, which is a mix of both cash and Tethers.
And we know that Tether spends virtual dollars against a clip of $ 33 million a day for the past five months—A strong indicator that the level of actual cash in Weaver’s system is dangerously decreasing.
How much cash disappears from the system in energy costs? According to a estimate published by researchers at Cambridge University, the Bitcoin network consumes more electricity than a small country – what Weaver calls “obscene.”
Based on 5 cents per kWh, the Bitcoin network is expected to spend approximately $ 335,000 every hour, Alex de Vries, a blockchain specialist at Big Four accounting firm PwC, said, Decrypt. That means someone has to be there to buy nearly $ 8 million in new Bitcoin a day for cash – just to secure the system.
Those costs are now putting pressure on miners.
They earn 6.25 BTC in block rewards every 10 minutes. For $ 9,000 per BTC, that equates to $ 340,000 per hour. Right now, they have to sell every BTC they mine to pay for electricity costs. (Prior to the halving event on May 12, it was 12.5 BTC, so they earned more.) Average costs will drop to 2 to 3 cents per kWh between May and September, de Vrie said. That’s because passing 50% of Bitcoin mining is centered in Sichuan Province of China, which benefits from lower costs of hydropower in the wet season.
Electricity is not the only price miners have to bear. They have to pay for their installations, which can go up to $ 3,000 each and have to be replaced regularly as faster ASIC machines become available. They also have to pay rent, taxes, wages, and all other costs of running a business. All of these things have to be paid in real dollars or yuan, not Tethers, which results in a steady net drain of cash from the ecosystem.
Weaver claims that even if the miners hold on to their new BTC, instead of selling them right away, it still takes money out of the system. Because it decreases the supply of available BTC on the markets and increases the price of the BTC they do sell.
“Supply and demand must match to determine the price. If the offer is less, the price would go up, ”he said.
But aren’t there enough whales (big Bitcoin holders) to ensure there is no shortage of Bitcoins?
After all, they can arrange the offer and make whatever they want.
“Right, but you would see the whales move,” Weaver said. “Every whale shouldn’t keep its currency on stock exchanges, because that’s suicidal stupid.” He added, “Whale sales don’t affect the dollar supply. Dollars go in, dollars go out.”
It’s all Tether now
In 2017 – the last Bitcoin bubble – everyone and their university uncle or descendants bought cryptocurrency of age. A lot of cash flowed into the Bitcoin ecosystem. That wasn’t the only thing driving Bitcoin’s price, which hit a record high of nearly $ 20,000 in December of that year.
The bull run was also fueled by Tether, according to a June 2018 report by two researchers from the University of Texas at Austin. (One of them, John Griffin, is now funded by the Justice Department to investigate Tether through his company Integra FEC. Here is the contractIn 2017, approximately $ 1.4 billion was spent on Tether.
“Tether blew up the bubble, but there was still a net inflow of dollars into the system,” Weaver said. “Although the bubble was huge, there were people who bought Bitcoin.”
The latter price spike (the price of Bitcoin has risen 36% since the beginning of the year) is different. Now he said, “It’s all tied up.”
The question is, who is buying Bitcoin now? Where does all the money the system badly needs come from?
“I have no idea and that’s why I think it’s almost collapsing,” Weaver said. “The money is draining away at an amazing rate, and it has been supplanted by Tether. And of course, since Bitcoin is only safe when it’s expensive, a collapse would hopefully end this stupidity forever. “