## Monday, February 05, 2018 ... /////

### Anti-tether hysteria and low speed of deflation of cryptobubble

Two proofs of a low IQ of the cryptocurrency "investors"

The first TRF blog post that contains the word "Bitcoin" was posted in November 2013 and the title said Bitcoin will probably keep on skyrocketing.

Superficially, that title looks like an amazing prophesy today but the devil is in the details. If you had wanted to use my "precious prophesy" to become wealthy, you needed lots of patience. The Bitcoin was worth $1,000 when I wrote that blog post and it would decrease up to the bottom near$200 or so in 2015. (The drop was mostly due to the collapsed Mt Gox cryptocurrency exchange – this kind of theft became so mundane in the cryptoworld that no one gave a damn when a much bigger theft took place recently in Japan.) So you would lose 80% in a year or two, before you had a chance to add more than one order of magnitude to the original balance.

Another blog post said that a $100,000 Bitcoin was possible – something I consider extremely unlikely now – but almost everything else written on TRF about the Bitcoin was negative (well, a comparison between the blockchain and quantum mechanics was positive, too). On November 1st, I wrote that the Bitcoin futures should stop the Bitcoin bubble and drive the price towards zero. On December 9th, I reiterated the point in more practical terms when I urged TRF readers to sell their cryptostuff. On that day, December 9th, the dear readers would have gotten about$17,000 for one Bitcoin. Pretty close to the peak near $20,000 – where only a tiny fraction of the people sold their coins. So I guess my December 9th recommendation seems priceless now, doesn't it? When I am writing this sentence at 5:35 Prague Winter Time, the Bitcoin price at GDAX is$7,300. The number is changing violently and I won't update the previous sentence. The motion has been mostly down since mid December. It's common sense that the drops are as dramatic as the increases. Most people dealing with this stuff are bubble-like momentum would-be investors who jumped in because the price went up, and they obviously tend to sell after the price has gone down. So their behavior and psychology acts to actively destabilize the price and drive it towards infinity or zero. Since mid December, the rational direction towards zero was dominant.

Despite the low volumes, the CBOE and CME futures were an important reason why the bubble stopped inflating. Lots of the other things I was pointing out – and that were constantly denied by the Bitcoin cultists – became plain facts. The percentage of the Bitcoin in the cryptocurrency capitalizations dropped to 35% or so – it was over 90% one year ago. So my and other sensible people's complaint that the Bitcoin may be scarce but Bitcoin-like coins may be printed in unlimited amounts which makes the Bitcoin increasingly irrelevant has become a fact. If you think that 35% is still a good enough approximation of 100%, I assure you that the number will keep on dropping. But the total cryptocurrencies' capitalization will drop, too.

Also, the governments and commercial banks started their crackdown against the cryptocurrencies, despite the denials that it was needed or expected, and lots of these bans and regulations have been effective, despite the Bitcoin cultists' denial that it's possible to ban such things at all. China has banned ICOs and trading at domestic exchanges. Today, it announced the ban on the usage of foreign cryptocurrency exchanges, too – so the Chinese government wants to ban all crypto-trading in China (some local small off-the-counter fish are being targeted, too). There are also plans to ban the mining where Chinese activists contribute over 80% now (I am convinced that most of them are mining at a financial loss now). Add South Korea with the ban on anonymous trading and trading by minors, India with the nearly complete ban, big U.S. and U.K. banks' ban on the purchases of the cryptocurrencies using credit cards, Facebook ban on cryptoads, Facebook investigation of Bitcoin ads that bypass that ban, Norwegian government's hiring of AI experts who will analyze (and effectively deanonymize) the blockchain, Merkel and Macron's plans to globally organize regulation at G20, and lots of other things that some people sort of follow just like I do.

It makes no sense to enumerate all these policies and plans and announcements in detail – the trend is clear: the governments have been slow but it's becoming fashionable among governments and traditional banks to go after the neck of cryptocurrencies. These aggressive policies will exponentially grow as if they were another bubble, one that deflates the previous (Bitcoin etc.) bubble.

The Bitcoin bubble could have deflated quickly, even through a one-second flash crash, but that's not what we're seeing. Instead, we see an extremely slow and frustrating death in which the cryptocurrency prices get halved every two weeks if not slower than that. Given the almost complete inevitability of the change of the general perception of the long-term trend – from up to down – it's sort of amazing that a larger fraction of the holders wasn't capable of selling a month ago when the price was still way above $10,000. I think it's a combination of the religious faith, wishful thinking, and simply low IQ of the holders. The bubble should have deflated much more quickly. The tulip bubble burst in days – despite the absence of 21st century technology in the 17th century Holland – and I think it proved that the tulip traders were far more intelligent than the Bitcoin traders. The Bitcoin or cryptocurrency bubble has been – and still is, to a large extent – the textbook example of the most stupid form of a bubble in which the stupidest possible get-rich-quick "investors" dominated the inflow of the money. Also, the Bitcoin price chart basically coincides with the textbook chart for the history of a bubble. I think that it's accurate to say that the Bitcoin investors are mostly the same people as some gambling addicts who haven't achieved anything and who turned the possibility of a big victorious lottery ticket into a meaning of their life. I think it's unlikely that the Bitcoin price will ever see$20,000 again. Too many people just want to get rid of it. Why did the bubble grow so insanely in 2017? Throughout 2017, the Bitcoin was an investment in which you were almost 100% certain – regardless of the price at which you bought in – that at most 2 weeks after you "invested", you were significantly richer than in the beginning. So it looked like a safe, very profitable investment in which you need at most 2 weeks of strong nerves. You don't even need to look at the price that you pay at the beginning – and indeed, almost no buyer cared.

Well, the Bitcoin has obviously ceased to obey this condition. Its price is at a 80-day low. So it's clear that you may need 3-month patience and a 60% loss in between if you want to get a chance of a profit, and it's not clear whether you can make make the profit, ever. So the people who have believed that the Bitcoin was a safe bet with at most 2 weeks of patience needed should rationally sell and they're just waiting for a better moment. New investors became less likely because the reliability of the growing Bitcoin bubble is much worse now – which makes the Bitcoin much less attractive to the get-rich-quick people. Most people who have wanted to invest have already invested. If someone didn't find the "reliable bubble" of Fall 2017 attractive enough, he will probably find the current dwindling Bitcoin even less attractive. So the current Bitcoin holders are already selling the hot potato to each other.

Although this is a reasoning trying to analyze people's thinking and emotions – and like Isaac Newton (after he lost a fortune in another bubble), I can understand the motion of the planets but I can't see into the human stupidity – I think it's a pretty safe bet that the signs have simply reversed and the Bitcoin is gonna deflate in a very analogous way in which it grew except that the sign will continue to be negative now. We didn't know the e-folding time but the recent month indicates that the deflation of the bubble will be as fast (or as slow) as the inflation was.

Tether hysteria

But I want to write about another meme spread among the mindless Bitcoin believers, the anti-tether hysteria. Tether is a crypto-version of the U.S. dollar. It's a coin that may be moved using a blockchain but the company that prints it promises that it's pegged to the U.S. dollar – it's the only major cryptocurrency that is an actual currency (because it's just a form of the U.S. dollar which is clearly a currency). The people behind the company are the same who control the Bitfinex cryptocurrency exchange. For the sake of simplicity, I will call the company issuing the tether coins "Bitfinex".

The Bitcoin cultists love to hate Bitfinex and the tether. Tether is fraud, it may make the Bitcoin collapse, it may be responsible for the inflation of the Bitcoin bubble in the first place, so when the tether collapses, so will the Bitcoin, and so on. Every single statement in this list and many others – mindlessly parroted by the Bitcoin cultists – is an absolutely irrational idiocy proving the presence of the vacuum in the Bitcoin community's brains.

The main (and very simple) point you need to understand is that for all market purposes, one tether is almost exactly the same thing as one U.S. dollar. It's just like a plastic coin that someone sells and buys for $1 and people understand that for this reason, it's possible to consider it an equivalent of the 1-dollar coin. Just click at the hyperlink in the previous paragraph; you may see that it's been between$0.98 and $1.02 at almost all times since the summer – and most of the time, the rate was much closer to$1. The tether is the actual cryptocurrency that people in Venezuela etc. should use if they really want some hard currency that avoids the governments and that is usable for daily payments etc.

Now, what is going on? Bitfinex just increases the total supply of the tethers whenever it gets $1 from somebody. Bitfinex is obliged to keep the exchange rate near$1 (although the precise conditions about the accuracy don't seem to clear to me) and it can only "strictly guarantee" this condition by having $1 in physical cash reserves (well, on some banking accounts) for every tether that has been printed. And they verbally promise that they have these "full reserves" and don't touch them. So even if everyone decided to sell their tether, Bitfinex could buy all of them for$1.

In this way, and if the peg were perfectly accurate, Bitfinex wouldn't do any profit. Bitfinex would act as a charity printing new dollar replacements for free. They probably want to make a profit. So it's possible that they're selling the tether when people are willing to pay $1.01 or$1.02 for them – which happens often when the Bitcoin price goes down and people need a safe haven. The tether is a fast currency and a safe haven where you may flee whenever the volatile cryptocurrencies go down.

OK, so Bitfinex could be seen as a non-profit NGO that prints plastic one-dollar coins and gets nothing for that job. In reality, the Bitfinex may make profit through the slight differences in the rate (where it buys and where it sells). On top of that, they may very reasonably believe that it won't happen that all the tether holders will want their real dollars back. For that reason, Bitfinex doesn't have to keep the whole reserves. They may spend a part of them – take them as profit. Or invest them into stocks. They only need to keep the reserve fraction which is equal to a "reasonably expected" percentage of the tethers that the holders will want to convert back to the U.S. dollars.

This business is unregulated but it's analogous to what normal banks are doing. Normal banks are also incapable to immediately pay all the deposits of savers if they decided to take the cash simultaneously. That's impossible because the bank couldn't make any profit. The deposits have been lent to some borrowers (banks make a profit out of the differences of the two interest rates) and those borrowers don't have to return the funds immediately. But civilized countries regulate banks and banks are obliged to be "safe enough". In practice, they need some fraction of the deposits in the liquid forms which reduces the probability that a bank run will make the bank go bust.

OK, Bitfinex is not regulated much, like the rest of the cryptocurrency industry, which some people consider an advantage but I, generally a foe of the government regulation, think that the regulation of the minimum reserves of a bank are damn good (they're basically just a legal protection of the clients against the banks' fraudulent pretending that they're safer than they are). Bitfinex vows to have the "full" reserves but many people don't believe them. I am agnostic. I can imagine they have the full reserves – because a profit may be generated differently, too (if they sold tethers for $1.01, 1% of the obtained funds would be profit, and that would still be$22 million now, not bad). But I can imagine that they only keep a fraction of the maximally needed reserves. They may keep a fraction that is common in ordinary banks, or a higher fraction, or a lower fraction, I don't know.

But what is clear is that the peg has worked so far which means that so far, the tether has been completely equivalent to the U.S. dollar. It's also clear that if the peg breaks heavily, it will prove that the claim about the "full reserves" was false. But the Bitfinex folks will be in big trouble – because they will have actually violated some commitments. In this sense, they differ from the issuers of the "scarce" cryptocurrencies who have no commitments at all.

Again, so far, the tether was just another version of the U.S. dollar. If you think about the motivation and economic reasoning of anybody, and if you neglect the 1% or so fluctuations in the tether-dollar exchange rate, there is absolutely no reason to distinguish the tethers from the ordinary U.S. dollars! Tether is just a one-dollar coin with a new picture on it. The difference between the tether and the U.S. dollar is purely cosmetic in character! Tethers are faster to be moved from one cryptocurrency exchange to another, and so on, but otherwise it financially is the U.S. dollar.

Yes, Bitfinex may have "insufficient reserves" and they could have turned a part of the reserves to profit. But that doesn't mean that the tether peg must break – just like the regular banks don't have to go bust soon because of their "not quite liquid" deposits for the savers. It's normal for Bitfinex to make a profit. At the end, it's a similar profit as the profit of those who issued "scarce" cryptocoins such as the Bitcoin.

A difference is that Satoshi Nakamoto only made the profit determined in the units of BTC at the very beginning when he mined the first million of Bitcoins or so. His wealth grows along with the Bitcoin price. On the other hand, Bitfinex prints tethers. They're not printed just at the beginning – new tethers are printed when new people want to buy them and will be printed in the future, too. So the total number of tethers grows – it's at $2.2 billion right now, which makes Tether the 14th cryptocurrency by capitalization. (It will be the #1 after all the volatile scarce cryptocurrencies collapse.) So Satoshi's wealth goes up because the initial mined Bitcoins become more expensive (their number in Satoshi's wallets is fixed). On the other hand, Bitfinex's wealth goes up when they sell new tethers whose price remained fixed in the U.S. dollars. The details are different but at the end, Satoshi and Bitfinex make a profit out of the same thing: the people's irrational demand for worthless records in the blockchain. When the Bitcoin cultists claim that it's a fraud to gradually print new tethers and treat a part of the obtained U.S. dollars as profit, while it's not a fraud for Satoshi to easily print (and acquire) millions of Bitcoins at the beginning, they show that their understanding of morality is completely irrational. Satoshi and Bitfinex have been morally doing the same thing, just at different times and with different formulae for the profit as a function of the behavior. They have sold worthless cryptocoins to others! Bitfinex is more ethical – their coin has at least some value, a persuasive enough commitment (enforced by Bitfinex if needed) that the coin will be worth$1.

Now, what is the relationship between the tether and the Bitcoin? A relationship is that the tether is a cryptocurrency so it's traded at exchanges such as Bittrex. It's the only "not fluctuating" cryptocurrency which makes it a safe heaven. When the Bitcoin price goes down, people sell them and buy the tether (USDT). They must buy them from someone else. But when the demand for tethers is high, the price in U.S. dollar could go well above $1, and Bitfinex uses it and prints some new tethers and sells them to some of the people who demand tethers, thus keeping the exchange rate near$1. It's simple.

It's totally obvious why the number of tethers in circulation grows whenever people escape Bitcoins and similar šitcoins. It's basic economics. People who don't understand this simple mechanism and look for conspiracy theories behind the simple relationship between the dropping Bitcoin prices and the growing tether supply are just financially illiterate morons. That includes basically everyone who considers himself a member of the Bitcoin community, plus a majority of the journalists who write about the tether.

What about the future relationship between the Bitcoin's and the tether's prices? Well, if people were rational, there would be none. The logic defining the values of both coins is totally different and independent. The Bitcoin is intrinsically worthless and derives its nonzero price from people's irrationality and mania in which they want to participate in a stupid bubble. On the other hand, the price of the tether is dictated by the promised peg to the U.S. dollar – and you could sell it for less than $1 if you have doubts that you will get your$1 in the future; or more than \$1 if there's a big demand because someone (the panic sellers of the Bitcoin) just finds the tether (a fast dollar) to be much more convenient than an ordinary U.S. dollar (and is willing to pay the premium for the speed).

So if one of these cryptocurrencies collapses, it should rationally have no implications for the other. After all, the Bitcoin cultists hate the U.S. dollar (or any currency whose money supply may increase by printing). So they should simply hate the tether to the same extent. It may be printed, too. After all, as I said repeatedly, one tether effectively is one U.S. dollar. Because the Bitcoin cultists claim that the existence of the U.S. dollar doesn't imply the death of the Bitcoin, it should be obvious to them if they had at least a glimpse of a brain – they don't – that the tether shouldn't imply the Bitcoin death, either.

The real "market" of the cryptocurrencies is dominated by irrational morons, however, and they don't understand anything in this logic. So it's of course possible that the most dramatic panic selling of the Bitcoin comes e.g. after Bitfinex is banned by some U.S. authorities (I don't believe that the tether will stop working due to natural causes – the Bitfinex folks would be in too much trouble that they may simply avoid, despite nice profits, because a relatively small fraction of the reserves is sufficient for the peg.) So if the tether and/or Bitfinex is banned, the Bitcoin may drop dramatically, but that won't be a rational reaction. It will be a proof of the stupidity of many or most holders of the Bitcoin.

Yes, the Bitcoins have been bought for the U.S. dollars but it's no different from the Bitcoins that have been bought for the U.S. dollars. Even if Bitfinex has spent a big part of the reserves and you call them scammers, the tethers that they have printed were used just like the U.S. dollars. If you call the devoured U.S. dollars in the tether reserves "stolen" or "counterfeit" tethers or U.S. dollars, they still behaved and behave exactly like any other tethers or U.S. dollars (as ex-president Klaus correctly said, there's no economic difference between clean and dirty money). The "stolen" tethers could have been used to buy fancy cars, too. If they were mostly used to buy the Bitcoins, it doesn't imply any special relationship between the Bitcoin and the tethers. If Russians buy lots of gold for roubles, it doesn't mean that the price of gold or the exchange rate of the rouble will collapse together, does it?

I don't really care about the existence of the bubbling cryptocurrencies. What drives me up the wall are the efforts of the Bitcoin cultists to hide that they're brain-dead and financially illiterate losers – and efforts of the numerous scammers in the cryptocurrency business to pretend that they're as good as prestigious banks if not better. I just hate when fools are pompous – when they're trying to pretend that they're more than what they are. And I hate when the society silently and sometimes explicitly okays these morons' and scammers' bullšit.