[Cryptography] The Bit Short: Inside Crypto’s Doomsday Machine

jrzx jrzx at protonmail.ch
Mon Jan 18 22:33:22 EST 2021


On Monday, January 18, 2021 8:22 AM, Phillip Hallam-Baker <phill at hallambaker.com> wrote:

> If the numbers in the article are correct, Tether is responsible for the overwhelming proportion of money flowing into BTC and all other cryptos. As in 70-80%.

The numbers do not indicate the overwhelming majority of money flowing into crypto is tether.

Tether is an unregulated bank. Which claims to be practicing full reserve banking, but is probably practicing marginal reserve banking. And seventy to eighty percent of Bitcoin/US$ transactions are mediated by that bank.

Should that bank expire, they will likely be mediated by one or several of its competitors, of which there are no shortage.

Should that bank expire, the crypto markets will likely be no more inconvenienced that they were when that bank was disconnected from the US$ banking system.

When Ripple was cut off from the US$ banking system it died.

When Tether was cut off from the US$ banking system, nothing much happened, indicating that the center of mass of the world financial system is starting to shift from fiat to cryptocurrency.

> While the nominal value of crypto is enormous, the actual amount of cash that has flowed in is much, much, less and unlike with the subprime mortgage situation, crypto is not generally accepted for collateral outside the crypto world. So what we have is a Bernie Madoff sized Ponzi scheme about to collapse, not a more general situation.

It looks like tether has seventy four percent marginal reserve of US$ denominated assets, which is way short of the claimed one hundred percent, but makes it less of a ponzi scheme than the vast majority of marginal reserve banks throughout history.

(Though there is something fundamentally crooked about marginal reserve banking, because when it rains, it rains on everyone, and everyone tries to withdraw their money at the same time, and they cannot.)

And, if, as seems likely, it has been issuing unbacked tethers to buy bitcoin, that gamble has paid off mighty well.

If Tether is twenty six percent unbacked by dollar denominated assets, which it probably is, if Tether has been gambling its depositors money on bitcoin, which it probably has, that is not a hundred to one leverage. That is four to three leverage.

The collapse of a four to three leveraged position is unlikely, and if it collapses, will not have very dramatic consequences.

Tether is not a ponzi scheme, because it is not promising its depositors huge rewards, or any rewards. It is offering its depositors a way to move US$ around without the inconvenience of the US banking system. So no one holds tethers for very long.

Since no one holds tethers for very long (they are not an investment, but a medium of exchange ) few people would be greatly inconvenienced if they all vanished tomorrow morning.

No one, no one, is investing in tethers. So, if they implode tomorrow, scarcely a ripple.

> Young men, absolutely convinced that they know the truth and everyone else is a fool... Is that BitCoin or QAnon?
>
> The immediate trigger for the collapse may well be the news that $500,000 was transferred to 22 individuals in the US advocating far right causes ahead of the Capitol invasion. This has been atributed to a French person who committed suicide shortly after. But the FBI will be forced to dig deeper and make a federal case out of the whole affair because that is what they do. And the latest is that the FBI is investigating a Riley Williams who allegedly offered to sell Nancy Pelosi's laptop to Russia, reading between the lines BitCoin is going to feature prominently there.
>
> [gov.uscourts.dcd.226160.1.1.pdf (courtlistener.com)](https://www.courtlistener.com/recap/gov.uscourts.dcd.226160/gov.uscourts.dcd.226160.1.1.pdf)
>
> I for one am not going to defend crypto-currencies just in case end-to-end crypto is the next target in line. The idea we can stop terrorists using PGP is silly. The idea that we can stop them using a multi-billion dollar global financial system is not. PGP only requires two people to work. BitCoin requires tens of thousands to maintain the group hallucination that the 'money' has value.
>
> At the end of the day, that is the difference between BitCoin and Gold or USD. There are tens of thousands of people who are convinced that BTC has value, there are 5 billion who believe Gold and USD have value. Money is just a group hallucination but that doesn't mean it is an easy thing to create. The group hallucination supporting the value of gold is as old as civilization, possibly older. The USD group hallucination is centuries old. BitCoin is ten years, if that.
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