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That author is plain wrong and shows deep ignorance about bitcoin and the crypto-market.

An unsustainable price of bitcoin will lead to the collapse of other exchanges since people cashing out on these exchanges requires enormous amount of real money.

This will create a situation where the price of bitcoin in Bitfinex is higher than other exchanges by a big gap. This is not the case, actually the opposite is true: Bitstamp, Gdax, and Gemini prices where higher for substantial durations in the last few weeks.

You can only artificially pump the price to an unsustainable high for a very short period of time (2013/mtgox) or have this market restricted (no withdrawals/deposits, etc...). However, this is not the case. You can withdraw/deposit to bitfinex and their coldwallet shows 1.6bn usd worth of bitcoins.

TL;DR: The author fits the "butt-hurt" category, refuses to accept the reality and tries to find non-real argument for his hypothetical flash crash.

Disclosure: I currently hold no Bitcoin but some bitcoin cash positions. I also think the market is in a bubble. But a bubble with real people dollars flowing in.

Naive question: when an exchange sells, I assume they can decline to buy if they don't have a buyer or too much inventory?

For example, if suddenly everyone wants to sell BTC, the price would drop, at which point the exchange could buy the BTC at a much lower price, or not buy at all?

(unless they commit fraud, massively purchase BTC without having the actual money to back it, then not be able to wire money out of our accounts?)

The exchange doesn't sell/buy. It just connects the buyers/sellers. There are brokers that do that but you can't call them an exchange. I also think regulation prevent exchanges from trading on their own exchange to avoid front-running and since they have lots of information about the users/deposits/etc...

From coinbase TOS:

You acknowledge that the quoted Buy Price Conversion Rate may not be the same as the Sell Price Conversion Rate at any given time, and that Coinbase may add a margin or “spread” to the quoted Conversion Rate.

Coinbase is not an exchange, it is a direct seller. Gdax is the exchange.

Same TOS

I'm having trouble locating it but it is the same for Gdax except that it is individual market makers who make the spread and not coinbase itself.

Thank you for the clarification.

If that's in the GDAX TOS, it's an unnecessary disclaimer. The best Bid and Ask are by definition not the same price, otherwise one or the other order would have been at market and matched against the other, and there is always a non-zero spread between the two.

I like how they say "may add"... haha, they always add it! I assume they're talking about the GDAX order book but if you watch the live coinbase price data on tradingview.com and try to buy bitcoin on casebase at the exact same time, it's always a little higher on coinbase.com (about 0.5% higher from my experience). I wouldn't mind if they weren't also charging an additional ~4% fee on top of that.

So that's more fee than the worst wire transfer or credit card currency exchange?

Definitely more than a wire transfer, but I'm not sure where else to buy with a credit card at a lower fee. Buying instantly at a known price is much better than a wire transfer that comes through in 2-3 days -- who knows what the price will be when it comes through!

Thanks. Makes sense. I guess the "instant buy" on some exchanges gave me the impression that they kept coins in stock. (edit: I just saw the other comments regarding Coinbase, which answer that issue)

However I'm a bit confused by:

> An unsustainable price of bitcoin will lead to the collapse of other exchanges since people cashing out on these exchanges requires enormous amount of real money.

To cash out, other people need to buy, typically with fiat currency, so it's unlikely that their bank accounts would empty overnight? (assuming no fraud, bugs, not running the exchange at a loss, etc)

>To cash out //

Isn't the problem that an exchange can [pretend to] credit your account to the tune of $n million, use your bitcoin to sell for that amount, then keep/use the proceeds of the sale.

This is what traditional banks do with fractional reserve banking, except here the fraction of your bitcoin held is zero ;0).

Also, if bitcoin plummets you're probably not going to be happy when the exchange says "oopsies, our bad, that transaction failed, here's your bitcoins back".

>I also think regulation prevent exchanges from trading on their own exchange to avoid front-running and since they have lots of information about the users/deposits/etc...

hahaha, regulation. That is hilarious

Sound analysis! Quick question: what do you think is going to happen to BCH when coinbase unlocks users' tokens?

Most coinbase users withdrew their coins. I'm guessing they have way less than 100k BCH. Xapo recent dump of 25k in a couple days barely moved the price downed considering its volatility. I'm guessing we triple/quadruple from here by early next year. Don't take this as investment advice. I'm not responsible for your losses or your life.

ZeroHedge recently had an article posted here showing that there were just $6bn of actual inflow into Bitcoin go account for its $330bn market cap. Thoughts on that?

There's no reason arbitrage should push up the price of Bitcoin. Tether exists to normalize arb opportunities between exchanges. That's what it was created for. There is indeed a real question as to whether or not Bitfinex has issued more Tether than it has in reserve, or whether or not they will actually pay people out for their Tether tokens. But there is no 'arbitrage feedback loop' driving the price rise.

> Tether exists to normalize arb opportunities between exchanges. That's what it was created for.

What things are created for and how they actually behave often diverge.

Sure. Not claiming it can't have secondary effects. But there's no argument been presented that establishes that it does.

Does not the claim, that Tether is not actually backed by dollars, also double as an argument that it would be difficult for it to behave as intended? - i.e. to the extent that the former may be correct, the latter is likely?

Claiming that it doesn't behave as intended is not equivalent to claiming that it pumps the price of Bitcoin.

Wasn’t it _actually_ created to allow export of funds after the parent exchange was banned by the US and Taiwanese banking systems?

I'm no expert but mulling it over.... If Tether is big enough that the price of BTC is effected by it, such that investors feel they can cash out and that is part of their risk calculation, then a tank in Tether would also cause a drop in BTC.

If Tether is backed by loans and not hard cold cash that's a risk and effects the value.

If someone is able to buy Tether on credit, and the credit is actually backed by BTC then there could be a loop.

I'm not sure about the likelihood of this but if Bitfinex is overleveraged somehow then anything is possible. At least I think that was the argument.

If traders lose faith in Tether, they would sell Tether and buy Bitcoin in a flight to safety. Bitcoin prices would rise as traders try to get out of Tether.

Conceivably, a crisis with Tether could affect confidence in the entire cryptocurrency ecosystem, which would put downward pressure on the Bitcoin exchange rate.

It's not clear which of these factors would dominate, so it's not clear what would happen to exchange rates.

But currently Tethers trade 1:1 for USD on multiple exchanges, so markets aren't showing evidence of lost confidence.

> If traders lose faith in Tether, they would sell Tether and buy Bitcoin in a flight to safety. Bitcoin prices would rise as traders try to get out of Tether.

That might be the outcome, however:

- If there would be the slightest bit of panic btc transactions would be congested for days.

- If people would loose money by Tether their btc margin positions would be getting closed.

- Because they loose faith in one crypto they would by another?

If Tether is garbage, the only way to get your money out is by converting Tether to something worth real money.

We saw this in Mt. Gox. When USD withdrawals failed and people suspected Mt. Gox was insolvent, the only way to get money out was to buy BTC and withdraw that. The Mt. Gox exchange rate inflated because everyone knew dollar balances on Mt. Gox were worthless.

If Bitfinex is insolvent and Tether fails, we'll probably see panic selling across the market as people start fearing Bitcoin is a giant tulip scam.

>If traders lose faith in Tether, they would sell Tether and buy Bitcoin in a flight to safety. Bitcoin prices would rise as traders try to get out of Tether.

The Tether:Bitcoin rate would rise, but I’m not sure that the Bitcoin:USD price would follow suit.

>If someone is able to buy Tether on credit, and the credit is actually backed by BTC then there could be a loop.

Indeed, one of the BFX employees accidentally let it out that Tethers are not backed by USD but perceived value of cryptos held by the exchange.

https://mobile.twitter.com/bitfinexed/status/935333097377329...

Anybody claiming that a loop does not exist has to be in some kind of denial.

But is $845m enough to pump the entire crypto market by billions in market cap? Maybe there are secondary effects here, like increasing peoples confidence in crypto because of a false sense of liquidity, or something like that.

Market cap defined as price * total supply is a fallacy because it does not account for liquidity. Order books are fairly [0] thin even at the larger exchanges that you only need to buy/sell a few thousand BTCs to have a significant impact on price. If you consider the potential of wash trades it gets even easier. Bear in mind that up to 1/3 of all bitcoins mined could have been lost[1] and only a small amount of actively traded anyway.

A good parallel would be that Tesla is valued by the market at 500+ billion, but it's impossible for all shareholders to sell their shares for 500 billion because there are no buyers with 500 billion in cash waiting to buy Tesla stocks, and if anyone tried the price will crash after the first few percent has been dumped.

[0]:https://www.bitfinex.com/order_book [1]:http://fortune.com/2017/11/25/lost-bitcoins/

It only works that way if you trust Tether and the exchanges. Given how shadowy the big ones are, I'm not sure that's a good idea.

It appears this kind of arbitrage is designed to push up the price of BTC -- as long as the price keeps going up, people aren't going to withdraw. Once we start to see a sell-off though, the exchanges will stop being able to pay in USD pretty quickly.

My thought is that every time Tether/Bitfinex sees a sell-off happening (which, being an exchange, they can) they issue a bunch of new Tether, push the price higher, and take the money of some more suckers entering the market by selling BTC. If true, this is basically just a ponzi scheme.

Without evidence to the contrary, this is the safest assumption at least. I cashed out a few days ago regardless; but I do think there's a big crash coming. I don't think cryptocurrency is inherently bad, just that Bitcoin is all hype.

If you don't mind my asking, how long had you held for?

About 4.5 years? Bought some on Coinbase when I saw them at SXSW a few years back then promptly forgot about it. Pretty sure I'm gonna be one of the few "casuals" who manages to take any money away from BTC when this is all said and done...

Yes, but there is no evidence that that is happening. Bitcoin has a $200B market cap. There is only approximately 800 million usd worth of Tether on the market. It's easy to make up stories about what might be happening, but just because it's possible something is happening doesn't mean that it is.

You are underestimating the extent to which a finite $200M injection can make it seem like the price is skyrocketing for exogenous factors and therefore yield real money coming in. Classic pump and dump strategy.

> Even IF Tether is NOT running a fraud, the arbitrage positions that automatically exist between Bitcoin and any tether are real and do create incentive to create an arbitraged feedback loop whereby a pegged tether between Bitcoin - any_generic_tether - USD does exist and self feeds, driving up Bitcoin exactly as the author contends may be happening with the current Tether.

This purported mechanism needs a more thorough explanation from the author before it can seriously considered. How, exactly, does this arbitrage opportunity work?

Tether price is 80cents. Person trades bitcoin for tether. Person redeems tether for $1, profiting 20cents. Tether issues more (fraudulent, not backed) currency. Repeat.

If someone sells bitcoin for tether (because they want to redeem the tether and collect 20 cent profit) the price of bitcoin goes down, not up.

Which markets confuse tethers with USD? They are clearly two different assets. The former is a private currency, issued by a company and redeemable in USD, while the latter is the USD that the former IOU is denominated in.

I see how this would affect the price of bitcoins in tethers, but not how it would affect the price of bitcoins in USD (unless the market, as a whole, conflates the two).

Also, where do these alleged arbitrageurs redeem their tethers? As I understand it, the corporation that issues tethers was cut off from doing international wire transfers, thus rendering tethers irredeemable.

Can anyone explain how this "arbitraged feedback loop" allegedly works? Arbitrage causes prices to converge, not spiral up or down.

Tether artificially inflates the price of tether to $1. It's "tethered"

The claim is this phenomenon exists even without printing unbacked tethers.

> Even IF Tether is NOT running a fraud

I can't wrap my head around this. Who is silly enough to sell bitcoins for 'worthless' Tether?

People without USD accounts. To them selling for USD is just getting them a promise of USD which they're never going to cash out anyway.

People who want a liquid USD tethered asset on many exchanges and aren't needlessly paranoid over absurd conspiracy theories that have yet to present a single ounce of real evidence.

Bitfinex is also lacking in evidence when it comes to showing that Tethers are backed by USD.

How would they prove it? Twitter a picture of the bank balance?

At the very least, inform the public about which banking institutions they are currently using ever since Wells Fargo dropped out.

Contracting a reputable firm to conduct an in-depth audit and publicly releasing the results would also be a useful step.

And not refuse to name banks without an NDA signed and in place...

Did I misread the article, or weren't the banks they refused to name the banks involved in shutting them out of the US?

As far as I believe Wells Fargo is the bank that severed ties:

"After Wells Fargo severed ties, Tether won’t name its banks"

"On Dec. 2, Bitfinex released a quarterly report announcing it would no longer serve U.S. customers because it’s too expensive to do business with them. This followed Wells Fargo & Co.’s decision earlier in the year to end its role as a correspondent bank through which customers in the U.S. could send money to Bitfinex and Tether’s banks in Taiwan. Bitfinex and Tether filed suit against Wells Fargo, but later withdrew the case."

"However, Ronn Torossian, a spokesman for Bitfinex and Tether, refused to identify their current banks unless a reporter signed a non-disclosure agreement, an offer that wasn’t accepted."

This is what regulation is for. No regulation? Then people are stealing. History suggests it's that simple.

Precautionary Principle.

Likelihood of a problem x the cost of the problem happening = how much you should worry/care/act

When someone asks 'how sure you are' about something and you say 'really sure', unless you pull out a slide deck with numbers and graphs, that's an emotional estimate, and has no bearing on the precautionary principle. We naked apes get tripped up by this because we are used to dealing in social interactions, where your intuition works pretty well. Statistics, not so much.

You loan your friend your car when you're pretty sure that they won't wreck it, scratch it, make it smell like pork rinds. A business is not your friend. There's no social capital at play. Without that social capital you would never lend your car to a business. You don't owe them the benefit of the doubt nor do you reap a non-monetary benefit from doing so. Only when there is such a benefit (community building, networking, etc) would you even consider doing so.

I have certainly defended companies in forums because I felt they represented some part of a world I wanted to live in. That's my social capital in that case. The best way to predict the future is to create it, and I had a small part in that. I participated.

But in this case if you're wrong, instead of losing out on a toy, or a pillow that is always the exact right temperature, or a fridge that always has chocolate milk in it, you're going to lose money, face, and probably that world you hoped for. There's been enough shenanegans that the confirmation bias that kicks in if Tether is allowed to continue to grow and turns out to be a pyramid scheme has a real potential to have deleterious effects on the whole concept.

How willing are you to back Tether if it means there will never be a similar company that is actually legitimate? What are the objective odds of that outcome at this point? If you really want this world, you should be demanding transparency from everyone you support in this space at this point.

Why not. Sell your coin to tether to weather short term price dips and transfer between exchanges.... If tether is unsustainable long term, who cares?

> who cares?

Cryptocurrency markets are dominated by highly rational traders with deep pockets.

Just because a bunch of newbies are buying 0.002 BTC on Coinbase doesn't change that fact.

Highly rational traders with deep pockets do care. Getting hand-wavy talking about "irrational markets" doesn't adequately explain why Tethers trade at parity to USD.

If the fire that this smoke points to is really there, someday soon a lot of people are going to be left holding a bag of worthless tethers. That'd be a pretty bad day, wouldn't it? Kinda like being stuck in Mt. Gox during the end days.

sure, you just have to move quickly, which USDT enables you to do (versus USD, which to do transfers has ECH delays).

I don't think we're talking about the same problem here. If the day comes that Tethers are proven to be insolvent (because there isn't actually a USD in reserve for each Tether in circulation), moving quickly won't make a damn bit of difference. You can't quickly unload an asset when there is no taker. Somebody will be left holding a big fat stack of nothing.

I don't know what's going on with Tethers, honestly, it's not something I've followed very closely; so this may not be a problem at all (and if it's not, I would assume the people involved would be eager to get an audit done and results published so the money train can keep rolling). I'm just saying that unless you believe strongly that Tethers are backed 1:1 by USD, it would be irrational to hold Tethers, even for a short time.

I found it worrying that when the guy they interviewed tried to move his Tethers to another exchange, he couldn't find enough takers (and Bitfinex wouldn't let him exchange for dollars either). So, the argument that Tethers trading at roughly $1USD across exchanges is "proof" that Tethers are sound is shaky, at best. If you can't sell more than a handful of Tethers without crashing the market for Tethers, it's not actually the market setting the price. Something else is going on...something that would be illegal in a regulated market.

You'll be able to unload, but basically only into other crypto. Exchanges that deal with crypto will see crypto prices skyrocket, then shortly collapse, as people buy BTC or other coins then try to move to other exchanges to sell for real USD.

Why would anyone sell you crypto for Tethers if Tethers are found to have no USD backing? I mean...isn't that the entire point of Tethers?

If it's 1-1 to USD, why not just swap coin for USD?

Then you'd have to pay capital gains taxes.

That's the point, you can't do that now and more than likely ever...

What are you talking about? I can do so easily on gdax.com and I assume other places as well.

I saw a bitcoin ATM at the mall the other day.

I get that I guess it's not easy for someone in a major city or whatever.

Ok, now I question the validity of everything I've ever read on Seeking Alpha.

Don’t they pay per article you write? Is there any vetting?

I once tried to write an article for Motley Fool (for ~$50) and they kicked it back to me and said I didn’t have enough stock tickers in the article.

It seemed that only spelling and referencing a bunch of stock tickers are what they care about (probably due to SEO). In the end, I didnt re-submit my article because I didn’t want my name on it.

I'm not sure I follow.. There is no BTC-USD tether?

USDT is tethered to USD.

For better context, here's the related article he was commenting on: https://news.ycombinator.com/item?id=15852750

There doesn't need to be an official BTC-USD tether, BTCUSD on bitfinex is exactly that in practice and in fact.

That's not a tether though, that's an exchange rate.

A tether is like a fixed (pegged) exchange rate[1], where there is an arbitrage opportunity. But that's not BTC-USD.

[1] https://en.wikipedia.org/wiki/Fixed_exchange-rate_system

BTCUSD floats freely, based off the latest trade. It's not pegged.

Is it speculative to think Tether has the means to forcibly make Bitcoin collapse?

Am I reading that right?

can you explain this like you would to a five year old?

I really hope this was an intentional quote from the movie Margin call

I don’t think I quite follow the reasoning here.

> Causality is difficult to prove, but based on the correlation between the supply of Tether and Bitcoin and Tether Limited operating model, I am highly confident that the issuance of unbacked Tether is driving the insane rise of Bitcoin in USD.

Is this a parody?