A Hungarian man sweeps paper money out of the gutter

Answers To: “The problem with the Fed is that it’s private”

I hear this argument in most critiques of the Federal Reserve, so it definitely needs to be addressed.

Talking to an anti-Fed person, you may have heard something like “The Fed is terrible, it controls all our money.  And did you know it’s private?!”

The implied or stated proposal being that government should take over the money-printing.  But it’s not the fact that the Fed is partially private that’s the problem – it’s the fact that it’s partially government!  What’s bad about it is that we’re all forced by law to use their currency.  It is a legal monopoly on money, for which there is no ethical justification.

From a voluntary ethics standpoint, no one should be forced to use or not use any money, or prohibited or compelled to issue money.  But even from a utilitarian view, a government takeover of money would not be a very good safeguard against monetary inflation.  Historically, governments have debased their currencies as a means to finance their grand schemes, variations of bombs or bread.  Can you imagine what Congress would do without the admittedly weak restraint of the Fed?  They’d spend into oblivion, even more than now, and destroy the dollar in the process!

The real answer is – eliminate the Fed’s legal monopoly on money.  Let them be a private bank competing in a free market.  Of course, they probably would go out of business, but hey, that’s free market capitalism!

Contrails on Jet

Debunking “conspiracy theory”

Why the quotes around “conspiracy theory”?  Because I’ll be debunking the term “conspiracy theory”, not the ideas referred to as conspiracy theories.  The purpose of the term is to attack any non-conformist idea about how the world works, without actually engaging the idea itself.  It’s a way of shutting off the brain and letting the mainstream media and government textbooks do your thinking for you.

This is not to say that all theories of the world, or allegations of conspiracy, are correct, or tend to be correct.  Many are incorrect or simply unsubstantiated.  This article is also not a defense of conspiratorial thinking, or belief that historical events can only be explained by conspiracies.  The point is not about any particular idea, but how we evaluate all ideas:  Giving some undue credence, while ignoring others because they don’t fit the standard narrative.

Frequently, establishment shills in the media and academia “debunk” such crazy “conspiracy theories”, or even conspiracy theories as such, as if there is no intellectual escape from their approved opinions.  Let’s debunk the debunkers!

“Conspiracy theory” as rhetorical device

global government CFRBefore debunking specific arguments, let’s look at “conspiracy theory” as a rhetorical device.  It is not selected haphazardly.  The word “theory” connotes speculation, uncertainty, whimsy, in everyday usage.  Just as some creationists mock evolutionary theory because it is “just a theory”, debunkers attack the validity of an idea before even engaging it.  Doesn’t matter if your idea is based on documentation and facts cited by reputable sources – it’s just a “theory”.

Simply calling an idea speculative isn’t enough though.  It’s too arbitrary.  We need a specific, descriptive modifier, to give the appearance of solidity to the attack.  Ah!  “Conspiracy” – Sounds so shadowy and creepy.  Grammatically, it is a modifier on “theory”, creating the impression that the theory itself is conspiratorial and dark, as are the people who espouse such crazy ideas.  Thus we have “conspiracy theory” – the perfect, catch-all answer to any non-conformist idea about the world!

In an ironic twist, it turns out the CIA actually coined and promoted the term “conspiracy theory” for precisely this purpose.

Double standards

911 WTC world trade centerNotice how mainstream conspiracy theories are never referred to as “conspiracy theories”?  I mean, bin Laden and his merry band of hijackers supposedly had a secret conspiracy to take down the World Trade Center towers with planes.  If anyone but the mainstream media proposed this story, it would be labeled a crazy conspiracy theory!  But no, it’s a perfectly valid view of history, despite inconsistencies and discrepancies.  On the other hand, the idea that there were perhaps other actors involved in the operation, perhaps even in the US government, well that’s just a crazy “conspiracy theory”!  So, it’s not a descriptive term at all.  It’s a rhetorical device to invalidate a non-conformist idea before it’s even considered.

No WMDs in IraqAlso, notice how the epistemic standards applied to non-conforming ideas are much, much higher than those applied to conforming ideas.  The burden of proof is through the roof!  No matter how much evidence you present, and how consistent your theory is with human behavior, the debunkers will demand absolutely undeniable physical proof of every part of the claim.  Of course, mainstream narratives face no such requirements.  No matter how ridiculous the claims get, such as the Syrian government supposedly attacking its own civilians with chemical weapons, no proof is demanded whatsoever.  It’s all about maintaining the party line, conforming to the establishment narrative, and not at all about finding the truth.

Answers To: “Conspiracies can’t last because someone will talk.”

Moon landing and flagThe biggest argument the debunkers love is that conspiracies are inherently unsustainable because eventually, one of the conspirators will talk and blow the whole thing out of the water.  Nevermind the piles of conspiracies throughout history that falsify this argument, let’s examine the logic.

This argument usually gets presented with something like the faked moon landing theory, that, well, there were all these people involved, all these engineers, and nobody spoke up?  You’d think among thousands of people involved in a conspiracy, at least a few would blow the cover.

Well hang on a second.  Isn’t that exactly what the CIA is?  And every other intelligence agency.  How do they manage to have an organization of thousands of people and keep things secret?  Yes, NASA is not the CIA, but it’s not the Boy Scouts either.  NASA had national security objectives and keeping such secrets, even among many people, is precedented.

If people’s interests are aligned in an organization, it’s indeed possible to keep a conspiracy secret.  This is done by aligning financial interests, making sure everyone gets a piece of the pie, or by threat of punishment.  If you talk, we’ll come after you and your family.  These methods are well known and effective.

CIA Special Operations - Covert ActionsThe “someone will talk” argument also ignores compartmentalization.  The CIA uses it all the time.  The idea is that not everyone involved in executing a secret plan has to know the exact nature of the plan.  Most of the staff for a fake moon landing might not be aware it’s fake, just fed simulated information.  Only a few people need to be aware of the reality.  Again, I’m not arguing for the faked moon landing theory, just pointing out why this argument against it is weak.

Lastly, simply releasing information to the public doesn’t mean anyone will pay attention.  The apathetic public yawns when past conspiracies are regularly outed and finally admitted to.   The debunkers conveniently ignore those.  And if any conspiracists did come forward and admitted the moon landing was faked – the debunkers would be the first to dismiss them as wackjobs!  So, there’s no winning with these people.

Answers To: “There have never been conspiracies.”

Masonic pyramid on dollar billThe implication of debunking “conspiracy theories” as such is that there have never actually been any conspiracies in history.  Of course, this is obviously false.  Past conspiracies are well-documented, but I’ll just mention a couple that are now accepted as historical fact.

The meeting in 1913 on Jekyll Island that formed the Federal Reserve was a quintessential conspiracy, that now is simply accepted historical fact, albeit ignored.

The Gulf of Tonkin incident, a purported attack on US ships by North Vietnam that provided the basis for the Vietnam War, ended up being … nothing but radar ghosts.  The war was planned long before and this was merely a contrived pretext.  Sound familiar?

There are also many later-declassified plans that did not go through initially, but which provide a blueprint for future action.  Operation Northwoods was a US military plan to cause false flag attacks and blame them on Cuba, to provide justification for overthrowing the Cuban government.   Such operations demonstrate the mentality and means of those in power.  Does anyone really believe such plans were scuttled and forgotten about after the 1960s?

Answers To: “We can only know about the world by the particular facts we can directly observe.”

Ignorance is sticking your head in the sandThis argument is an inversion of the scientific method.  Science derives universals about the world through experimentation and then deductively applies them to particulars.  Saying that we must prove all particulars is ludicrous:  it implies we do have to be in the forest to know whether the tree that fell really did make a sound.  It denies the reality of our limitations.

The problem is that we simply can’t know every particular about the world, or even most of it. In social science, we can test theories about how the human world works, then deduce likely motives for particular actions.  This applies to both current events and history.

Pharaoh Ramses of Egypt - HieroglyphsThe old aphorism is that history is written by the victors.  Unlike geology or biology, history doesn’t rely on physical evidence, but man-made accounts.  These are inevitably colored by prejudice and agendas, distorted, hidden, destroyed, censored.  Most of human history is simply unavailable to us.  We are forced into making judgments according to a present-day worldview, which is why it’s incredibly important to constantly critique and revise our notions about history.

What is true of history is true of the present.  Direct experience is very limited for most people.  We rely on media and others for our knowledge about the world.  At each step in this knowledge-gathering process lies the potential for distortion.  Media can be bought, manipulated, censored.  Individuals can be threatened, rewarded, or they self-censor based on their perceived risk.  Documents, meetings and finances can be hidden.

iceberg is hiddenAll is not always what it seems.  We have to read between the lines to understand the motivations of players, which are critical for filling in the blanks about the world.  If we restrict ourselves to proving particulars before accepting any theory of the world, then we are hopelessly at the mercy of whoever has power and influence in the present.

The danger of this approach of course, is the rabbit hole of conspiratorial thinking, that everything that happens in the world is planned that way.  But vigilance and debate are the antidote, not dismissing ideas out of hand because they do not conform to the popular narrative.  Just as natural science is not harmed, but actually powered, by constant hypothesis and revision, let the field of politics and history also be a marketplace of ideas.

Dutch tulip bulb mania

Answers To: “Free markets don’t work because people are irrational”

It’s government planning that depends on rational actors.  Irrational actors will result in a flawed plan, which is then imposed on the entire society.  One irrational bureaucrat at the top could spell disaster for everyone else.

A free market implies nothing about the rationality of its actors.  Those who end up making the best investment decisions get a return on capital, while those who make bad decisions lose.  Over time, this produces a natural selection pressure in the economy, towards more efficient habits, procedures, and technologies; but, this tendency has nothing to do with the rationality of individual actors in the system.  They could be rational or irrational, taking planned or random actions.

This process is analogous to natural selection in biology.  As long as expressions of fitness can be retained over time, selection pressures will produce life forms optimized to their environment.  Those who claim a functioning economy requires an all-knowing, “rational” central planning committee to make order out of the irrational chaos of society, are proposing the necessity of economic “intelligent design”.

That assumes there is and should be an objective and particular purpose for the economy.  But, there is no such thing, because people’s preferences and goals are subjective.  There is no such thing as “market failure”.  It is impossible to objectively evaluate economic outcomes without an a priori ethical framework, but this is what economists pretend to do.  The result is nonsensical arguments like this one.

If we boil it down, this is not an economic argument at all, but an ethical one.  The person making the title argument is saying “People engaged in free, voluntary trade are doing things I don’t like.  Therefore they are irrational and this represents a market failure.”  My response is “live and let live”!

Hear no evil, see no evil, speak no evil

Answers To: “Taxes/regulations aren’t backed by violence”

So I’m going to start this “Answers To” series where I respond to some of the more common and inane arguments I hear in support of government.  This isn’t so much to uncover new theoretical arguments, because most of this stuff has been dealt with by libertarian thinkers.  It’s more about rhetoric – how an argument is presented and what an effective response might be.  I encourage you, dear reader, to submit arguments you’ve heard (and answers!) to apollo at apolloslater dot com.

A common one I’ve heard is one probably encountered by most libertarians.  You’ll be arguing with your friend about some tax or regulation and you’ll say something like, I don’t think people should be “forced at gunpoint” or that “violence” should be used to accomplish something.  At which point your friend gives you a blank stare and thinks you’re bananas.

After all, you don’t see mass executions of people who aren’t paying taxes!  Maybe if someone screws up, they pay a fine and that’s the end of it.  So there’s a lack of perspective here – not seeing the end of a chain of events that resisting taxes would bring about (I’m charged a fine; if I don’t pay, I’m thrown in jail; if I resist, I’ll be beaten or shot).  And not seeing the threat of violence that underpins government mandates, precisely because the threat causes most people to comply, making the execution of the threat a rare, unobserved event.

Explaining this chain of events and the effect of the underlying threat may help your friend understand your position.  You can also say, I’ll agree to your new tax or regulation, as long as the government cannot use physical force to enforce it.  Put the onus on him to describe how his program would work without the threat of physical violence.  If it does, then he is describing a voluntary program.  If it requires a threat, then you’ve proven your point.

chase-fire

What now Bitcoin?

Bitcoin & other cryptos have taken a sharp nosedive of ~33% from peak.  Although it may rally short-term, let’s take a look at the internals of what’s going on and where this is all heading.
People are parking Bitcoin profits on Bitfinex (biggest bitcoin exchange) into tethers, the fake token people think has 1:1 USD backing (but doesn’t). Tether will push the printing press into overdrive to try to pump Bitcoin price once again.
 
If this fails, there will be a run on Tether as people try to realize profits in USD. This can’t be done — the money isn’t there. At that point, holders of Tether have only one choice: buy crypto, anything, and try to transfer out to exchanges that support USD withdrawals (Bitfinex does not).
 
This could be the biggest spike crypto has ever seen. It’s uncertain which cryptos will spike most. For example, Bitcoin has well-known transaction problems, so would not be the transfer mechanism of choice. Probably Bitcoin Cash would be preferred, since that is relatively fast, cheap, & supported on GDAX (USD exchange).
 
That would mean the evisceration of the Bitfinex exchange and a sharp drop in aggregate trading volumes. The owners may opt for a big gamble to retain their profits — look for claims of a huge “hack” on Bitfinex.  This lets the Bitfinex operators steal customer funds before the collapse, Mt Gox style.  An alternate scenario is a “hack” on Tether to prevent a run on Tether in the first place. This actually happened about a month ago, 30 million Tether stolen, from a 3/4 multisig wallet (likely inside job).  Something of this magnitude may trigger government involvement.
If the crypto in Bitfinex does make it into the other exchanges, you’ll see the huge spike I mentioned.  But, since Bitcoin price will now be un-tethered from the Tether printing press, it will be very short lived and collapse once former Bitfinex customers try to realize USD profits.  Then Bitcoin could fall way below the levels we are seeing today.
monopoly-money

Economics of merge mining

A common argument for the unique value of bitcoin is its hash power, meaning the amount of computational power (miners) dedicated to mining bitcoin. But, with merge mining, another blockchain can potentially capture the entire hash power of bitcoin with no impact on bitcoin’s network. That means that, although independent cryptos may eventually be swamped by a bitcoin monopoly, the value of bitcoin will be diluted by other chains piggybacking on its network.
 
The way bitcoin is mined is by miners “hashing” the existing blockchain with a random number. Hashing is a one way function that takes in some content and spits out a result. If the result meets certain “difficulty criteria”, it is accepted by the network and the miner is rewarded a coin. It is impossible to ever derive the original content from the result, which is why it’s called one way.
 
Merge mining works by combining the random number guesses from one chain, with those from another chain. The result will be valid on both chains. If it meets the criteria for both chains, the miner will get rewarded for both. The miner loses nothing by mining both, but gets more reward.
 
The economic effect of this is to increase the miners available to mine alternative chains. Since profits go up, the number of total miners goes up, which will push profits for a particular chain down. This should mean lower transaction fees for any particular chain. It also means that no chain holds a monopoly on being a transaction mechanism.
 
The lack of a potential monopoly means that bitcoins should be treated as a competitive payment mechanism, instead of as a monopoly. Many coins will be able to process payments, with the same hash power, even if most miners mine the bitcoin chain.  Some may be superior to bitcoin in their payment processing capabilities.
Bitcoin pipes

Bitcoin’s dubious utility value

Bitcoin fanbois point to bitcoin’s utility as a payment network. But, unlike Visa, holders of bitcoin don’t get any of the mining revenues, so there is no revenue stream on which to value a bitcoin.
 
Participants do need to have bitcoin to transfer funds, but they don’t need to hold it for longer than the transaction itself. Since bitcoin is limited to ~3 transactions per second, and average confirmation times are several hours, depending on network congestion, there is no need for more than a few bitcoin to accomplish all payments across the network. As an example, assuming 1 bitcoin per transaction, 3/sec * 3,600 sec/hr * 3 hr/confirmation = 32,400 bitcoin to execute all payments on the network.
 
Also, since bitcoin can be divided into satoshi, hundreds of millionths of a Bitcoin, there is no need to hold a particular amount of bitcoin to accomplish a transaction. The bitcoin itself just represents the transaction record, not the value of the contract, just as a record in Visa’s database represents the transaction, and is not in and of itself valuable, beyond the market price of the transaction mechanism (about 1%).
 
Even if holders of bitcoin shared in the mining revenues, the competitive mining market produces a flat fee per transaction, not a percentage fee, which allows the transfer of massive fortunes for a tiny fraction of a percent. It would be a much worse value proposition, for investors, than Visa.
 
The fiat price of a bitcoin arises from an artificial restriction on bitcoin supply & mining, and people’s expectation that these restrictions will entice others to buy their bitcoin in the future at a higher price. The “greater fool” theory. But this is separate from bitcoin’s utility as a payment network.
 
It is no different from other speculative phenomena such as Beanie Babies, baseball cards, and other artificially restricted commodities. People misinterpret the restriction as an ipso facto justification for a high price. Once all available cash & credit has poured into the commodity, there are no further buyers, the mania ends, and the price drops to the utility value of the commodity.  In bitcoin’s case, its utility value is close to zero.
Tether collapse scenario hindenberg style

Tether collapse scenario

Current situation with dumb money buying BTC:

  • Tether prints tethers to buy bitcoin
  • BTC-USDT price skyrockets
  • Arbitrage bots buy BTC-USD, because everyone assumes 1 USDT = 1 USD
  • BTC-USD price matches BTC-USDT price
  • Price increase brings in more dumb money USD to buy BTC, skyrocketing price further
  • Arbitrage bots sell BTC for USD, profit
  • Tether sells BTC for USD
  • Tether is now “backed” by USD — can afford to redeem tethers for the small number of people who convert USDT to USD
  • Tether pockets USD, prints more tethers …

What if the flow of dumb money slows down or stops? (due to higher prices, and simply no more mattress cash to dump into BTC)

  • Tether prints tethers to buy bitcoin
  • BTC-USDT price skyrockets
  • Arbitrage bots buy BTC-USD
  • No more dumb money = no more USD arbitrage profit
  • Less arbitrage = increasing gap between BTC-USDT and BTC-USD prices
  • Now there is arbitrage opportunity the other direction
  • Buy BTC-USD, sell BTC-USDT, sell USDT for USD
  • Tether now has to redeem tethers for USD
  • The bigger the gap, the more tethers they have to redeem
  • If they stop printing tethers, the BTC-USDT price collapses
  • If BTC-USDT price collapses, arbitrage bots buy BTC-USDT and sell BTC-USD, further collapsing BTC-USD
  • If they keep printing, the gap widens and they have to redeem more and more tethers for USD
  • At that point, the game is up and Tether will have no incentive to continue redeeming tethers.  The tether market collapses.  You can redeem 1 USDT for 1 cent.  BTC paper profits are wiped out.  Tether is left with >600 million USD in the bank.

The phenomena to watch out for in this scenario are:

  • Increasing gap between BTC-USDT and BTC-USD prices
  • Increasing volatility of USDT-USD price, followed by collapse

Bitcoin’s paper price bump

What’s behind Bitcoin’s recent price increase? I’ll tell you — and it’s not Bitcoin’s utility as a currency, or wonderful investment opportunity.
 
Bitfinex accounts for the largest share of BTC trading volume. Yet they stopped accepting USD deposits back in April. This inevitably spilled into restricting USD withdrawals.  After that, BTC price on their exchange went up. Why?
 
If you were an account holder, what would you do? I’m not able to withdraw my USD. Therefore, I’ll buy BTC so I can move it to another wallet. Hence, increased demand for BTC on their exchange, and increased price AND volume.
 
Other exchanges did the same; there are not many that allow USD deposits & withdrawals now.
 
This recent BTC price increase is caused by the fact that no one can withdraw USD!
What happens when this bottled-up demand to withdraw finally moves into USD, other fiat, or other crypto?
Updated on 10/20/2017 to reflect USD withdrawal restrictions and supporting link.
chase-fire

What now Bitcoin?

Bitcoin & other cryptos have taken a sharp nosedive of ~33% from peak.  Although it may rally short-term, let’s take a look at the internals of what’s going on and where this is all heading.
People are parking Bitcoin profits on Bitfinex (biggest bitcoin exchange) into tethers, the fake token people think has 1:1 USD backing (but doesn’t). Tether will push the printing press into overdrive to try to pump Bitcoin price once again.
 
If this fails, there will be a run on Tether as people try to realize profits in USD. This can’t be done — the money isn’t there. At that point, holders of Tether have only one choice: buy crypto, anything, and try to transfer out to exchanges that support USD withdrawals (Bitfinex does not).
 
This could be the biggest spike crypto has ever seen. It’s uncertain which cryptos will spike most. For example, Bitcoin has well-known transaction problems, so would not be the transfer mechanism of choice. Probably Bitcoin Cash would be preferred, since that is relatively fast, cheap, & supported on GDAX (USD exchange).
 
That would mean the evisceration of the Bitfinex exchange and a sharp drop in aggregate trading volumes. The owners may opt for a big gamble to retain their profits — look for claims of a huge “hack” on Bitfinex.  This lets the Bitfinex operators steal customer funds before the collapse, Mt Gox style.  An alternate scenario is a “hack” on Tether to prevent a run on Tether in the first place. This actually happened about a month ago, 30 million Tether stolen, from a 3/4 multisig wallet (likely inside job).  Something of this magnitude may trigger government involvement.
If the crypto in Bitfinex does make it into the other exchanges, you’ll see the huge spike I mentioned.  But, since Bitcoin price will now be un-tethered from the Tether printing press, it will be very short lived and collapse once former Bitfinex customers try to realize USD profits.  Then Bitcoin could fall way below the levels we are seeing today.
monopoly-money

Economics of merge mining

A common argument for the unique value of bitcoin is its hash power, meaning the amount of computational power (miners) dedicated to mining bitcoin. But, with merge mining, another blockchain can potentially capture the entire hash power of bitcoin with no impact on bitcoin’s network. That means that, although independent cryptos may eventually be swamped by a bitcoin monopoly, the value of bitcoin will be diluted by other chains piggybacking on its network.
 
The way bitcoin is mined is by miners “hashing” the existing blockchain with a random number. Hashing is a one way function that takes in some content and spits out a result. If the result meets certain “difficulty criteria”, it is accepted by the network and the miner is rewarded a coin. It is impossible to ever derive the original content from the result, which is why it’s called one way.
 
Merge mining works by combining the random number guesses from one chain, with those from another chain. The result will be valid on both chains. If it meets the criteria for both chains, the miner will get rewarded for both. The miner loses nothing by mining both, but gets more reward.
 
The economic effect of this is to increase the miners available to mine alternative chains. Since profits go up, the number of total miners goes up, which will push profits for a particular chain down. This should mean lower transaction fees for any particular chain. It also means that no chain holds a monopoly on being a transaction mechanism.
 
The lack of a potential monopoly means that bitcoins should be treated as a competitive payment mechanism, instead of as a monopoly. Many coins will be able to process payments, with the same hash power, even if most miners mine the bitcoin chain.  Some may be superior to bitcoin in their payment processing capabilities.
Bitcoin pipes

Bitcoin’s dubious utility value

Bitcoin fanbois point to bitcoin’s utility as a payment network. But, unlike Visa, holders of bitcoin don’t get any of the mining revenues, so there is no revenue stream on which to value a bitcoin.
 
Participants do need to have bitcoin to transfer funds, but they don’t need to hold it for longer than the transaction itself. Since bitcoin is limited to ~3 transactions per second, and average confirmation times are several hours, depending on network congestion, there is no need for more than a few bitcoin to accomplish all payments across the network. As an example, assuming 1 bitcoin per transaction, 3/sec * 3,600 sec/hr * 3 hr/confirmation = 32,400 bitcoin to execute all payments on the network.
 
Also, since bitcoin can be divided into satoshi, hundreds of millionths of a Bitcoin, there is no need to hold a particular amount of bitcoin to accomplish a transaction. The bitcoin itself just represents the transaction record, not the value of the contract, just as a record in Visa’s database represents the transaction, and is not in and of itself valuable, beyond the market price of the transaction mechanism (about 1%).
 
Even if holders of bitcoin shared in the mining revenues, the competitive mining market produces a flat fee per transaction, not a percentage fee, which allows the transfer of massive fortunes for a tiny fraction of a percent. It would be a much worse value proposition, for investors, than Visa.
 
The fiat price of a bitcoin arises from an artificial restriction on bitcoin supply & mining, and people’s expectation that these restrictions will entice others to buy their bitcoin in the future at a higher price. The “greater fool” theory. But this is separate from bitcoin’s utility as a payment network.
 
It is no different from other speculative phenomena such as Beanie Babies, baseball cards, and other artificially restricted commodities. People misinterpret the restriction as an ipso facto justification for a high price. Once all available cash & credit has poured into the commodity, there are no further buyers, the mania ends, and the price drops to the utility value of the commodity.  In bitcoin’s case, its utility value is close to zero.
Tether collapse scenario hindenberg style

Tether collapse scenario

Current situation with dumb money buying BTC:

  • Tether prints tethers to buy bitcoin
  • BTC-USDT price skyrockets
  • Arbitrage bots buy BTC-USD, because everyone assumes 1 USDT = 1 USD
  • BTC-USD price matches BTC-USDT price
  • Price increase brings in more dumb money USD to buy BTC, skyrocketing price further
  • Arbitrage bots sell BTC for USD, profit
  • Tether sells BTC for USD
  • Tether is now “backed” by USD — can afford to redeem tethers for the small number of people who convert USDT to USD
  • Tether pockets USD, prints more tethers …

What if the flow of dumb money slows down or stops? (due to higher prices, and simply no more mattress cash to dump into BTC)

  • Tether prints tethers to buy bitcoin
  • BTC-USDT price skyrockets
  • Arbitrage bots buy BTC-USD
  • No more dumb money = no more USD arbitrage profit
  • Less arbitrage = increasing gap between BTC-USDT and BTC-USD prices
  • Now there is arbitrage opportunity the other direction
  • Buy BTC-USD, sell BTC-USDT, sell USDT for USD
  • Tether now has to redeem tethers for USD
  • The bigger the gap, the more tethers they have to redeem
  • If they stop printing tethers, the BTC-USDT price collapses
  • If BTC-USDT price collapses, arbitrage bots buy BTC-USDT and sell BTC-USD, further collapsing BTC-USD
  • If they keep printing, the gap widens and they have to redeem more and more tethers for USD
  • At that point, the game is up and Tether will have no incentive to continue redeeming tethers.  The tether market collapses.  You can redeem 1 USDT for 1 cent.  BTC paper profits are wiped out.  Tether is left with >600 million USD in the bank.

The phenomena to watch out for in this scenario are:

  • Increasing gap between BTC-USDT and BTC-USD prices
  • Increasing volatility of USDT-USD price, followed by collapse

Bitcoin’s paper price bump

What’s behind Bitcoin’s recent price increase? I’ll tell you — and it’s not Bitcoin’s utility as a currency, or wonderful investment opportunity.
 
Bitfinex accounts for the largest share of BTC trading volume. Yet they stopped accepting USD deposits back in April. This inevitably spilled into restricting USD withdrawals.  After that, BTC price on their exchange went up. Why?
 
If you were an account holder, what would you do? I’m not able to withdraw my USD. Therefore, I’ll buy BTC so I can move it to another wallet. Hence, increased demand for BTC on their exchange, and increased price AND volume.
 
Other exchanges did the same; there are not many that allow USD deposits & withdrawals now.
 
This recent BTC price increase is caused by the fact that no one can withdraw USD!
What happens when this bottled-up demand to withdraw finally moves into USD, other fiat, or other crypto?
Updated on 10/20/2017 to reflect USD withdrawal restrictions and supporting link.