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
