Bitcoin crashes, Tether prints $500M+

– Let’s talk about magic fake Internet money.

Crypto Weekly. Crashes, tether and schnorr signatures.

Hi, thanks for watching, it’s Jackson.  Welcome back to another episode of Crypto Weekly,  where we unravel everything that happened in the last week  and explore what’s driving that behavior.  Before we kick things off today,  I want to remind you just to hit  that subscription button below  so you get regular weekly updates  and you get those notifications in your inbox.  I think if you click the little bell icon, that helps.  I don’t really know how that works.

Спасибо за просмотр!

If there’s a bell icon, click it, thank you.  Let’s start with the thing that’s on top of everybody’s mind  and that’s the Bitcoin crash  that happened over the last week.  There was a lot of market panic  as over a space of about three days,  the price of Bitcoin went below 10,000 dollars  after being up towards 20,000 dollars  at the end of last year.  We saw some alt coins and ICO tokens out there  dip upwards of 30, 40, even 50 percent in value.  While on the following days,  Bitcoin and other alt coins did recover,  not to their previous peaks,  but they recovered back from such a large drop,  some haven’t recovered completely  with tokens such as Ripple still only being at about  50 percent of their previous all-time high just a week ago.  Not that anybody tried to warn people  that Ripple is just all hype, right?  There’s been a lot of speculation about what drove  this crash with multiple theories out there.

The first is that some of those Bitcoin future contracts  that were on the market were expiring last week.  People were throwing around the idea that if people were  cashing out of those on the public market,  it might’ve affected the price.  This theory was quickly debunked though  because those futures contracts really didn’t  see a lot of volume in terms of money.  Also they settled in cash and not hitting a public exchange  that would drop the price like that.  Two other big theories came out of Asia.  The first being that Chinese regulators are thinking  of banning Bitcoin mining.

This would be huge if it does happen.  It kinda would make sense given that a lot of the money  that the miners are making out of their mining operations  isn’t necessarily going back into the Chinese economy  and is probably going offshore into other ICO companies  that are all across the world at this point.  We have no confirmation if that’s gonna happen though.  We’ll just have to wait and see.  The other big news out of Asia being that  South Korean regulators are starting to think about  just banning all exchanges that exist  in the country as of right now.  Again, this is just a rumor and there’s no official news  coming out of the government just yet.

It does kinda stand to reason that with this  huge boom in popularity, especially in Korea,  that regulators are doing their homework  and taking note and trying to come up quickly  with some sort of solution to the problem.  There is a lot of illegal activity  most likely happening in these markets in Korea.  Some of them don’t have fees on their exchanges.  There’s all sorts of wash trading happening.  It is a little bit of a worry.  It wouldn’t personally surprise me if we do see  regulators clamp down in some way  over in South Korea in the coming months.

That being said, it probably wasn’t just a single one  of these things driving the market correction last week.  It could well be a combination of these things together  or it could also be some news that we don’t even know about  ’cause it’s all happening behind closed doors.  That’s often the case when it comes to financial markets  because if somebody knows something,  either legally they can’t tell other people  or they don’t want to because it would erode any advantage  they have in that market.  As I mentioned, Bitcoin did recover magically  from this massive downturn it saw in the last week.

Many people are theorizing and in some cases proving  that this was correlated to a fresh printing of Tether,  or USDT, flooding the market.  For those that are unaware,  Tether or USDT, which you’ll probably see  if you use any of the popular exchanges,  is simply a cryptographic token  that’s built on the top of something  called the Omni Protocol.  This is just a centrally managed token  on this protocol that is backed by the Bitcoin network.  In a nutshell, there’s a company called  the Tether Corporation who are offshore somewhere.  They control and can print this money  at any point in time they want.  The whole gist of it though is that they say  every tethered token or USDT  is backed by USD reserves sitting in a bank somewhere.

The creation of Tether can kinda be drawn back  to a company called BitFinex  which also run a very large Bitcoin exchange.  Details are scarce on these companies.  It’s hard to find out who’s pulling the strings.  There’s a lot of evidence that suggests  Tether and Bitfinex are really the same company  or being run by the same people.  You’ll notice if you use exchanges like Bittrex,  Poloniex or some of the Asian exchanges as well,  when you’re cashing your Bitcoin or Ethereum  or any of these tokens out into USD,  you’re not actually getting USD  that can be transferred to a bank account,  you’re getting USDT tokens.

In many cases, this is because these exchanges  simply couldn’t get banking relationships  for their exchanges.  Unlike something like Coinbase or GDAX  where you actually link your American bank account,  you don’t do that with things with Bittrex and Poloniex.  They just offer this USDT token in its place.  I think what a lot of people fail to understand with USDT  is that there’s actually no way currently to redeem it  for USD into a bank account.

The Tether system was hacked late last year  and as a result, they’ve actually closed down the creation  of new deposit addresses on their system.  Even if you did have a thousand dollars worth of USDT  sitting on an exchange like Bittrex,  there’s no way to transfer that over to the Tether website  and cash it out for USD in any way.  Even then, before that hack happened,  I’d actually never seen any evidence of somebody  successfully converting USDT into USD  through the Tether Corporation.  There’s only one or two exchanges which actually  let you exchange USDT for USD,  Kraken being one of them.

They actually let the Tether token float  which is a little bit weird.  The reason I say that’s weird is ’cause the only way  that the USDT token is pegged to one US dollar  is because the exchanges literally hard code it  to be one US dollar.  Whereas on an exchange like Coinbase or GDAX  where you’re actually dealing with USD,  which you can quickly liquidate back into USD  and send to your bank account,  with USDT, that’s completely separated.

It’s just balances they’re moving around  in a database somewhere.  There’s no way you could then send that back  to a bank account of any sort.  Exchanges like Bittrex and Poloniex  simply have the USDT token hard coded  to equal one US dollar.  For some reason, people using these exchanges  just believe that.  We know it’s a centrally controlled currency.  It’s not really redeemable for anything.  They say that it’s backed by these USD reserves  but they’ve printed two billion Tether  cumulatively up to today.  They’ve provided no audits or details  of which bank in the world is allowing them  to store two billion dollars in assets somewhere.  What’s this got to do with the Bitcoin crash  and everything recovering, right?  Since the Bitcoin crash just five or six days ago,  the Bitfinex or Tether company have printed  more than half a billion dollars worth  of this USDT token.  They’ve just made it appear out of thin air.  They claim that this money, this 500 million dollars,  has actually been injected  by large institutional investors out there somewhere.

The problems.

The only problem is we have no way to verify  that money is actually being put  into a bank account somewhere.  What makes it even more suspect  is when a new batch of USDT is printed,  it then is quickly transferred over to the Bitfinex exchange  and you see a whole bunch of buy orders put up for Bitcoin  that drive the price back up.  They usually do this in batches  of around 100 million dollars.  When the market is suffering and the price is down,  an injection of 100 million dollars of capital  on the buyer’s side of the book  can really affect the way that the price goes back up.

The side effect of this is if you go to a website  like CoinMarketCap, you’ll see just green everywhere.  The reason for that is that you have to remember when  you’re looking at all these alt coins and other tokens,  their USD value is most often tied back  to the Bitcoin exchange rate for that token.You can’t directly take some random token back into USD.  That pair doesn’t exist on most exchanges.  If they can make the Bitcoin price green,  they actually make most of the market green  because that’s the off-ramp for most of these tokens.

This is all kinda crazy  and I think it took some people by shock  when after such a massive market downturn,  this huge injection of capital through Tether  would just magically pick the price back up.  The theory, the hypothesis that a lot of people have,  is that the Bitfinex Corporation  and Tether, whoever they are,  are manipulating the market and trying to push  the Bitcoin price back up whenever it falls a little.  The problem is because it’s all centrally controlled  and we have no audit trail,  there’s no way to know who’s telling the truth  or whether they’re actually doing that.  It really just smells a little bit fishy.  It’s really hard to see how this shakes out or where it ends  because Bitfinex and Tether  can just keep printing more and more USDT  without anybody controlling it except them.

The biggest threat I can personally see  is if a regulator comes in and says  this USDT thing’s really fishy.  You US-based exchanges, i.e. Bittrex,  you have to de-list it.  If that happens and Bittrex or one of these  other big exchanges are forced to remove all USDT pairs,  then everybody who had their money in USDT  is completely stuck.  As I said, there’s no current way to send that tether back  to the Tether Corporation and redeem it  for USD into your bank account.

If you suddenly can’t trade it back into something  like Bitcoin and Ethereum, then send it to GDAX  and then get USD through that method,  then you’re kinda left just holding a bunch of this token  that overnight could be worthless.  If this happens, suddenly you have  two billion dollars worth of this liquid asset  that’s being held by people who thought  they were holding USD but actually weren’t.  There’s a really good account on Twitter called Bitfinex’ed.  I’ll link it below.  I recommend that people follow that account.

It can get a little troll-y from time to time  as with most crypto.  I think it’s important that people keep  a rational objective opinion about this and stay informed.  The last thing you want is to be a bag holder  of this thing that suddenly overnight  isn’t pegged to the US dollar anymore,  not that we know it ever really was.  Changing the topic and another interesting trend  we saw this week was OG developers from the crypto space  leaving their corporate interests behind  to get back into the technology side of things.  As someone who’s really interested in the technology,  this excites me.  It’s good to see these characters come back  and not be focusing on the price  or investing in stuff as much anymore.

The latest news

The first piece of news that came out  was that Ethereum co-founder Vitalik Buterin  had actually left Fenbushi,  which is an investment firm he was part of.  They are actively involved in investing in ICOs  and some of the really early ones as well.  He wants to get back to focusing on proof of state,  Casper, shotting, all this good stuff  that’s gonna help Ethereum scale over time.  I really honestly think that’s the best use of his time  as a community advocate for that kind of stuff.  Even more recently, we heard that Greg Maxwell,  who’s one of the foremost Bitcoin core developers,  is leaving his company Blockstream  also to focus on Bitcoin core development more.

Blockstream, if you all remember, was a big company  that was doing something called side channels  a long time ago but then ultimately just turned in a way  to fund the Bitcoin core dev team in a way  with many of the members of the core dev team  sitting on the Blockstream team as well.  Blockstream have recently moved in a more enterprise,  partnering with banks direction.  It’s really nice to see Greg move away from that  and just focus on the open source project  and making it scale finally.  On that note, we’re already starting to see  some of the fruits of that labor with a paper being released  this week about Schnorr signatures.

Greg Maxwell and some other devs from Blockstream  released this paper, which essentially explains  how Schnorr signatures can be integrated  into a future version of Bitcoin  and what it means for scalability.  In a nutshell, a Schnorr signature is an algorithm  which allows for more compact signatures.  More specifically, it means that  when you sign a transaction,  you don’t have to sign every input in that transaction.  You can sign them together instead of separately.

This gets even more powerful when you’re talking about  multi-signature wallets where currently  you have to have multiple signatures per input,  which bloats out the size of transactions.  This means it’s gonna cut down on all the space  that signatures take up in a current transaction,  which reduces the size of the transaction ultimately.  Combined with segregated witness,  this means that you’ll be able to fit more into blocks  and the whole network should see an improvement  in scalability as a result.  This is really cool to see.

I hope it comes out sooner rather than later.  I’m really looking forward to seeing these developers  that are getting back into the open source community  and focusing on that instead of corporate interests  ’cause I think that’s the way forward.  That’s the only way that we’re really gonna get  their full attention on scaling these solutions.  That’s it for this episode of Crypto Weekly.  I hope it explains some of the stuff  that’s happened in the last week.  If you have any questions,  just drop it in the comments below  and I’ll try to get back to you soon.  If you did find this video helpful, hit that like button.  If you want weekly updates, hit the subscribe button  and that little bell icon.  I don’t know what it does but hit it  and you’ll get notified every time  there’s a new video on my channel.  Again, thanks for watching.  Until next time, see ya later.  (downtempo electronic music)



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Bitcoin crashes, Tether prints $500M+