Tether In A Bitcoin Bear Market, And Can Tether Be A World Currency?

What is Tether.

Tether is a token issued on the Bitcoin and Ethereum blockchain. and promises to pay out 1 USD for every Tether issued. This led to the community;s concern as to whether the $2 billion in reserve exist. Tether.io did not, could not or would not provide proof of this. News of Tether.io parting company with their auditors made the situation worse.

Lets examine the facts

1)  The price of Tether remained stable throughout this controversy, meaning that even though there was a strong and targeted campaign against it, Tether holders remained steadfast. There was no sell off and the number of Tether issued actually increased. Action speaks louder than words. Therefore we have to conclude that Tether must have an important role in the Crypto economy.

2) One year ago the daily volume of Tether traded was about a million dollars. Today it is 3.5 billion dollars. This is a phenomenal increase. Something is happening.

3) There were claims that Tether was issued to prop up the price of BTC. This can't be true because the price of BTC is down in spite of the increasing number of Tether issued.

Like it or not, Tether is now a huge part of the Crypto economy. It is already second behind BTC in trading volume. ( Adjusted : BTC 6.5 Tether 3.5 billion ) I have no doubt that Tether will surpass BTC in trading volume soon, especially with BTC losing utility and usage daily.

A "Reserve Bank" For Crypto

Does Tether.io have 2.2 billion USD deposited and/or in assets as they claimed? It is dangerous for Tether to reveal their fiat holdings as these can be subjected to confiscation. More than likely if it exists they will mostly be in accounts not directly attributable to them.

They could be held in pledges and guarantees in fiat or assets. However this is done, all that is necessary is for their holders to believe that they can have their Tokens converted to USD on demand as promised. This really makes Tether.io for all intent and purposes "A Bank". It exist because we believe it is solvent. If not there would have been a huge "run on the bank".

This means that USDT can be just printed into existence by Tether.io at whim. We have no way of knowing if they have the full reserve backing for every Tether they issue. What this means is that Tether is now basically backed by the full faith and trust of the Crypto community. This is the reality. If this is not true Tether will not exist, as they have not or cannot prove that they have full reserves. They only have their promise to convert Tether tokens on demand.

It is possible that the number of Tethers issued follows demand, so that its' value always remain at approximately 1 USD. If the units of Tether issued was fixed then demand would have push the price upwards. There must be some mechanism that is keeping the price of Tether stable. Perhaps it is the belief that there is 1 USD backing every Tether issued.

Now comes an interesting thought. What if the whole world starts pricing everything is Tether. Initially we will view Tether the same as 1 USD, but over time Tether may be deemed to be  the stable unit of monetary value and the USD gets to be priced in Tether, together with every other world fiat currency. If this happens, Tether becomes a world currency! This is not so far fetched as how we view money is a generational thing. The younger generation have more faith in the Crypto economy because they are basically excluded from the legacy economy.

Is Tether a huge risk to the Crypto economy? Will Tether crash to zero?

The whole crypto market is crashing. The only Token increasing in market capitalisation is Tether. Based on this it is unlikely that Tether will crash ahead of other tokens. More than likely it is actually underpinning the whole crypto economy.

Can a government shut Tether.io down? The Chinese government is already clamping down on anything crypto. The currency most at risk is the USD. I really have no clue. If the US government could shut down Tether's accounts, I am sure that they would. All that is needed for crypto to survive is for one country to legalise it and Japan has.

We will have to watch this play out, but the bigger the market cap of Tether the harder it will be to shut it down. The value of a token is in the minds of the people using it, and Tether may actually get the full appreciation, support and protection of the whole crypto community.

Tether is not a threat to the crypto economy. It is a stable unit of measure for the crypto economy.  Even the legacy economy does not have this stable unit of measure. Hopefully a system of decentralised governance for Tether may evolve.

Tether in a bear market

Having seen so many boom and bust cycles in the Bitcoin space I have come to appreciate the value of a stable coin like Tether. A market indexed to BTC rises and crashes with the price of BTC. When the market is index to Tether, each coin will rise and fall on its' own merit.

Current demand for Tethers is fuelled by investors wanting a stable unit to hold value while the crypto market is falling. These investors have not cashed out. Perhaps they are looking to buy back in when they belief the market have bottomed out. Perhaps its' arbitrage value is significant. Maybe it will be a hedge against inflating fiat currencies. Time will tell.

Questions Questions and more Questions.

a) What happens when the market turns bullish again? Will supply and demand for Tethers still be kept in equilibrium?

b) Who is the counter party for Tether is a bear market?

c) Will unscrupulous parties print Tethers out of thin air to manipulate the market?

d) Can Tether become a world currency?

Update 10/2/2018

Another interesting observation on Tether is that its' trading volume is equal to its' market cap at the moment. Meaning that the trading volume is at least 1X the number of coins issued. All other coins trade at only a percentage to its' market cap eg Bitcoin at 0.05X. (1/20th) If this observation holds then Tether will have the highest trading volume if its' Market Cap reaches 8 Billion or with the issue of anoher 6 Billion coins.

Tether is an interesting development as it really can be the glue that connects the whole crypto market. It is an issued token so it is not subjected to mining. It is built on the Bitcoin blockchain as a second layer and is therefore secured by the Bitcoin blockchain. Compared to all the other wannabe stable coins, Tether has achieved the network effect.

It has a very interesting use case in that centralised exchanges uses it to offload most of their KYC AML requirements to Tether.io.

Its' function as in intermediary coin between those who believe that the market is rising and those that believe that the market is falling in any particular coin can only gain more usage and prominence.

Another feature is that it trades in a small price band of +/- 10%. This could be deliberate in the sense that more Tethers will be issued if the price trades above 1 USD and redeemed f it trades below. It now makes it possible for risk adverse traders to enter the market knowing that there is a floor bottom for the price of Tethers. This will bring more liquidity to the whole crypto market.

The Tether database is under reconstruction at the moment, perhaps due to the recent 30 million hack. Even with this negative news the price of Tether did not tank, and Tether continues to trade on the exchanges.

Pushing the virtues of Tether does not mean that I am pro Tether against all the other coins. In fact it means that I am pro Crypto. Tether being a stable coin allows all other coins to rise and fall on their own merits against it. This makes it somewhat like Shapeshift.

Can you see where this is leading? If Tether wallet becomes a spending wallet, it means that you can spend whatever coins you have in Tether on the fly. Merchants need only worry about one currency Tether, and for he moment it is equivalent to USD.

There is no mental gymnastics required to convert between Bitcoin or Ethereum or Litecoin or whatever coin when spending or receiving Crypto. The decision to use or hold any particular crypto or fiat comes before or after the Tether transaction by both parties if needed.

This reasoning taken to the extreme may mean that we could easily drop the USD equivalent. It could just become a stable Tether in its' own right. Can this happen/ I think yes. Will it happen? This is hard to predict.

Tether's advantage here is that it has achieve the most network effect as a stable coin. It is neutral. No one holds Tether expecting the coin to "go to the moon" so to speak. That aside, if Tether.io ever goes for an ICO, their tokens will be a very good buy.

There has been much controversy about the connection between Bitfinex and Tether. I do not know much about the politics in this relationship but I think that it has been positive for Bitfinex and probably all exchanges that uses Tether without dealing in fiat. I hear from a reliable source that Bitfinex is giving out a $1.01 dividend in its' 3rd quarter. That is 100% its' share value and comes after 2 previous dividend issue of  25 cents and 37.5 cents respectively. Without a doubt Tether provides liquidity to the Crypto market and more Tether can only mean a stronger Crypto industry.

Will Bitcoin Segwit Recover its' All Time High Or Go to Zero?

Bitcoin Segwit proponents have spent more that the last 2 years arguing that BTC is a store of value and should not be used for everyday transactions. They have even proposed that transactions can be conducted on Ethereum and Litecoin. Now they are actively touting Lightning as the killer innovation that will make Bitcoin great again.

I find this argument hard to swallow because experience tells me that it is difficult to win customers and nearly impossible to win them back, if they left because of poor customer service. It is no different for Bitcoin. BTC is a product and transactions on the blockchain is a service. Gaining converts was hard, very hard. Now look at how easy it is to lose them.

Using the Sent From Addresses as an approximation to number of users, we see that in less than a month ( 4 January to 1 February ), the number of users fell 60% from 536K to 218K. 

Where have these "customers" gone?

Since the all time high of 19.5K on 17 December, BTC price have dropped to 10K today. Some call it a correction but I will argue that the correction ended 7 January.  Since then the drop in price have tracked the decline in the number of users as shown in the graph above.

It looks like even the most ardent supporters of BTC are no longer buying into the promises of Core developers. BTC's price drop is more than just a correction and the bear market, because Ethereum's price is bucking this trend. 

Since 1 August a large number of BTC users have moved to Alt coins and many have gone all-in to Bitcoin Cash. It would now appear that, even those vehemently against Bitcoin Cash are leaving and moving to Ethereum. This can only mean that Ethereum will soon replace BTC as the top coin in terms of market share.

What about the flippening?

Bitcoin Cash is only 6 months old. The flippening will happen soon enough after BTC loses its' market dominance to Ethereum. Bitcoin Cash will have to convince the market that it is the real Bitcoin and that Bitcoin Segwit was the fork, before it can unseat Ethereum. This will happen because Ethereum was never designed to be a monetary token. For now it can be a "store of value".

Lightning Destroys Bitcoin's Security Model.

Bitcoin stands on three pillars, the users, the miners and the developers. The weakest link here was the developers but fortunately Bitcoin has self correcting features which resulted in the forking off to a new development team (Bitcoin Cash).

Lightning destroys Bitcoin's security model.

One of the most fascinating attribute of bitcoin was that the system pays for its' own security. It may seem trivial now but ask yourself back then, how do you pay someone to secure your protocol with coins that are worth nothing? This was the chicken and egg problem. All prior solutions, including governments,  have all relied on trusted entities to perform that function.

Miner's reward = Block Reward + Transaction Fees  =  12.5  + E[xT]

The principle idea is that as the Block rewards decreases every four years the block reward will be replaced by transaction fees.

T is allowed to increase as fast as the technology for block space allow while keeping x as low as possible.

This requires larger block sizes. Even one that can accommodate billions of transactions (T) in say 10 years. We can be sure that technology will come to the rescue. For example, as we will move to 5G networks, developing countries will skip  1G, 2G, 3G and even 4G to move directly into 5G with the rest of us. This development will happen as sure as they skip landlines entirely to move into mobile networks.

Lightning network changes the security model to :

Miner's reward = Block Reward +  ( Transaction Fees - Lightning Fees ) =  12.5  + { E(xT) - E(yL) }

As the block rewards decreases the transaction fees must also increase. The idea here is to make on-chain transaction very expensive and move all smaller transactions to the Lightning network or side chains.

T is capped and x is allowed to increase as much as demand for settlement allows.
L is allowed to increase indefinitely and y is kept very small.

Transactions to get on and off the lightning channels are part of total T. If it is not obvious yet, as x increases it also gets more expensive to open and close a lightning channel. So how would one get on to lighting if it gets too expensive to open a channel. You will have to subscribe to a channel node directly. That is put your money into a "banking" node. These "banking" nodes will now be in a position to allow or deny services to you ie Be A bank!

At the moment we tend to assume that miner's cost are denominated in dollars or fiat. Therefore as the transaction cost grows to thousands of dollars it will keep pace with costs and miners will be happy. But will they? When we get to the situation where the unit of transaction is bitcoin and not dollars, then the block reward will tend to zero in BTC terms. The only real reward are the on chain transaction fees.

Miners are price takers. They get to determine their income by selecting from a smorgasbord of fees. "Banking" nodes become price setters. They put up that smorgasbord of fees. It will be in their interest to set Lightning fees as high as possible and Mining fees as low as possible.

Nodes were never meant to be compensated in the Bitcoin protocol. They are placed on the user side of Bitcoin's 3 legged equation. They pay for the cost of running a node because their business model requires it. It is their cost to use the system.

Lightning has not taken hold yet and we are far away from "banking" nodes. It could work if miners do not have a choice. But miners have a choice in Bitcoin Cash. Miners will not put up with a situation where they get elbowed out of the system, just as happened with the original core developers.

Bitcoin's security is one of its' greatest strength.

Bitcoin uses proof of work to secure the protocol. This is the most secure system we know. Nothing has ever worked before bitcoin. To emphasise this point, the fastest and most powerful chips are used to mine bitcoins even before they are deployed into mainstream computers. The technology to secure Bitcoin is bleeding edge and will remain so.

Any departure from this is a compromise and introduces some level of centralisation or trust. Proof of stake requires some form of centralisation, moderated in different iterations of the POS model. Without Bitcoin coming first, POS cannot take off on its' own. Bitcoin made it possible for value to flow into the POS tokens.

Trust but verify

It can be argued that not everyone can run a Bitcoin Cash node because of the cost and we have to trust a small number of these expensive nodes. However, any business or organisation that needs to verify their transactions real time will have to run a node. We could have hundreds of thousands of nodes across all sectors and industries. We don't have 100% trusted nodes but we have enough, just as we may not have 100% honest miners, but we have enough.

We cannot say the same for "banking" nodes because their profitability depends on their control of miners revenues, and thus the erosion of Bitcoin's security model. You will not be allowed to verify or audit their setups.

A Rating Agency For Cryptocurrency - Blue Sky For Bitcoin Cash.

The announcement that Weiss will release the first crypto curriency ratings on 24 January 2018, will be the most significant development in the crypto space.

 

Basically Weiss have developed an algorithm to rate cryptos base on 4 criterias

Risk Index   -  Volatility 

Reward Index  -  Profit potential

Technology Index - Whitepaper

Fundamental Index - General Useability

By my reckoning if this rating is accurate then Bitcoin Cash stands head and shoulder above all the others.

1) It scales which puts it above Bitcoin Segwit and Ethereum

2) It is true to the original Satoshi whitepaper 

3) It is a small world network meaning that it is immune to Sybil attacks.

4) It is gaining adoption everyday with large enterprises

5) Price have increased from 300 to $2500 with low volatility in downward price movements

6) It competes on the most secure hashing algorith

7) Biggest development team with at least 4 clients

Look for the price of Bitcoin Cash to strengthen on this news. It will also push the awareness of Bitcoin Cash to people old and new to cryptos.

Update 25/1/2018  The Weiss rating report is a subscription service priced at $936 per annum with a 50% discount for early bird subscriptions. It currently rates Ethereum and EOS at B, Steemit and Cardano at B- Bitcoin at C+ Bitcoin Cash is C-. 

Weiss Announces First Bitcoin and Cryptocurrency Grades by U.S. Rating Agency

Risky Crypto Market to Get the Clarity Only Impartial Ratings Can Provide

Palm Beach Gardens, FL — Weiss Ratings, the nation’s leading independent rating agency of financial institutions, will issue letter grades on cryptocurrencies, including Bitcoin, Ethereum, Ripple, Bitcoin Cash, Cardano, NEM, Litecoin, Stellar, EOS, IOTA, Dash, NEO, TRON, Monero, Bitcoin Gold and many others.

The new Weiss Cryptocurrency Ratings, to be released January 24, are the first by a financial rating agency. They are based on a groundbreaking model that analyzes thousands of data points on each coin’s technology, usage, and trading patterns.

“Many cryptocurrencies are murky, overhyped and vulnerable to crashes. The market desperately needs the clarity that only robust, impartial ratings can provide,” said Weiss Ratings founder, Martin D. Weiss, PhD. “We’re proud to be the first to bring that benefit to investors — to help them cut through the hype and identify the few truly solid cryptocurrencies. Our ratings are based on hard data and objective analysis. But they're bound to create controversy, including some grades that may come as a surprise to some people.”

Weiss Ratings, which began in 1971, rates 55,000 institutions and investments. Unlike Standard & Poor’s, Moody’s, Fitch and A.M. Best, Weiss never accepts compensation of any kind from the entities it rates. Its independence and accuracy have been noted by the U.S. Government Accountability Office (GAO), Barron’s, The Wall Street Journal, and The New York Times, among others.

The Weiss Ratings Scale

Investors should interpret the Weiss Cryptocurrency grade scale with these terms:

A = excellent

B = good

C = fair

D = weak

E = very weak

A plus or minus sign indicates the upper third or lower third of a grade range, respectively. In addition, an F grade is assigned to cryptocurrencies that have failed or are subject to credible allegations of fraud.

Important Caveats

Before acting on, or reacting to, any single grade, investors should be aware of the following five caveats:

Caveat 1. Do not misunderstand the Weiss Ratings scale. Other rating agencies use a scale from triple A to single C.  In that scheme a B grade is “junk” and a C is close to failure. In contrast, Weiss Ratings’ B is “good” and C is “fair.” Based on a study of the Weiss Ratings by the U.S. Government Accountability Office, an institution is not categorized “vulnerable” unless its grade is D+ or lower.

Thus, cryptocurrencies do not have to achieve an A grade to merit interest by investors. A “B” or even “B-” also qualify as the investment rating equivalent to “buy.” At the same time, investors should not be overly alarmed by a “C” rating. It is a passing grade; and for investors, implies the equivalent of “hold.”

Caveat 2. No safe cryptocurrencies. At this early stage in their evolution, there is no such thing as a “safe” cryptocurrency. All investors in the sector must be willing to accept wide price volatility, undefined regulatory risk, frequent market irregularities, and deficiencies in platforms such as currency exchanges.

Caveat 3. Frequent ratings changes. The metrics used to evaluate cryptocurrencies can change more rapidly than those of other investments. Therefore, when using Weiss Cryptocurrency Ratings, investors should expect frequent upgrades and downgrades.

Caveat 4. Opinion. Although Weiss Cryptocurrency Ratings are based on objective analysis free of conflicts of interest, they should not be interpreted as be-all-end-all evaluations. Every grade issued by any rating agency is ultimately an opinion, to be used by the public in the context of opinions from analysts, developers and users.

Caveat 5. Incomplete. No ratings model, no matter how well designed, can evaluate all factors; and this is especially true in new, unchartered sectors like cryptocurrencies. For example, to fully evaluate the blockchain software programs of each new cryptocurrency, teams of expert blockchain developers would need to audit and thoroughly test the code. Although that effort would be an important step forward, especially for developers and certain institutions, it is beyond the scope of this project. Instead, to help guide investors to cryptocurrencies with the most robust technology, the Weiss Ratings evaluates each blockchain technology by using a series of the proxy metrics described below.

The Model

The Weiss Cryptocurrency Ratings model is built from the ground up with five basic layers:

Layer 1. Current data on each currency’s technology, performance and trading trends

Layer 2. Proprietary formulas that convert the data into comparable ratios.

Level 3. Proprietary sub-indexes that aggregate the ratios to measure key factors and features considered critical to the potential success or failure of investments in each cryptocurrency

Level 4. Aggregation of the sub-indexes into four key indexes, each meriting a separate letter grade

Level 5. Aggregation of the four key indexes into an overall letter grade

Thus, each Weiss Cryptocurrency Rating represents the pinnacle of a pyramid built from tens of thousands of calculations that feed up to a final grade.

Disclosure of Model Components

To be consistent with the transparency that has become the hallmark of the cryptocurrency space, Weiss Ratings’ intent over time is to disclose as much as possible about its model.

However, decades of experience in the financial marketplace indicate that, once armed with the specific formulas or processes of a ratings model, some rated entities seek to game the system: They try to manipulate data they can influence or control with the goal of achieving an unfair advantage. To help avoid this outcome, disclosure must proceed in phases, beginning with a broad description of the four key indexes in the Weiss Cryptocurrency Ratings model. These are:

1. The Cryptocurrency Risk Index. A composite of sub-indexes that measure (a) relative and absolute price fluctuations over multiple time frames, (b) declines from peak to trough in terms of frequency and magnitude, (c) market bias, whether up or down, and other factors.
2. The Cryptocurrency Reward Index. A composite of sub-indexes that evaluate (a) returns compared to moving averages, (b) absolute returns compared to a benchmark, (c) smoothed returns compared to a benchmark, and other factors.
3. The Cryptocurrency Technology Index. A composite of sub-indexes calculated by a manual analysis of publicly available white papers, public discussion forums or announcements, and open source code to evaluate the protocols underlying each cryptocurrency. Factors considered include the level of anonymity, sophistication of monetary policy, governance capabilities, the ability or flexibility to improve code, energy efficiency, scaling solutions, interoperability with other blockchains and many more.
4. The Cryptocurrency Fundamental Index. A composite of sub-indexes that evaluate transaction speed and scalability, market penetration, network security, decentralization of block production, network capacity, developer participation, public acceptance, plus other key factors.

Each of these indexes is appropriately weighted, compared and then evaluated in terms of how it interacts with the other three indexes systemically. The end result of the analytical process is the Weiss Cryptocurrency Rating.

Overall, Weiss Cryptocurrency Ratings provide a well-rounded, solidly-grounded opinion based on hard facts and steeped in four decades of ratings experience. They can serve as much-needed cryptocurrency GPS for investors.

Is The Sky Falling ? No It Is The CBOE/CME Futures But The Flippening Is Still On.

So we are at 11K for BTC today and we nearly went below 10K. What caused this crash? Remember back in December when some of us had doubts about the futures being bullish for Bitcoin, Well we were right. The short sellers are in to make a fortune.

To make money you will always need to bet against the trend ant at that time the trend was bullish. All the pundits were predicting 25K 30K Bitcoin. If you were a whale or belong to that group and had the resources to sell the index then taking up a short position on the futures would be the surest and most profitable bet of all. Each CME contract was for 5 BTC which at 18K would mean a profit of around 40K a contract. The beauty is that this is an unregulated market and even if they manipulated the index there is no authority that can hold them accountable for market manipulation.

The first CBOE futures expires 17/1/2018 and the first CCME futures expires a week later. We can expect to see bearish prices for the next week or two. By then when the sentiment is really bearish and pundits predicting 5K BTC then the smart money futures bet will be the other way. So we will see a huge recovery come March/April 2018.

Update : Calvin Ayrn was bringing in significant hashpower to BCH this week. Instead we we the hashrate increasing in BTC. It could be difficulty pump for BTC, before pulling the plug. Looks like it is Coingeek.com and they have started mining BCH. First block today. This is the beginning of the end for BTC. Good riddance.

The flippening is still on.

I do not trade futures. I buy on fundamentals. For this period the only fundamental that we need to be concern with is that both BTC and BCH cannot co-exist on the same mining algorithm. BTC will have to fork away once it is caught in the Chain Death Spiral. High transaction fees is an extinction event, and BTC is only holding the higher price ahead of BCH because it has incumbency.

A price drop of this magnitude without the price of BCH following suite would have triggered the Chain Death Spiral for BTC. However all cryptos including BCH experience the same sell off which means that weak hands who were only in it for speculation and a quick profit have sold their positions.

What we need to realise is that there were many BTC investors who bought into BTC at up to 19K and have moved the BTC to their personal wallet, found to their detriment that their transfer to the exchange for a quick sell was stuck and in just over 24 hours saw their investment drop an additional 3K per BTC and it is possibly still stuck in the BTC unconfirmed mempool. This will be a bitter pill to swallow. Another angry BTC investor.

Everyday the odds are being stacked against BTC. More people are leaving. More businesses announcing that they no longer accept BTC and they are switching their business model to BCH. More mainstream adoption for BCH.  More features being added to the BCH platform and more project shelved because of the unuseability of BTC are now being revived on the BCH chain.

The greatest threat to BTC now is not a drop in the price of BTC but a quick rise in the price of BCH. Keep an eye on that metric. It was .18 when the market collapsed and went as low as .15 but have now recovered to .16

Yes. The flippening is still on.