I warned everyone every about Tether’s impact on Bitcoin (OTCQX:GBTC, COIN) back in December (part 1, part 2, part 3) before the mainstream media finally picked up the story. Now that the cat’s out of the bag, what will save Bitcoin investors?
It’s been two weeks since the last 100 million lot of Tether was issued (view the history here). It appears that the tap has run dry for now as the controlling entities behind Tether (Bitfinex and Tether Limited) face mounting regulatory and public scrutiny over the legitimacy of what now amounts to over 2.2 billion of Tether. Since Tether Limited just severed its relationship with its auditor Friedman LLP (can’t say I’m surprised), who by the way never produced an audit, the outlook isn’t so bright. To save Friedman some face, I will add that they couldn’t produce an audit not out of incompetence, but as the result of direct obstruction from Tether Limited, as they freely admitted in Tether Limited’s statement to Coindesk:
We confirm that the relationship with Friedman is dissolved. Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame. As Tether is the first company in the space to undergo this process and pursue this level of transparency, there is no precedent set to guide the process nor any benchmark against which to measure its success. (emphasis added)
Perhaps the Tether generator will start up once again, as I’m sure Bitfinex and Tether Limited have wads of wash to throw at lawyers to delay any judgement for as long as possible, but for now at least, there is not much liquidity for sellers as evidenced by the collapsing Bitcoin price, which has cratered by more than half from its near $20k high at its lows.
Enter Jack Dorsey and Robinhood
During a time when legitimate financial institutions are scrambling to protect naïve consumers by imposing restrictions such as banning the purchase of cryptocurrencies with credit cards, Jack Dorsey of Square (SQ) and Robinhood (the no-commission broker, unrelated to Square) are trying to open the flood gates. Before anyone rush to say that the banks only care about protecting their own business model (as if cryptocurrencies are disrupting the status quo in any meaningful way), I would note that banks would love it if you could splurge your credit on anything so that it carries a positive balance for them to earn 20% interest.
Masquerading as the good guys (consumer friendly platform, “disrupt the banks”, all that jazz), Square (through its Cash app) and Robinhood are now actively encouraging consumers to purchase Bitcoin. To celebrate Bitcoin, Square (through cash.me) even created a series of cute cartoon drawings (examples below) littered with inaccuracies and exaggerations and presenting them as facts; such as touting Bitcoin’s ability to hold value because there is a limited amount and stating that Bitcoin is a “radically new way to transact and store value all around the world.” At best, these are arguments that a Bitcoin bull could make, which by no means make them facts. You can read my previous article (Why Bitcoin Is Worthless) to understand why I disagree with them.
Robinhood’s promotion of cryptocurrencies is very blatant as well. On its dedicated cryptocurrency website, cryptocurrencies are promoted as an “investment opportunity” that you don’t want to miss out on.
Despite both companies painting themselves as consumer friendly platforms, neither of them highlight the tremendous risks associated with cryptocurrencies; instead, they are peddling this new “investment opportunity” to uninformed consumers.
Impact on Bitcoin’s Price
Once fully implemented, I believe that the Cash app and Robinhood will have a very positive effect on Bitcoin prices in the short-run. Considering that 2.2 billion of Tether likely created a massive bubble and completely distorted the underlying supply/demand dynamic of Bitcoin, a sudden surge in buying pressure from Square and Robinhood users will have a similar effect. The reason is that it will be a one-way street upward is very simple: once crypto trading is enabled on these platforms, new users can only buy because neither platform allows short selling.
Currently Robinhood has 3 million users and I estimate the Cash App to have at least 15 million users based on Google Play’s download count and the number of reviews on the App Store on iOS and Google Play. If every user threw in just $100, $180 million of new demand would be created. If every user invests $500, $900 million of new demand would be created.
Before the “Crash of 2018,” the last 900 million of Tether issuance corresponded to Bitcoin’s rise from $6600 to $13200.
At the time of writing, Bitcoin has dropped to a similar level once again, hovering around $6600. This means that theoretically we could see a rise of a similar magnitude once $900 million of new demand shows up in the market; Bitcoin could double once again to $13200. However, given the clear shift in sentiment due to the bursting of what was clearly a bubble (in hindsight), I believe that the theoretical gain is unlikely to materialize in practice. Still, even if we assume that the new demand is only 25% as effective as before (due to higher selling pressure), Bitcoin could still rise to $8250 on this tailwind.
I remain highly skeptical of Bitcoin’s rise and Tether’s role in the ecosystem. However, I believe that Bitcoin bulls will catch a break in the short-term once the Cash app and Robinhood fully enable crypto trading as a flood of new money pours into Bitcoin.
While this may be good for Bitcoin in the short-run, I find this behavior by both companies to be absolutely disgusting. The fact that Jack Dorsey put up some fairy tale cartoon called “ My First Bitcoin” made me throw up a little. We are talking about an “asset” that could potentially be built on a foundation of lies, the fact that the CEO of Twitter (TWTR) and Square (SQ) is using his social status to promote it is sickening.
On Tether Limited and Bitfinex, I believe that we are at a critical juncture with Bitcoin, not unlike the time when Kenneth Lay of Enron famously said: “We will cooperate fully with the SEC and look forward to the opportunity to put any concern about these transactions to rest.”
The truth will reveal itself in time. For the long-term, I reiterate my belief that Bitcoin is worth $0. But in the meantime, I expect the flood of new money to push prices higher. Don’t be fooled however, lest you become a new bagholder courtesy of Square and Robinhood. Perhaps this article will change that, perhaps not, but I will continue to monitor the situation.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.