the house of cards is collapsing

Bitcoin, far from being an asset equivalent to gold as its most fervent supporters believe, continues its descent into hell. With him, the entire cryptocurrency ecosystem is at risk of collapse. In addition to small investors who believed in the myth of easy money, the entire financial system would be hit in the heart. When history keeps repeating itself…

At the time of writing, Bitcoin continues to fall. After going from being worth one bitcoin to $32,000 a year ago and peaking at $67,000 in November 2021, bitcoin is now worth just $20,000.

Evolution of the value of Bitcoin in dollars © CoinMarketCap

This phenomenon is also visible for another popular cryptocurrency, Ethereum, which runs on another blockchain, as well as the vast majority of cryptoassets. This fall also affects Tether, which experienced a flash crash in May this year. Or, unlike the two previous ones, this asset belongs to the category of stablecoins, whose value is assumed to remain very stable.

Evolution of the value of Tether in dollars © CoinMarketCap

Tether, lubricant of the crypto exchange system

Admittedly, during this crash, the difference in parity between Tether and the dollar seems small, around 4/1000. However, unlike Ethereum and Bitcoin which rely on an extremely energy-intensive mining system, and therefore on scarcity to ensure their value, the value of Tether is based on the supposed dollar reserves of Tether Ltd (as well as on usefulness or popularity). More specifically, Tether Ltd is supposed to guarantee parity between Tether and the dollar and that is why it is included in the category of stablecoins : its value is indexed on another element, supposed to guarantee its stability. For the rest, as for other cryptocurrencies, it works using a blockchain.

The whole cryptocurrency edifice is a veritable house of cards which, in reality, is only based on the trust of its users.

Besides the stablecoins of the type of Tether that are backed by fiat currency (such as dollar-backed Binance USD or euro-backed Stasis Euro), there are stablecoins backed by metals (such as gold pegged Tether Gold) and stablecoins so-called algorithmic (like Terra, which has just gone bankrupt). The value of the latter is supposed to be guaranteed by algorithms called “smart contracts”: when the value of one of these assets decreases, an algorithm withdraws it from circulation in order to increase the scarcity and vice versa. Finally, there are stablecoins, like the DAI, which combines a stabilization algorithm and … indexing to another cryptocurrency. It is undoubtedly thanks to this last example that we realize that the whole edifice of cryptocurrencies is a veritable house of cards which, in reality, is only based on the trust of its users.

The crash of Tether is all the more serious as this crypto plays a fundamental role in the piping of cryptocurrencies. The majority of Bitcoin exchanges are done for example via Tether. There are two reasons for this. The first is that it can be long and must convert dollars or euros directly into Bitcoin or Ethereum, which is not the case when going through a stablecoin like Tether. The second is, conversely, when a stock market storm hits your favorite cryptocurrency, you can convert it and hold onto it while the storm passes through a stablecoin of your choice to limit losses. However, since the value of cryptocurrencies has fallen sharply since the start of the year, uncertainties about the ability of stablecoins to fulfill their promise of stability have increased.

A scam that comes to light

Several elements indeed invite us to question the long-blind trust in the stablecoins. In the case of Tether, as well as for other stablecoins backed by fiduciary currencies, to ensure parity between Tether and the dollar, Tether Ltd must hold, in dollars, the equivalent of all the Tethers in circulation. So, if 100,000 Tethers are in circulation, Tether Ltd is assumed to hold $100,000. But the reality is quite different: to ensure the value of the 65 billion Tethers currently in circulation, Tether Ltd is supposed to hold 65 billion dollars. To give an order of magnitude, if Tether Ltd were a bank, only about forty American banks would be able to insure deposits at this height. This constitutes a first reason for doubt as to the real value of a Tether.

Tether Ltd would only hold 3-4% of dollars compared to the amount of “currency” issued.

However, Tether Ltd would only hold 3 to 4% of dollars compared to the quantity of “currency” issued. The rest consists of assets, mainly IOUs from other companies which, for the time being, it is difficult to see who they are and whether they are reliable. Finally, an investigation for bank fraud against Tether is being carried out by the American authorities. In short, Tether would therefore only rely on wind.

With the Tether scam coming more and more into the open, it becomes more and more likely that it will eventually collapse and disappear. He will then suffer the same fate as Terra, whose death wiped out $50 billion in market capitalization overnight. This consequently caused the explosion of the cryptocurrency bubble. This latest event would have major repercussions for the global financial system, similar to those that followed the bursting of the stock market bubble. subprime in 2007.

“Cryptocurrency Winter”

In addition to cryptocurrency reliability issues, two other factors may explain what is already being called “cryptocurrency winter”. The first is due to the very nature of cryptocurrencies based on the “proof of work” method, such as Bitcoin, Ethereum or Dogecoin. This method, to verify that the blockchain does not contain errors and which leads to the creation of the corresponding currency, requires “mining”, that is to say, performing a large number of calculation operations. In other words, to produce Bitcoin, for example, you have to run a large number of computers, which therefore requires a large amount of energy.

However, with the inflation of energy prices, due to speculation, the war in Ukraine and, in recent days, the increase in temperature in certain “mining” areas, the profitability of such operations is severely eroded. Moreover, the “mining” operation consists of using a lot of energy to obtain something purely virtual, a “coin”. By way of comparison, the printing of common currency is much less energy spent for a similar result. These cryptocurrencies therefore have a strong deficit aspect… hence the need for an external contribution to justify their interests.

This external contribution probably came from the FED and the ECB. Indeed, if we look at the end of 2021, we see two things: on the one hand, it is the moment when Bitcoin, Dogecoin and Ethereum begin their descents; on the other hand, it is also the moment when the FED begins to signal its intention of monetary tightening via the end of quantitative easing (QE) and via the increase in its interest rates. One hypothesis is therefore that the markets have been reduced and have therefore limited risky investments… such as cryptocurrencies.

Receive our latest articles

Sendinblue Newsletter

This hypothesis was confirmed by subsequent events: the FED raised its rates in March, May and June while Bitcoin, Ethereum and Dogecoin confirmed their collapse… This monetary tightening should continue to increase as much more than it is expected that the ECB, after initially refusing to close the monetary tap for the year 2022, will reconsider its decision and increase its interest rates as of July 21, 2022.

A significant portion of the investors who will find themselves harmed would thus be made up of low-income workers, having believed in the myth of easy money associated with cryptos.

This explosion of the cryptocurrency bubble, before creating a chain reaction in the financial system, will first impact cryptocurrency investors. And these are probably not only made up of wealth: in December 2021, 16% of Americans had already used or invested in cryptocurrencies, while in June 2022, 10% of European households had invested in these assets. A significant portion of the investors who will find themselves harmed would thus be made up of low-income workers, having believed in the myth of easy money associated with cryptos.

Instead of letting them give in to the sirens of various celebrities promoting cryptocurrencies, such as Katy Perry, Lionel Messi, Paris Hilton or Mike Tyson, or wanting to develop this sector as the Minister of Economy and finances, he should have taken an immediate protective measure: prohibit the sale of cryptocurrencies via online exchanges like Binance or Coinbase, which make money through commissions on transactions carried out. There is worse, like the case of Celsius, which, in addition to commissions, allows the cryptocurrencies of its users, which amounted to mid-May around the trifle of ten billion dollars and which now allows it that the platform went bankrupt, to repay its creditors to the chagrin of its users. More generally, the lack of interest of cryptos in everyday life, confining them to a purely speculative role, as well as their disastrous energy bill, should encourage consideration of an outright ban on the trading and holding of these assets.

As this has not been done, we can once again observe this fact: the market is its own gravedigger and the States must therefore intervene to regulate it. It was a lesson that should have been taught as early as 2008 by our leaders. Since this has not been done, we will, once again, suffer the disastrous consequences. Until when ?

Leave a Comment