Controversial twitter user Bitfinex’ed has been shadowbanned from twitter as of the 7th February.

EDIT: As of 8th February, Bitfinex’ed has been reinstated on twtitter.

What you see when clicking on Bitfinex’ed’s twitter page

He had been a tireless campaigner exploring the fundamental problems of Tether as well as attacking exchanges for wash trading and other types of manipulation. In my opinion, I can see how twitter wants to avoid controversy, but it’s another damning indictment of their views on freedom of speech. This article will go into some detail about his findings, and try to explain what the tether problem is in simple language. In the meantime, please support Bitfinex’ed however you can in the quest for truth and concrete answers.

Why the Bitcoin and wider crypto community need the tether question answered once and for all to promote true growth

It sounds counter-intuitive, but in the long term, bitcoin needs the tether situation exposed in order for true price growth. As long as the tether question lingers around, it will scare off real investors who don’t know how much of BTC’s price rise since 2015 has been organic buying and how much of it has been tether printing.

In case you missed it, I’m going to explain exactly how the Tether ploy works, and then explain why it is a thorn in Bitcoin’s side, so if you’re already aware, please skip the first two sections.

What is Tether

Tether is a cryptocurrency that states that the value of each tether token is the equivalent of one us dollar. It gets it’s name from the idea that the value of the cryptocurrency is ‘tethered’ to the value of the US dollar. Tether aims to be a ‘stablecoin’. That is, an easily exchangeable coin that is an intermediary between real fiat currency and cryptocurrencies. Without a stablecoin, changing from bitcoin to USD, for example, is quite costly because of the large spread in exchanges as well as any arbitrary fees that are added on. With a ‘stablecoin’ you can easily swap out your bitcoin for a coin that mimics the movement of fiat currency, but doesn’t have such a high exchange fee, allowing you to quickly take exposure away from cryptocurrencies, without having to spend the time, effort and cost of swapping into fiat.

When tether was first introduced, exchanges liked the concept — they could avoid having to be regulated by pesky financial authorities, as well as not needing banking licenses and avoiding other paperwork. You could start up your own exchange and simply say that you only accepted BTC and would convert all holdings to tether. Everybody wins, because the user gets to convert out of BTC, and the exchange doesnt need a license. Indeed, this was completely fine when bitcoin had a much smaller marketprice and market demand. In a sense, it even added legitimacy to exchanges that worked with USDT, and the idea that a cryptocurrency could mirror the price of a government backed currency (the US dollar,no less) was both novel and exciting at first look. That’s all tether is, and that’s all that it claims to be.

Why does it work? It works because people have been willing to accept that the value of Tether is the same as the value of the US dollar. But how can something that’s printed out of thin air be worth the same as a US dollar?

So, where’s the problem? The problem exists based on where tether claims to take its value from. On tether’s website, they claim that “Every tether is always backed 1-to-1, by traditional currency held in our reserves.” This would indicate that they have well over 2 Billion USD of reserves backing the tether cryptocurrency. Wow! That’s a lot of money for a crypto that was launched in 2015! If you take them at their word then all is well, however, if you are a septic, like Bitfinex’ed and the author, there is a whole host of problems with Tether.

The Tether problem

Given how many exchange users have been, until recently, almost forced to use tether when cashing out of bitcoin, tether found itself with an amount of cash it could use to promote bitcoin price growth. For example, if you sell your BTC for USDT (tether tokens), you can always buy back the BTC with the USDT. Now, we know the amount of bitcoin in the world is fixed, however, the amount of tether is NOT fixed. In fact, they continually change the supply of it. The main accusation leveled against Tether is that they have artificially increased the supply of tethers and used those tethers to buy BTC. In other words, they have printed money out of thin air, and used that money to buy Bitcoin.

The nightmare scenario with Tether, is simply that one day, users who own tether will try to swap their tether for USD, and will find it impossible to do so, because there will be no dollar reserves left.

Why does it work? It works because people have been willing to accept that the value of Tether is the same as the value of the US dollar. But how can something that’s printed out of thin air be worth the same as a US dollar? As mentioned above, Tether claims that they have each USDT backed by a real USD. At this point, you can take them at their word for it, or you can be sceptical and say “maybe they don’t have a dollar for each tether”

Potential nightmare scenario involving Tether

The nightmare scenario with Tether, is simply that one day, users who own tether will try to swap their tether for USD, and will find it impossible to do so, because there will be no reserves left. If this happens it will be because tether has run out of USD reserves. The value of a tether token will instantly plummet, and faith in bitcoin’s price will also plummet as a result. Ironically, if this happens, it will probably happen during a market crash. Remember, When Bernie Madoff was exposed for running a hugely sucessful ponzi scheme, it only happened because investors wanted their money back because of the crash of 2008.

A cynical person would say that Tether understand that they need to avoid a BTC market crash, and as a result, they will continuously print tether to buy BTC with, keeping the BTC price high. Because of this, it breeds distrust in the price of bitcoin, and therefore the crypto community as a whole (because at the moment, alt coins values are highly correlated to the price of bitcoin)

Conclusion: Your choice

You now have the choice as a reader and potential crypto participant to think about the tether problem and decide to continue shedding light on it, or to ignore it and hope it goes away. Perhaps it will go away and resurface in 6 months time. Maybe it will take longer. Madoff kept his ponzi scheme going for decades.

Do what you believe most expedient, but I should tell you I haven’t explored the Tether controversy in much depth. I haven’t mentioned how they severed their relationship with Freidman LLP, or how they have been potentially spoofing and bidding up the market. Bitfinex’ed has explored all of this in great detail, and he has now been banned by twitter. Make of that what you will.