Online currency markets have dropped this week- with some currencies dropping up to double percentages figures. If historical trends are any indicators, the entire market is forecast for a continual downward trend for the next few weeks. A correction has been long overdue as the total market capitalization in the past three months doubled from 100 billion to 200 billion. I still find it absolutely incredible how people expected the market to continue rising at a completely unsustainable rate.

I’m even more astounded at the levels of loyalty individual’s display towards certain currencies. I’m noticing more and more investors display zero insight (or even interest) towards the market forces at play outside of their chosen forum and how these market forces impact profit of their investment. It worries me that the individuals within these forums display increasing levels of idolisation towards the developers of their currencies. Developers are quickly becoming superstars and it’s another reason why I’m concerned about the overall health of the market. But it’s not the only reason.

Prior to this drop, I was becoming more and more nervous about the rapid, unsustainable increase in the price of BTC and the looming Segwit2x hard fork. I knew it was time to look for an exit when I actually started to look into the integrity of Aon insurance company http://www.aon.com/default.jsp after becoming increasingly paranoid that in the event of the entire market crash, liquidity in the exchanges might potentially have a collateral effect on reputable exchanges like GDAX (who is insured by Aon).

After some consideration, the following are my five concerns about the health of online currencies. I do feel that these issues will play out in the following two years at some point. Whether they have a substantial effect on the market is anyone’s guess. They are in no particular order.

1. Is Tether (USDT) really backed by USD by Bitfinnex?

Tether is a currency supposedly backed 1:1 by US Dollar. The idea behind Tether was to provide a safe haven throughout potential market volatility. It was somewhere for investors to park their money safely before reinvesting funds into their chosen currency.

Tether assures people that:

“Every tether is always backed 1-to-1, by traditional currency held in our reserves. Our reserve holdings are published daily and subject to frequent professional audits”

Sounds good so far, so what’s the problem?

A. Although the public audits released by Tether bank do provide some information, they only date back to early 2017. This is important. Six months prior to this, the majority holder of Tether- Bitfinnex Exchange was hacked for 120,000 Bitcoins (now worth 160 million). As a result, Bitfinnex issues a token “BFX” to their customers who lost money in the hack as an IOU. Bitfinnex encourages these customers to trade their BFX for shares that Bitfinnex has determined are worth $1.00. Bitfinnex customers trade these shares to other customers. After some magical accounting wizardry, 6 months later, Bitfinnex claims to have fully reimbursed all of their customers back for the loss, while in the meantime a number of Tethers are issued into the market.

B. The issuance of Tether appears to correspond with increased Margin borrowing availability on the Bitfinnex Exchange. Simply put, there is a plausible theory that Tethers are being issued as a way of funding margin positions on Bitfinex

https://medium.com/@bitfinexed/are-fraudulent-tethers-being-used-for-margin-lending-on-bitfinex-5de9dd80f330

This leads me to my second concern:

2. Concerns regarding the liquidity of Bitfinnex

At this time there has been $370 million Tether issued onto online markets. Any potential run on the Bitfinnex exchange might only be a hiccup for BTC- which now has a market cap of $112 billion at this time of writing, however; it would also have a domino effect on other currencies stored on the exchange. It still amazes me that investors continue to ignore the price relation between BTC and everything else.

Regardless, If either A or B above is true, then it creates a very real question as to the liquidity one of the largest Bitcoin exchanges in the world- Bitfinex. Even after briefly research into Tether and its ties to Bitfinnex- the lack of public auditing is a cause for concerns. My theory is that it would not cause any major dips in the market; instead, any market correction would only be aggravated by worried investors attempting to exchange BTC for USD. It would be similar to a run on the bank, except the bank doesn’t have any money and there is no other financial body to bail them out. Then again, this wouldn’t be the first time where liquidity is created out of thin air. Real world financial markets have been doing this for years and this is my third concern.

3. The elephant monster in the room: Government debt at an all-time high

Currently, the world sits on a total debt of 60 trillion- the highest it’s ever been. If the worldwide debt is a giant bonfire doused with petrol then the US debt crisis is a lit match. Since 1962, American presidents have appealed to Congress 74 times to increase the debt ceiling. Congress- with no other alternative other than facing a worldwide recession has increased the American debt ceiling 74 times. As a result, America now sits on a gross national debt of $19.8 trillion and it’s getting worse.

The last economic crisis in 2008 was a result of the subprime mortgage bubble and gross misconduct of CDO’s by banks such as Lehman Brothers and Merrill Lynch. It could be interpreted as debt accrued by the individual and traded irresponsibly between investment firms rather than debt accrued by the government. This is my concern. Individuals and companies file for bankruptcies every so often and no one bats an eyelid. If a bank goes under it makes the front page of a newspaper for a few months. If a country goes bankrupt it has massive, financial implications. Just look at Zimbabwe, India, Greece and more recently Venezuela. If this happens on a widespread scale it would massively impact not only bonds, stocks, precious metals but online currencies too- at least initially.

4: The Stock market is at an all-time high

On November 7, 2017, the Dow Jones set a new closing record of 23,557.23. It has set 74 new record highs since Donald Trump took office. (note: It is a complete coincidence that the 74 record highs of the Dow Jones matches with the 74 times Congress has increased the debt ceiling, they are not correlated). I personally view Bitcoin as an excellent store of value, however; if other financial markets collapse, large investors will be pulling liquidity out of online currency markets to fund losses there. The immediate aftereffect of a real-world financial collapse would be the beginning of a bear market within online currency markets. Long-term- it might provide an excellent kick-start to online currencies and we might see a flock of new investors exiting other financial markets. In the future Bitcoin will be utilised more as a store of value than gold.

One quote that remains with me when considering the future is that “you don’t need a crystal ball when you have a history book.” If we look at the chart below you can see how the market rises and falls since the early 1960’s. Right now we are sitting on the precipice of the greatest financial economic incline in history. Maybe it will go up further; maybe it will be years before the next economic recession. For me, it’s more of a question of when.

5: The rapidly expanding ICO bubble and online currency scams hedge funds:

I think most educated investors see this one coming, so maybe it’s already priced in. I doubt it. I’m not going to write much about this, instead, I’m going to link a video of Tone Vays and Vortex interviewing Augusta Summers- managing partner at Auryn Capital which manages more than $12 million of investors funds. Bear in mind, that this is only one online currency hedge funds managing hundreds of millions of people’s money. Many of you might find the interview funny, I found it terrifying. (Interview starts at 4:10)

In conclusion: I’ve been out of the market for the past week and have no intention of returning in the immediate future- at least until we see a significant correction for Bitcoin. The above points aren’t the only challenges for the online currency markets, There are others such as the Bitcoin war against Bcash as well as the rapid acceleration of the price of Bitcoin in the past year. There are also some positive such as the introduction of CME futures in the coming weeks- which could potentially stabilise the volatility of Bitcoin.