Structure of Crypto Market? (Card House?) – Beginners’ Guide

Is the cryptocurrency market a card 
house that could collapse at any moment?   And if so, what's underneath the card house? Well 
if you tuned into the first video of this series,   we know it may frightfully be yet another card 
house. Hello, I'm Crypto Casey and this is the   second video in a three part series where we will 
investigate whether or not the cryptocurrency   market as well as the entire global financial 
system is indeed on the verge of collapse. This   is a beginner's guide, where we will break down 
step by step how the cryptocurrency market is   structured, What stable coins are, their role in 
the cryptocurrency market, and why stable coins   will both drive a massive global adoption 
of cryptocurrencies while also potentially   threatening mass adoption of cryptocurrencies. 
Our goal by the end of this video series is for   us to understand the traditional financial 
systems relationship with the cryptocurrency   market. And if a crypto collapse can happen, how 
and when it could happen, and what we can do to   protect ourselves as investors in this space. 
If you haven't yet, click on the link above to   check out the first video where we learn about 
the structure of the financial system and how   it's the foundation upon which the crypto markets 
currently operate.

Awesome. Let's hit video two.   Just a quick recap for a more seamless transition 
between the first video currently the crypto   markets are highly correlated with the traditional 
markets. And on an abstract conceptual level,   the crypto markets are still utilizing their 
traditional global financial system as a   foundation. And here's a visual representation 
of the current state of the US financial system,   an inverted or upside down card house, the 
lowest rows representing less risky assets   and the highest rows representing the 
most risky assets. from bottom to top,   we have a few real treasury bonds. above those 
we have re hypothecated bonds in real estate,   then mortgage backed securities and commodities. 
Next, stocks, bonds and equities.

And finally,   options futures and derivatives, and surprisingly, 
are rather unsurprisingly, the structure is a   right side up card house whose foundation is the 
traditional financial system, inverted card house,   which when put all together looks something 
like this. Fascinating, right? So let's break   down the structure of the crypto market card house 
together in three sections so we can get a better   understanding about the current state of affairs 
in the crypto markets, section one stable coins.   So each cryptocurrency has a different function 
or utility. And types of cryptocurrencies that peg   their price per token to something with stable 
pricing like the US dollar are known as stable   coins, for example, usdc and dai or d.a.i.

Are 
tokens that are pegged to the US dollar and that   they maintain the same value as a US dollar. 
This makes the token price stable staying at   nearly $1 per usdc, which is why tokens with this 
function are called stable coins. Stable coins   were designed for two main reasons, one to bridge 
the gap between fiat currencies like the US dollar   euro or British pound and cryptocurrencies with 
VR to crypto convertibility. This allows people   to transact between cryptocurrencies quickly and 
seamlessly without the multi day lag associated   with wire transfers of Fiat between traditional 
banks and to stable coins were also designed to   decrease volatility associated with holding most 
cryptocurrencies by allowing people with the token   to hold an amount of crypto with less price 
fluctuation. For example, when you look at the   price of cryptocurrencies, like Bitcoin and ether, 
you see how the prices are constantly in flux.   One day, Bitcoin can be worth 30,000, and the next 
day it can be worth 35,000.

However, with a stable   coin, like USD C, you can hold $10,000 worth of 
the cryptocurrency and minute to minute day to day   the value will be representative of the US dollar 
and remain relatively unchanged, which gives   stable coins like USD C, a lot of utility in the 
crypto market. This greatly facilitates trading,   lending and borrowing in the cryptocurrency 
marketplace, while also providing massive amounts   of liquidity stable coins allow for fast efficient 
treatability of crypto which leads to high   liquidity. What is liquidity? liquidity is just 
a fancy finance term that describes the level of   activity in a market or how many people are buying 
and selling in the market and at what frequency.   So high liquidity and crypto means 
cryptocurrencies in the marketplace,   or exchanges are being bought and sold frequently 
and fast before much price change occurs.

Bitcoin   is an example of an asset with high liquidity as 
when you buy or sell Bitcoin at market price. The   transaction happens instantly because there 
are a lot of buyers as well as sellers in   the Bitcoin market. So you can sell your Bitcoin 
for cash instantly pretty much on exchanges with   high liquidity like crypto.com or Coinbase. And 
stable coins are one of the main reasons that the   crypto market has a lot of liquidity due to the 
Fiat to crypto convertibility and the decrease   in volatility they provide for investors in the 
space.

There are several different stable coins   currently in use, but the largest most popular and 
pervasive one is tether or USD t Which brings us   to the next section. Section two tether. tether 
is a stable coin that was founded in July 2014   by Brock Pierce, Greg sellers and Reeve Collins 
originally tether was created as a cryptocurrency   fully backed one to one by bank deposits of real 
US dollars. But as time went on that intention   couldn't be farther from tethers current reality. 
Let's briefly touch on tethers business structure   before exploring the many uncertainties 
and scandals that plague its history and   taint its current reputation.

There are four main 
entities that make up tethers business structure,   Ifinex, bitfinex, tether limited, and tether 
Holdings Limited. bitfinex is a cryptocurrency   exchange that was founded in 2012. And a 
couple of years later, in 2014, bitfinex set up   one entity called tether Holdings Limited in the 
British Virgin Islands, and another entity that   is a fully owned subsidiary of tether Holdings 
Limited based in Hong Kong called tether limited,   which was created to issue the tether tokens 
the following year in 2015, bitfinex enabled   trading of tether on its platform, and during 
that time, tether and bitfinex representatives   deceptively maintained that tether and bitfinex 
were completely separate, unrelated entities. It   wasn't until two years later in November of 2017, 
and the paradise papers leak that the creation of   tether Holdings Limited in 2014 was revealed. 
So the owners of bitfinex control both tether   Holdings Limited and tether limited, and as 
if it couldn't get even more convoluted.

An   investigation found that an entity called Ifinex 
is the main operator of both bitfinex and tether.   Next, now that we know more about tethers 
origin and suspect business structure,   let's go through some of its scandals that further 
damage its reputation. Since its inception, tether   claimed that each other token issued corresponded 
with it was backed by one equal real dollar in   a bank account. It wasn't until March of 2019. 
That tether admitted its underlying assets also   included loans to undisclosed affiliate companies. 
And a month later in April 2019, tethers lawyer   revealed that only 74% of the outstanding tether 
in circulation was backed.

That same month,   New York Attorney General Letitia James filed a 
lawsuit against Bitfinex, alleging it used tethers   funds to try and cover up $850 million worth of 
missing funds since 2018. Further investigation   revealed that bitfinex was unable to create 
relationships with traditional banks. So instead,   they started using an unlicensed payment processor 
called crypto capital Corp, which unfortunately   ended up stealing funds. Ifinex, the operator of 
bitfinex and tether lied about tethers backing   in the relationship between the two companies in 
an attempt to hide those losses. And there was yet   another scandal that surfaced around the same time 
during the previous bull cycle in 2017, bitfinex   and tether were accused of manipulating the price 
of bitcoin. Research shows that increased amounts   of tether printed into circulation associated 
with trading on the bitfinex exchange accounted   for about half of the increase in bitcoins price. 
So was 50% of the price increases be experienced   during the last bull cycle, all because of the 
orchestrated creation of tether token printing?   Well, wait, there's more. In addition to price 
manipulation bitfinex was also manipulating   trading volume at that time to make it look like 
more trading activity was happening in the crypto   market then there actually was.

Research found 
that small orders were moving the price as much   as large orders with lots of oddly specific order 
sizes, order sizes, so specific mind you that   they went out five decimal points, and these 
orders were repeated over and over again with   high frequency. This begs the question of whether 
or not we can even rely on the historical price   movement of Bitcoin from the last bull cycle 
to predict how the current one will unfold.   But that question warrants its own separate 
video altogether. Either way, shady AF. So   and the settlement this past February of 2021, 
bitfinex and tether agreed to pay a penalty of   $18.5 million and provide quarterly audits of 
tethers underlying reserve assets. Nice. Finally,   a slap on the wrist and fourth oversight that 
will put all of our minds at ease, right?   Moving right along next Finally, the 
gold ticket item we have been waiting for   cash. Cash at Big yikes guys big big Yikes. 
3.87%. Well, and bear in mind this represents   a percentage of a smaller percentage. According 
to this morbidly massively oversimplified report,   together in all of its short sketch late in time 
of existence, admits to the entire world that the   amount of cash it has on hand backing all of 
the at the time of this video, upwards of $63   billion worth of it's the goosy for Ghazi, fairy 
dust tether to again adds up to a whopping 2.93%   2.93% of the amount of real US dollars tether 
claims to have on this elementary school level   pie chart that looks like it was whipped up by 
the likes of I don't know, maybe some especially   savvy housecat are held as reserves for the 
third largest cryptocurrency by market cap,   unsettling.

Oh, just wait, this is just the tip 
of the iceberg. But first, let's get through this   report, which I swear would not receive high marks 
in any grade above fourth. Seriously, this is some   fourth grade level reporting here. They literally 
just use some template from Excel and put the   numbers chose the color scheme and didn't even 
bother changing the font from the default Colibri.   Look, there's not even a source or footnote 
information for these percentages. And there's   not even any dollar representation of these 
percentages. We need an audit of the audit. And if   it is going to be this level of reporting, we're 
going to need an audit of the audit of the audit   in aconitum. I mean, let's ask ourselves what 
was tethers goal with this report? To buy trust   or to buy time? Let me know in the comments below. 
Alright, let's move on because this next item from   the pie chart should pique your interest if you've 
survived the first video of this finance and   crypto cartel series 3.6% of the chart consists 
of reverse repo notes.

And using our newfound   knowledge, we can deduce that tether is borrowing 
some definitely re hypothecated US Treasury bonds   with a promise to give them back at a later date 
plus interest hence the reverse repo note. And the   final piece of the pie 2.94% consists of treasury 
bills, all of which are 1,000% re hypothecated,   I can assure you amazing, people are putting their 
money into tether borrowing against their tether   lending their tether holding their tether 
leveraging their tether staking their tether,   trading their tether have a buy and sell 
orders to convert crypto into tether.   All the while tether is basically doing the 
same very thing with their reserves. Gambling,   oh wait, hold on. Maybe we're being too hasty in 
our judgment. Let's see what others have to say.   criticisms of tethers reserves are unfounded 
says, Wait, who's this bitfinex CTO? Yeah, get   out of town. That's basically tether saying that 
criticism of their own reserves is unfounded. So   just to recap, tether the most massive, pervasive, 
stable coin that is largely unstable is sketchy   because of its unclear relationship with business 
entities that were Actually in control over it,   that being bitfinex and overall Ifinex these 
entities manipulation of the price of bitcoin by   50% in the last bull cycle, and their failure to 
produce believable, substantial evidence of their   reserve assets, or rather lack thereof.

Excellent. 
Let's move on to the next section of this slippery   slope, section three lack of regulation. To 
illustrate how terrifying the tether situation is,   let's talk about how tether and other stable 
coins currently work in the crypto markets   to highlight how lack of regulation is largely to 
blame for the creation of this ticking time bomb,   when you deposit $100 into Coinbase, and convert 
it into the stable coin usdc Coinbase credits your   account with $100 worth of USD z tokens and takes 
your real $100. And that you can either lend it,   save it in a bank, use it to invest in assets, or 
use it to pay for expenses like payroll, office   supplies, etc.

On Coinbase, you can choose to lend 
out the $100 worth of usdc for up to 4% interest.   nice, simple enough, right? An easy passive income 
stream, set it and forget it. So what happens   next? Well, Coinbase can lend your $100 worth 
of usdc tokens to another financial institution   like an exchange. So let's say Coinbase lends 
out your $100 of uscc. To buy Nance, and some   random customer named john on by Nance makes a 
deposit of 100 real dollars, then exchanges it   for uscc. And by Nance credits your $100 of uscc. 
You went to Coinbase to John's by Nance account,   and did well what do you know by Nance is offering 
up to 7.12% interest for usdc.

So john is like oh   snap, sign me up. And now the $100 of usdc, you 
went to Coinbase that Coinbase limited finance   that by Nance link to john is now being lent out 
to yet another borrower, this can go on and add an   item. Sound familiar? Like maybe if the fractional 
reserve banking system and the reverse repo market   had a twisted demented baby perhaps the cherry 
on top of it all is there's no FDIC insuring   any of it. Check out coin bases User Agreement, 
acknowledgement of risk, you acknowledge that   digital currency is not subject to protections 
or insurance provided by the Federal Deposit   Insurance Corporation or the securities investor 
protection Corporation USD wallet, your USD wallet   allows you to hold and transfer USD with your 
Coinbase account as described below. In general,   we will combine the balance of your USD wallet 
and other customers balances and either hold those   farms in a custodial account at a US FDIC insured 
bank or invest those funds in liquid investments,   such as US Treasuries in accordance with state 
money transmitter laws. Coinbase owns the interest   or other earnings on these investments.

Pooled 
customer funds are held apart from coin basis   corporate funds, and Coinbase will neither 
use these funds for its operating expenses   or any other corporate purposes. Okay, so 
your US dollars on coin base are held in an   FDIC insured bank or invested in US Treasuries 
that have most likely been re hypothecated fine.   How about that USD? See we lent out coin bases 
User Agreement reads usdc wallet. You may also   elect to buy USD coin from coin base a digital 
currency fully collateralized by the US dollar   which is issued by circle internet financial 
or circle and supported by Coinbase usdc.   You are the owner of the balance of your usdc 
wallet Coinbase is not the issuer of uscc does   not hold us dollars on reserve for uscc holders 
and has no obligation to repurchase your usdc   for USD, you can redeem your usdc with circle and 
Coinbase may also elect to repurchase your usdc.   In exchange for USD, you agreed to be bound 
by the terms of the circle usdc agreement   located at support dot usdc dot circle comm which 
provides additional obligations, undertakings and   limitations with respect to usdc.

Interesting. 
Okay, let's see what circle says about our usdc   we went out no deposit insurance usdc held in your 
usdc account are not subject to deposit insurance   protection, including but not limited to where 
your country of residence is the United States.   The Federal Deposit Insurance Corporation 
insurance or securities investor protection   Corporation protections for where your country of 
residence is outside of the United States, United   Kingdom financial services compensation scheme or 
equivalent scheme in your country of residence.   Okay, so this is the same situation for every 
digital stable coin out there, including the   largest, most pervasive one tether there's nothing 
insuring them. No one owes you anything if the   value drops.

And if you haven't realized that yet. 
There is an extremely small amount of real dollars   being used and held in the global cryptocurrency 
exchange and market ecosystem. Meanwhile, tons and   tons of re hypothecated Digital representations 
of dollar price value or stable coins are running   rampant without any regulation or oversight. 
I mean, check it out. It's not even a real   $100 worth of Fiat in an FDIC insured bank 
account that's being re hypothecated via   stable coins.

A $100 worth of stable coins itself 
that is not insured at all, and whose underlying   reserve assets are unknown, in addition to being 
unregulated, are being re hypothecated. So why are   the transaction fees so cheap to use stable 
coins like tether? And why are staking and   lending interest rates so favorable for stable 
coins like tether? Well, isn't it obvious? The   only ones taking the risk? Are the individual 
users like us? Not Coinbase not by Nance, not   any of the exchanges. It's all us. But what about 
the entities like tether and circle that issue   tether and usdc tokens? Well, let's just assume 
for a moment that tethers audit report looked   and seemed reasonable. The trouble is that the 
third party companies that sign off on these   audits are like United States politicians bought 
and paid for these auditors can look and see. Oh,   okay, you have $63.5 billion worth of assets, and 
$63 billion worth of tether tokens in circulation,   checks out. All good. Nothing to see here. Here's 
my signature and blessing for your audit. And oh,   by the way, here's my invoice.

Thanks, bye. They 
don't ask who they loaned the money to in exchange   for corporate paper or check to see whether or not 
their treasuries are re hypothecated. Or asked how   many times each of those 63 billion tether tokens 
have been re hypothecated. Another issue with lack   of regulation around stable coins is how the 
reserve assets values are accounted for. In a   regulated environment. The SEC requires financial 
institutions to use stable pricing conventions or   amortization schedules of assets that basically 
track the value of the assets over time to ensure   accuracy of the balance sheets. However, in the 
case of tether and other stable coin providers,   they are not subject to those rules, it can 
simply list the market value of assets at the time   of purchase. For example, let's just say that a 
portion of tethers reserves is in Bitcoin that was   purchased at the all time high of around $64,000. 
And that's how it's listed on their audit.   So they could have 100 Bitcoin they bought at 
$64,000 listed as $6.4 million in reserves,   when in reality, those 100 Bitcoins are now 
worth 3.3 million. And that same goes for the   commercial paper, they could have bought a lot of 
commercial paper that is now in default.

Yet, it's   still listed as reserves at the purchase price of 
the paper, even though in reality, it's worthless.   This is why lack of regulation, especially around 
stable coins has created what we will discuss   in the final chapter of this video series and 
the third and final video. In the chapter we   are going to pull it all together and explore 
why the structure of the cryptocurrency market   could resemble a card house on the verge of 
collapse, courtesy of tether, other stable coins,   lack of regulatory oversight, and the fact that 
its foundation is the inverted card house that is   the current state of the traditional financial 
system. And finally, we will discuss different   ways the collapse could materialize as well 
as ways we could prepare ourselves to protect   our investments. Until then be holding in the 
structure of the current traditional financial   system that also currently serves as the 
foundation of the entire cryptocurrency market.   Awesome.

Congratulations for making it 
through chapter two of this video series. Yes,   it was tedious but probably a lot more interesting 
as an investor in this space because it's helping   us all better understand and appreciate the 
current state of the crypto market so we can   implement ways to protect our investments. This 
is the second video in a three part video series,   so make sure to check them all out to get 
the full scoop. If you enjoyed this video,   please make sure to like this video and subscribe 
to my channel for more crypto content. So what do   you guys think about the current structure of the 
crypto markets? Do you think that tether situation   is old news and no longer relevant? Or do you 
think it's prolonged deep entrenchment in the   market could be detrimental to crypto? Let me 
know in the comments below. Be safe out there..

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