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
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.
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.
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.
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
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.
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.
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..