In this issue
- What’s behind the crypto market crash?
- Tether USDT’s big reveal
- Facebook-backed Diem going to California.
- BlockFi’s accidental Bitcoin millionaires
- China enlists Inner Mongolian public to report illicit crypto mining
From the Editor’s Desk
A week is a long time in crypto.
Remember when Bitcoin was trading at more than US$50,000? That was just seven days ago.
Since then, we’ve seen the world’s best-established cryptocurrency — which one might reasonably expect to be its most stable — crash and burn before staging a modest recovery, paring losses to around one-quarter of its valuation a week earlier.
Much of this has come courtesy of one Elon Musk. Bitcoin investors have hung on every word of his tweets about the cryptocurrency, and have reacted almost as mercurially as the Tesla founder himself. If moving markets is a superpower, then Musk could be a Marvel character.
And if Musk’s Twitter missives weren’t enough, Bitcoin investors’ alarm bells started ringing anew earlier this week amid rumblings from China about a fresh clampdown on the country’s already constrained crypto sector.
The wild swings of recent days may justifiably have given investors — and mainstream finance sector players that have been making forays into crypto — pause for thought on just how reliable cryptos are as a store of value. Although Bitcoin’s price appears to have stabilized — for now, at least.
Speaking of stability, U.S. dollar-linked stablecoin Tether has also been in the spotlight — not, of course, for its face valuation, but for similar reasons to Bitcoin: what stands behind it.
It’s been known for some time that Tether isn’t backed 1:1 by the U.S. dollar, but late last week the company came clean — in a manner that was striking for its sheer lack of detail — about the assets backing its stablecoin.
Tether’s opaque description of those assets has raised more questions than answers, with some commentators suggesting that the company is operating more like a hedge fund than a prudent custodian of investors’ money.
I gave Bitfinex as well as its CTO and public face, Paolo Ardoino, an opportunity to answer these questions directly in an upcoming episode of Word on the Block: What exactly stands behind the world’s biggest stablecoin? And when can we expect an independent audit of the multitude of credit assets, still of unknown quality?
Until we get answers, and in the absence of significant disclosures, those holding Tether may be content simply to cross their fingers and hope for the best. As we see the uptake in stablecoins amid the crypto market’s volatility and recent meltdown, a flight to perceived stability is better than nothing.
Until the next time,
Founder and Editor-in-Chief
1. What’s behind the crypto market crash?
By the numbers: Bitcoin — over 5,000% increase in Google search volume.
Bitcoin has fallen to below US$40,000 for the first time since Feb. 8 — when Tesla announced a US$1.5 billion Bitcoin purchase. But Bitcoin isn’t alone — the entire crypto market has been sinking, shedding a trillion dollars in total market cap in just a week.
- A series of events contributed to crypto’s downward spiral. One of the triggers appears to be Elon Musk announcing that Tesla would no longer accept Bitcoin as payment for its electric vehicles.
- Another Bitcoin price plummet occurred after news broke that the U.S. Department of Justice and the Internal Revenue Service were investigating Binance, the world’s largest cryptocurrency exchange.
- Then this week, China issued a fresh warning against crypto trading, putting banks and online crypto services — as well as their users — on notice that authorities are not only watching but displeased.
Forkast.Insights | What does it mean?
A trillion dollars was erased from the crypto markets in less than a week, but how did we get here? Let’s rewind for a second and go back to the coordinated buying attack on Gamestop (GME) in January this year — the first recorded event that brought meme trading into the mainstream consciousness.
When subreddit r/WallStreetBets (WSB) executed a short squeeze against American investment fund management firm Melvin Capital to bail out Gamestop, Robinhood halted GME trading, raising several questions about the funding structure of the commission-free trading platform.
The event made mainstream news headlines and was shortly followed by a Clubhouse session in which Tesla CEO Elon Musk questioned Robinhood CEO Vladimir Tenev as to why Robinhood had halted crypto trading. Not only did the crypto industry keep a close eye on this development, it was clear that the crypto faithful were cheering on WSB for executing a short squeeze against the very hedge funds that some may argue had been acting as gatekeepers to the democratization of capital — something Bitcoin has been attempting to achieve.
Shortly after Musk’s conversation with Tenev, the Tesla CEO joined the “democratization of capital” conversation on social media, and soon after, in February, Tesla purchased US$1.5 billion worth of Bitcoin, sending BTC prices soaring to new all-time-highs as retail traders began buying it in droves.
But something else started to happen. Musk began championing Dogecoin, the original joke cryptocurrency. Dogecoin then saw its token price soar by more than 12,000% in the following months as other celebrities took up the cause and the retail masses poured their money into DOGE. The meme crypto-trading craze reached such a frenzy that even Dogecoin imitators — memes of a meme — took hold of the crypto world, peaking with the flash popularity of joke-on-a-joke coins like Shiba Inu (SHIB) and Loser Coin (LOWB) popping up left and right.
Just as Musk had proved a few of his remarks could create enormous interest and value in a cryptocurrency, he also proved he could single-handedly drain a crypto of significant value with a single tweet. On May 13, Musk amplified Tesla’s announcement that it would no longer accept Bitcoin as payments, triggering a series of events that appear to have led to Bitcoin’s market slide.
Although most everyone agrees that Dogecoin and Shiba Inu are a joke, and that the institutional money has been on Bitcoin, the truth is that under the sheets, BTC prices have also seen huge swings as Musk blew hot and cold about it in his tweets — making Bitcoin an even more significant benefactor and casualty of the meme-trading phenomenon.
Only yesterday, Musk again came to Bitcoin’s rescue, with comments suggesting that Tesla would continue to hold its Bitcoin reserves, despite his previous concerns over its network’s energy consumption — and now BTC prices appear to be stabilizing.
From Dogecoin to Bitcoin, meme trading isn’t going away anytime soon, and it will likely continue to rock cryptocurrency markets in the months ahead. As Musk shows no sign that he will stop tweeting about Bitcoin and other cryptos, we can expect market conditions to continue to be dictated by investors jumping at his every word, hoping to make fast cash or panicking in correction.
2. Tether’s big reveal
By the numbers: Tether commercial paper — over 5,000% increase in Google search volume.
Tether (USDT), the world’s largest stablecoin, with a US$60 billion market capitalization, has finally published a breakdown of its reserves for the first time since it settled a lawsuit with the New York Attorney General. Tether’s big reveal showed that 75.85% of its reserves are backed by “cash & cash equivalents & other short-term deposits & commercial paper.” Tether and its parent company, Bitfinex, have been banished from doing business in the state of New York after agreeing to pay fines of US$18.5 million for hiding US$850 million in losses.
- Of the 75.85% of its reserves, 65.39% are held in commercial paper, 24.20% in fiduciary deposits, 3.87% in cash, 3.60% in reserve repo notes, and 2.94% in treasury bills.
- The rest of Tether’s reserves are held in secured loans (12.55%), corporate bonds, funds and precious metals (9.96%), and other investments that include digital tokens (1.64%).
- Tether’s growth hasn’t stopped since the New York case, including an upcoming expansion into the Avalanche blockchain. Tether supply has continued to grow on the Ethereum blockchain, but has been outpaced by Tron, which now holds around US$31 billion worth of USDT.
Forkast.Insights | What does it mean?
Bitcoin and the overall cryptocurrency market are currently in recovery mode following one of the most severe corrections since March 2020. While the world has largely focused on comments made by Tesla CEO Elon Musk regarding Bitcoin’s energy consumption and a U.S. investigation into cryptocurrency exchange Binance as the main factors contributing to the loss of more than $500 billion dollars from the total crypto market cap, Tether’s revelation of what is actually backing its stablecoin could be more significant.
Tether (USDT), was created originally as a way to digitize the U.S. dollar, to be used on centralized cryptocurrency exchanges. The USDT stablecoin serves three main purposes: to act as a portable unit of exchange while remaining pegged to the United States dollar, to serve as a gateway between different cryptocurrencies, and to function as a gateway between crypto and fiat. USDT is therefore highly leveraged on crypto exchanges, particularly in Asia.
The ongoing problem with USDT and the way it is used is that the crypto community has known for a long time that the stablecoin is not backed 1:1 by USD — which was Tether’s initial claim.
Following an investigation by the New York Attorney General over fraud and false claims regarding its reserves — which was settled to the tune of $18.5 million dollars — Tether has finally shed a sliver of light on the breakdown of the reserves that back USDT, and if anything, the plot has now thickened.
The situation remains murky, as the document provided by Tether is literally a single-page PDF with two pie charts and a few lines of text that make no mention of any independent review by an accounting firm.
Caitlin Long, the founder and CEO of Avanti Financial group, laid out the argument well on Twitter, claiming Tether’s recent disclosure about the stablecoin’s reserves may have contributed to cryptocurrency sell-offs over the past week.
“Tether’s reserve portfolio looks like a credit hedge fund, with some interest rate risk (corporate bonds) & commodities risk thrown in too. Need LOTS more disclosure now. So many new questions,” Long wrote on Twitter.
Long said the breakdown of Tether’s reserves showed that they were not invested in “short-term, lower-risk, liquid securities,” but rather credit assets of unknown quality. The Avanti CEO claimed traders may now feel compelled to sell other cryptocurrencies to reduce their total risk exposure, given that the stablecoin has the potential to bring down other tokens amid a credit market correction.
According to Long, if Tether continues to operate as a “de facto credit hedge fund by investing reserves this way, markets now can safely predict that Bitcoin and crypto prices will likely exhibit high correlation with credit markets” and will probably correct together.
3. Diem is going to California
By the numbers: Diem — over 5,000% increase in Google search volume.
Facebook-backed Diem, the project once known as Libra, is moving its operations from Switzerland to the U.S. as it announces a pilot for a USD stablecoin. Quoting an anonymous source, CNBC reported that the pilot could start later this year.
- The Diem Association, which has not disclosed the date for the pilot’s commencement, also announced that it would be partnering with Silvergate Bank, a San Diego-based, California-chartered bank that will act as the issuer of the stablecoin.
- Diem is withdrawing its Swiss Financial Markets Authority license and will be registering as a money service business with the U.S. Financial Crimes Enforcement Network.
Forkast.Insights | What does it mean?
Facebook’s much-anticipated foray into cryptocurrency finally appears to be going ahead, with the Diem project confirming that it will launch a stablecoin pegged to the U.S. dollar.
Formerly known as Libra, Diem has been a thorn in the side of lawmakers since the association publicly launched in mid-2019. As global financial authorities began to scrutinize Facebook’s plans to launch the digital currency from the get-go, major partners such as Paypal, Vodafone and Visa promptly abandoned ship, and it looked as though the project could die as quickly as it had been announced.
The announcement of Libra in 2019 has even been credited as one of the major motivations for the creation of central bank digital currencies. The original planned development of the Facebook-backed currency and blockchain could essentially have positioned the social media giant — a private company with more than 2.5 billion users — to wield enough power to challenge the sovereign financial control of central banks.
Now rebranded as Diem, the digital payments project has significantly scaled back its earlier global ambitions. The Diem Association is also relocating from Switzerland to the U.S. and has withdrawn its application for a payment system license from the Swiss Financial Markets Authority, noting that the license is no longer necessary as it pursues its new model.
No official launch date has yet been announced for Diem. However, one point that may concern users is Facebook’s less-than-stellar reputation for privacy protection. Could this be a ploy by Facebook to get its hands on users’ financial data and send more targeted ads? The social media giant has said it would keep financial data separate from its social network data. But although Facebook is telling users not to worry, it’s a line we’ve heard from founder Mark Zuckerberg before, and the public would be wise to consider the social media giant’s previous actions. Facebook and the Diem Association aren’t doing this to make friends.
4. BlockFi’s accidental Bitcoin millionaires
By the numbers: BlockFi — over 5,000% increase in Google search volume.
Interest-bearing crypto service provider BlockFi is in the midst of running a stablecoin promotion to reward users with an annual percentage yield of 10% in GUSD (Gemini dollars) that is supposed to hold non-USDT dollar-pegged stablecoin balances during its promotional period. Unfortunately for BlockFi, it mistakenly rewarded some of its users in Bitcoin rather than stablecoins.
- BlockFi has released a statement via Reddit, saying that fewer than 100 customers had received the surprise BTC reward, and that it had contacted those clients.
- According to an email said to be from BlockFi that has been shared on Reddit before it was spread on other social media, BlockFi is offering US$500 for the return of the “erroneously received assets,” and threatening to take legal action against those who don’t fall into line.
Forkast.Insights | What does it mean?
There’s a difference between centralized finance (CeFi) and decentralized finance (DeFi), and BlockFi’s latest gaffe is the reason why some people prefer not to work with a third-party intermediary — the possibility of human errors. However, those on the winning side of the human error in this particular case may be some of the happiest people in the crypto world at the moment, particularly given the tumble in Bitcoin prices this week.
Even as CeFi services like BlockFi are allowing users to earn higher interest through cryptocurrency outside the world of traditional finance, some people would much rather do it themselves using smart-contract ecosystems. Yet Ethereum’s gas fees have not been friendly to newer investors who may be interested in trying out DeFi. This has also given birth to centralized DeFi (CeDeFi), with services such as PancakeSwap and BunnySwap on Binance Smart Chain that have allowed users to enjoy DeFi at lower prices.
But there’s another race happening under this layer — the Layer-2 race, or the attempt to scale Ethereum. Several major contenders, including Solana, Polkadot and Cardano, are growing in popularity as Ethereum faces delays. In recent days, Polygon, formerly known as Matic, has also been on the rise by providing DeFi services on the Ethereum blockchain at a lower cost. Even with the broader crypto market falling, Polygon’s crypto MATIC has surged by 45% in the past seven days, reaching an all-time high of US$2.62 yesterday amid the market crash. It is now trading at US$2.16, as of publishing time.
5. Inner Mongolia sets up crypto mining reporting hotline
Once a hotbed for Bitcoin mining, China’s Inner Mongolia region recently dropped an ax on the industry, imposing a sweeping ban on any kind of crypto mining, effective this month. The government has now set up a hotline for tipsters to report to authorities anyone who might not be following the no-crypto-mining rule.
- Inner Mongolia — a region that relies heavily on coal-fired electricity — announced its crypto mining ban earlier this year in support of China’s national pledge to halt the rise in its carbon emissions by 2030 and to achieve carbon neutrality in 2060.
- To ferret out crypto miners who are not complying, Inner Mongolia is encouraging the public to call, email or go in person to a government office to report any crypto mining firms, crypto mining operations disguised as cloud data centers, businesses allowing crypto mining to take place on their premises, and companies obtaining electricity illegally to mine crypto, according to the Development and Reform Commission of the Inner Mongolia Autonomous Region.
Forkast.Insights | What does it mean?
Bitcoin is known as a decentralized cryptocurrency, but as it stands, most of the processing power for verifying transactions on its blockchain — or mining hashrate — is still heavily concentrated in China.
According to the Cambridge Centre for Alternative Finance, 71.7% of the global hashrate for mining Bitcoin comes from China, with 7.75% contributed by Inner Mongolia. In comparison, the United States contributes only 5.29% of Bitcoin’s hashrate.
However, starting this month, Inner Mongolia will no longer be an option for cryptocurrency mining, after its provincial government declared a ban on mining in March, giving miners two months to cease all operations and clear out of the region.
Unlike other regions in China, which can provide an abundance of clean hydroelectricity for powering crypto mining machines, Inner Mongolia’s crypto farms are run on coal-generated electricity, and crypto mining is viewed as a serious threat to the carbon-reduction goals set by China’s national government, which has pledged to reach carbon neutrality by 2060.
When it comes to helping China meet its carbon reduction goals, Inner Mongolia does not have a stellar track record, having failed to meet its national energy-saving target in 2019. At the time, Beijing has criticized Inner Mongolia for its “serious problems with energy conservation,” according to Communist Party mouthpiece People’s Daily.
Chastened, Inner Mongolia has not only banned crypto mining but is now also enlisting members of the public to assist with enforcement by reporting others. The purpose of its hotline is to uncover out crypto mining operations that are now concealing their activities within data centers — many of which still enjoy tax breaks, and subsidized land and electricity prices.