Tether and Bitcoin Ponzi Ecosystem Stage 2: DOWN

Lets start by summarizing stage 1, from yesterday's blog. My diagram there depicts how our imaginary trader XYZ starts with 100,000 bitcoins, sequentially converts lots of 100 BTC to USDT, and then uses maximum leverage on Binance to pump up the price of BTCUSDT perpetual. As more USDT is minted in lots of 100 BTC, and as the price of BTC is pumped up, Tether holds more and more BTC as reserves as it mints more and more USDT.

The Binance perpetual is used because it used to allow a maximum leverage of 100X, but after 19 May this was reduced the 10X. But the leverage is only relevant insofar as it becomes easier to place massive bids on BInance with higher leverage. Lower leverage just requires large lots of BTC sent to Tether, and therefore more USDT to be minted in return for BTC reserves. The UP effect is still the same. The Binance price leads the BTCUSD price on regulated exchanges like Coinbase so, having pumped the price from $10,000 to $40,000, XYZ then cashed in their remaining BTC on Coinbase for a profit of almost $3bn.

The daigram above depicts the DOWN phase, which starts with XYZ holding a lot of USD but not BTC, when its price is $40,000. Now XYZ is going to push the price back down to $10,000 using massive sell positions on the Binance BTCUSD perpetual. As before using maximum leverage is not essential, if XYZ holds enough USD. But note, the lower the leverage used on Binance, the more newly-minted USDT needs to be swapped for USD (because Binance doesn't accept USD). At least these tether reserves a real USD.

Once the BTC price has been pushed back down to $10,000 (in this simplistic example) XYZ uses the rest of their USD to buy BTC on Coinbase. And now they are back in their starting position for stage 1, pumping the BTC price UP.

Carol Alexander

13 November 2021