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A Good Old Fashioned Pegging

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Welcome to The Block. I’m Jeremiah Lewis, crypto-enthusiast and early adopter. This is a weekly email
 

The Block

February 5 · Issue #13 · View online
Weekly curated #cryptocurrency news and commentary.

Welcome to The Block. I’m Jeremiah Lewis, crypto-enthusiast and early adopter. This is a weekly email digest comprising one or two short topical essays followed by a manageable collection of curated links.
If you know anyone who’d be interested in this kind of content, forward this email, or they can subscribe here. I love feedback, so don’t hesitate to email me.

Twice a Week Is Twice As Nice
The problem with a weekly crypto newsletter is that things move so quickly, you often find what was true yesterday no longer holds; what worked today may not work next week. This week we’re seeing red across the board. Next week it could be green.
As a result, I’ve decided to bump this up to a twice-a-week newsletter. Consider this the first “Monday” edition. Most won’t be this crazy long, but there was just too much happening for me to resist.
The Crypto Bloodbath Continues
Or in other words, just another Thursday (I initially started writing this on Feburary 1). $112.6 billion was wiped off the global cryptocurrency market during a 24-hour period leading into Friday and as of February 2, Bitcoin flirted with sub-$9,000, then went all the way, like a bad high school romance, to $8450 before rebounding. 
And then shiz hit the fizz. As of Monday, February 5, Bitcoin was rolling around in the muck of $7240. That’s, like, so lower-upper class.
Basically, we’re in tried and tested territory. The bears are loving it, the bulls are sweating every minute those red candlesticks descend lower and lower, and the market sentiment is sour, and that old missive about any news being good news is most definitely not true for crypto. Right now cryptocurrency is Rodney Dangerfield: it just gets no respect.
That being said, it’s important to note that Bitcoin is still up 729% from last February. Still. Not fun getting crushed if you’re a crypto-newbie, which many in this new market are, having come to the field late in 2017.
Four things recently occurred to cause this most recent downturn.
1. Coincheck, a Japanese NEM exchange, was hacked, to the tune of a $500 million dollar loss. Yikes! For investors, that’s a lot of $2 scratchers they could have bought instead. And for regulators, it’s one more stain on the dirty laundry that keeps piling up. Weirdly, though, this was somewhat brushed off by investors, who checked to make sure it wasn’t their cryptos that got stolen, shrugged and kept sipping their Starbucks lattes.
2. Facebook announced it will no longer support advertisements for ICOs and cryptocurrencies, including Bitcoin. I guess James Altucher will have to go somewhere else to hawk his unending line of crypto-BS. This didn’t impact individual investors, insofar as trading goes, though it’ll probably prevent grandma from dropping her bingo winnings into crypto after seeing that scammy add in her Facebook feed.
3. China dropped the hammer on all cryptocurrency trading, declaring a ban on all foreign platforms. This is great for the rest of the world, as we get to see what it looks like when an authoritarian all-state regime tries to stamp out a decentralized-by-nature financial instrument. People don’t seem to be worried, though.
4. Bitfinex and Tether were subpoenaed by the Commodity Futures Trading Commission. This is the silver tuna, y'all. Bitfinex is one of the largest cryptocurrency exchanges, with a daily trade volume approaching $2 billion. Tether is the company that issues the supposed USD-backed “stable” cryptocurrency used as the trading medium across a bunch of major and minor exchanges. So why is this happening, and why is it news?
Tether and Bitfinex don’t disclose who owns them, but an email from a spokesman for the firm indicated that Jan Ludovicus van der Velde (try saying that three times quickly) is the CEO of both, while Phil Potter is Tether director and the chief strategy officer at Bitfinex. And Tether-the-cryptocurrency originated on Bitfinex.
Tether is a cryptocurrency pegged to the US dollar, which means that for every Tether token there should be one US dollar in a bank account owned by Tether the company. The general idea is that when USD is deposited into the Tether bank account, an equal number of Tether tokens—or USDT—are created, and if USD is withdrawn from that bank account, an equal number of Tether tokens are burned.
Why is this useful? Many exchanges don’t allow direct crypto-to-fiat sales. But many of them have USDT as their lingua franca, which means it’s a safe haven for investors to park their exchange assets during bad times.
So what’s the problem? While the USDT circulation is a known quantity (as of this writing, over 2 billion tethers in circulation), the amount of USD backing them is in doubt. Sometimes people on the internet lie about stuff, and sometimes that lie is about having $2 billion in fiat to cover $2 billion worth of cryptocurrency. That’s a Little Big Lie that could turn into a Very Big Problem for investors when they realize they’re no longer running on solid ground.
If it were discovered that Tether-the-company doesn’t have the fiat money to back the cryptos they’ve issued, and investors start selling back to fiat, it could disrupt the entire cryptocurrency ecosystem.
And that would be bad, for multiple reasons. 
Which brings us back to why Tether and Bitfinex were subpoenaed. There is mounting evidence that the price of Bitcoin itself has been maintained by Tether creating Tether tokens without the backing of USD. Over its lifetime, millions of Tethers have been created. We know this because the beauty of the blockchain is that it’s a public ledger, so we can all see when balances are created or destroyed. During downturns, those Tethers were used to buy millions of dollars worth of Bitcoin, propping up its value even when other cryptocurrency values were declining.
Moreover, Bitfinex itself has always had a somewhat dodgy reputation, with lack of transparency and a confusing (some might say opaque) corporate structure. Calls for Tether to be audited have been resisted, and then finally Tether brought in accounting firm Friedman LLP last fall to audit their books, but after months Bitfinex dissolved the relationship, with both parties claiming the other was obstructing. The optics of this are not good for Bitfinex. As former Goldman Sachs trader Jill Carlson put it, 
“The dissolution of a relationship between an auditor and a company is very rarely a good sign that the company is behaving in accordance with market best practices.”
In other, less negative news, South Korea says it definitely probably is very much not going to be banning cryptocurrency trading. For now, anyway.
Charitable Giving
Looking on the non-lying, positive side of crypto, co-founder and CEO of Coinbase Brian Armstrong muses on the uses of cryptocurrency for charitable purposes in this piece where he lays out some interesting potential use cases for crypto (assuming we don’t immolate ourselves first on the big Tether bonfire that’s about to get lit).
Charitable giving with cryptocurrency
And Back to Lies, Greed, and Fraud
Last week I mentioned the seeming downward spiral of greed within the cryptocurrency community, and I think it’s something worth revisiting. Like the demons released from Pandora’s Box, the ICO craze has unleashed some of the worst aspects of human nature in a way that could, if not contained, damage cryptocurrency’s reputation for years to come.
The Big ICO Swindle
Show Me The Innovation
A few weeks ago I posted a link that posited that ten years in, we’re still missing that key innovation within the blockchain space that would make it truly revolutionary. The money quote, from Kai Stinchcombe:
After years of tireless effort and billions of dollars invested, nobody has actually come up with a use for the blockchain — besides currency speculation and illegal transactions.
I’m not sure I agree entirely with the quote, though the sentiment behind it does have merit and is worth discussion. The seeming dearth of actual, useful applications of cryptocurrency and blockchain technology means the time is right (and ripe) for blockchain disruption. Perhaps we’ll see it where it seems to make the most sense right now. Enter:
Blockchain’s 1st Major Use Case: Stock Market 2.0
But in the meantime, 2018 continues to look promising for blockchain-based startups. Here’s a look at five of them:
Top 5 Blockchain-Based Startups to Look Out for in 2018
Fools and their crypto
I don’t normally side with the banks, but I think they actually made the right call here, even if I disagree with why they implemented this policy.
Chase, Bank of America, and Citigroup All Ban Cryptocurrency Purchases on Credit Cards
Lloyds Bank bans customers from buying bitcoins using credit cards
Remainders
My First Bitcoin and the Legend of Satoshi Nakamoto
Still confused about what the blockchain is? Seriously, people? Okay, fine. Here’s an excellent guide from Wired.
Blockchain: The Complete Guide
India Turns Against Bitcoin But Embraces Blockchain
Using an In-Browser Ethereum Wallet? Here’s Some Things You Should Know
Wrap Up
That’s it for this week. As always, thanks again for reading. If you find this newsletter useful and interesting and you think someone else would enjoy it, please forward it to them. You can always subscribe or read back-issues here.
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