A peak up Tether’s skirts reveals very ugly junk

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Macro Afternoon

Bloomberg has peaked up Tether’s skirts and glimpsed some very ugly junk:

  • Essentially is a stablecoin that will take your money in exchange for itself so you can trade crypto. It’s a made-up central bank that then invests your money in US dollar securities one-to-one.
  • Made up, that is, by a former child actor who starred in The Mighty Ducks and a disgraced Italian plastic surgeon previous fined for selling counterfeit software.
  • In short, Tether has a huge embedded liquidity risk. If there is a run by BTC loons wanting their money back or the value of Tether collateral falls, or both simultaneously, then the entire crypto universe will implode.
  • A former Tether banker says it is not a stablecoin, it is an offshore hedge fund with its owner’s gambling punters’ dollars on very high-risk securities while pretending that it is AAA-rated. Nobody even knows if the reserves even exist.
  • Nobody running this shit show has a license or any regulation.
  • Half of Tether reserves are in short-term commercial paper but nobody has ever seen it buy anything.
  • Management is as dodgy as hell.

In short, Tether is a digital ponzi-scheme that will either fall over by itself sooner or later or if regulated. Here is the money shot:

After I returned to the U.S., I obtained a document showing a detailed account of Tether Holdings’ reserves. It said they include billions of dollars of short-term loans to large Chinese companies—something money-market funds avoid. And that was before one of the country’s largest property developers, China Evergrande Group, started to collapse. I also learned that Tether had made loans worth billions of dollars to other crypto companies, with Bitcoin as collateral. One of them is Celsius Network Ltd., a giant quasi-bank for cryptocurrency investors, its founder Alex Mashinsky told me. He said he pays an interest rate of 5% to 6% on loans of about 1 billion Tethers. Tether has denied holding any Evergrande debt, but Hoegner, Tether’s lawyer, declined to say whether Tether had other Chinese commercial paper. He said the vast majority of its commercial paper has high grades from credit ratings firms, and that its secured loans are low-risk, because borrowers have to put up Bitcoin that’s worth more than what they borrow. “All Tether tokens are fully backed, as we have consistently demonstrated,” the company said in a statement posted on its website after the story was published.

Tether’s Chinese investments and crypto-backed loans are potentially significant. If Devasini is taking enough risk to earn even a 1% return on Tether’s entire reserves, that would give him and his partners a $690 million annual profit. But if those loans fail, even a small percentage of them, one Tether would become worth less than $1. Any investors holding Tethers would then have an incentive to redeem them; if others did it first, the money could dry up. The bank run would be on.

The officials who gathered in July at the Treasury Department are discussing regulating Tether like a bank, which would force Devasini to finally show where the money is, or even undermining it by issuing an official U.S. stablecoin. The strange thing is that, at least for now, most participants in the crypto market, including some very large and sophisticated operators, don’t seem to care about any of the risks. Just last month, traders bought $3 billion in new Tethers, presumably sending billions of perfectly good U.S. dollars to the Inspector Gadget co-creator’s Bahamian bank in exchange for digital tokens conjured by the Mighty Ducks guy and run by executives who are targets of a U.S. criminal investigation.

Tether’s HY Chinese debt very likely includes property developers given they make up the lion’s share of China’s $600bn dollar debt market. The same property developers currently defaulting left, right and centre. No wonder Bejing is happy to let foreign creditors carry the bag. This is the lowest form of hot money on earth.

That Tether and its many crypto spawn are being sold to punters as hard currency or digital gold is so bizarre that one can only look on in complete wonder and astonishment.

Houses and Holes
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Comments

  1. Camden HavenMEMBER

    “He said the vast majority of its commercial paper has high grades from credit ratings firms, and that its secured loans are low-risk, because borrowers have to put up Bitcoin that’s worth more than what they borrow”.

    Is the logic of this …. logical?

    • First thing I saw in the original article before it was posted here …. cough …. ****Ratings Firms/Agencies**** groundhog day to the GFC experience …

      But wait there’s more …. the same effect applies to all the other Chinese paper, not to mention others ….

    • That’s it. The promised potential of blockchain is the foundation upon which all the tall tales have been built. Maybe one day crypto will live up to the hype. That day is not on the immediate horizon. Before then there will be some big winners and unfortunately some very big losers.

  2. “The strange thing is that, at least for now, most participants in the crypto market, including some very large and sophisticated operators, don’t seem to care about any of the risks.”

    The big players know what they’re doing. They’re fleecing rubes in an unregulated market.

    The rubes don’t want to hear it because their fraction of a cell in the 21 million cell excel spreadsheet that burns coal to stay alive is their winning lotto ticket.

    • “The rubes don’t want to hear it because their fraction of a cell in the 21 million cell excel spreadsheet that burns coal to stay alive is their winning lotto ticket.” + many.

      Though I know some who got ahead and got out. Not always due to a sophisticated knowledge of the market. My favourite is a friend who was dating a true believer at the right time. She got swept up in his fervour and ended up a few hundred thousand ahead. She left him and the market and is now living rather care free.

  3. Curious why a tether run crashes crypto and not whatever securities tether would have to liquidate in a run. Crypto punters have plenty of re-access points to banks via exchanges like coinbase–they wouldn’t need to all squeeze through the tether door.

    But either way, yes, this is a ridiculous arrangement that will end in disaster somewhere.

  4. PalimpsestMEMBER

    We’ve been looking at the Chinese ban on crypto as eliminating competition for the eYuan. What if it was really aimed at protecting the Chinese economy from a foreign crypto collapse. Those instructions came after it was obvious that foreign bondholders were going to get a serious haircut. The authorities might well know the state of Tether loans. Just pondering out loud here.

  5. Jumping jack flash

    Seems like nothing has changed since the last time they decided to take a look at Tether…

    If my memory serves me though, the last time they started poking Tether, there was a bit of a crash in all that crypto at that time, and it was nowhere nearly as ridiculous as it is now. Maybe that’s what the point of all this poking is? Maybe they want to buy some Doge at a reasonable price?

  6. Ghost of Stewie Griffin

    “Tether’s HY Chinese debt very likely includes property developers given they make up the lion’s share of China’s $600bn dollar debt market. “

    Think about this statement for a moment, to suggest that Tether has invested in Chinese debt implies that Tether has allowed real USD liquidity to exit the crypto economy in order to buy Chinese commercial paper outside of the crypto economy, instead of allowing real USD liquidity to be made available for insiders to move their money OUT of the Crypto economy.

    IMHO this rumour has been encouraged and propogated by crypto media in order to imply that the Crypto or Bitcoin capital markets are wide enough and deep enough to enable the sustained withdrawal of some $20bn or $30bn USD to be withdrawan from the crypto space without totally imploding the BTC price. Where as the reality is that last week the price of BTC surged by more than 10% because of a $1bn inflow of USDT or 0.1% into a “1 trillion dollar” market capitalization.

    Real inflows are barely a 100m a week:

    https://www.reuters.com/business/cryptocurrencies-post-inflows-7-straight-weeks-led-by-bitcoin-coinshares-data-2021-10-04/

    While mining cost are around $50m per day:

    https://ycharts.com/indicators/bitcoin_miners_revenue_per_day

    There is absolutely no way that any real USD has been invested by Tether in any real assets in the real world – every single dollar of Tether’s reserves will be IOUs from other players in the Crypto market, like Celsius, Coinbase, Binance, etc.

    I would be very surprised if there was more than $10bn in real liquidity available within the entire “2 Trillion dollar” crypto market…. it would be easier to pass through the eye of a needle, then get $1 out when that real liquidity is finally gone.

      • From May 12 to 19 (1 week) BTC fell 50%. Crypto total market cap fell from 2.6T to 1.2T. The market shed 1.4T of value in 7 days! There was no bailout, defi literally had zero issues and the central exchanges had some volume related outages but no major issues. There was wide spread, real time liquidation of over collateralised, secured positions and loans across the space … but risk takers got cleaned out and the market consolidated for a few months. I think that’s the thing being missed. The protocols demand overcollateralisation and allow for real-time liquidation prior to loss. It just doesn’t break the way tradfi does with it’s messy T plus Forever settlement and structural counterparty risk.

        March 2020 markets fell circa 50% over a month and 12 trillion (and counting) in bailouts was forthcoming to keep things moving.

        On balance, the creative destruction of crypto over the zombiefication of everything else looks positively healthy. If there was ever an industry ready for a major component to slide to zero in a hurry it’s crypto. And if tether went, guess which asset most of the exit liquidity would flow to? BTC would spike … big time.

        Tether is shifty but you should look into how it’s being used for trade finance in SE Asia. Mind blowing stuff. The world needs and will have credible stables.

        Finally, I think China shut this down because crypto had ceased being net beneficial as a net USD inbound channel (BTC miners). With a slowing economy, crypto becomes an unacceptable risk of becoming a major potential capital flight channel. How much more capital would have flowed out of China due to Evergrande via crypto if they hadn’t banned it first?

    • Ghost of Stewie Griffin

      I don’t care who dies in the blast radius, but how far does the radiation go?

      Outside of the crypto economy – skin deep. Mild sunburn at most. Everything inside that hermetically sealed enclosure will be vapourised.

  7. I'll have anotherMEMBER

    Was wondering when you’d catch on to the tether scam DLS.

    It does seem like a dodgy Ponzi, been questions raised about tether going on a while now.

    I didn’t realise their connection to Celcius where I have a decent little pile of crypto earning very good interest. This might explain why.

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