Crypto Weekly: Bitcoin crashes, Tether prints $500M+ USDT and Schnorr signatures explained!

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Let’s start with the thing that’s on top of everybody’s mind and that’s the Bitcoin crash that happened over the last week. There was a lot of market panic as over a space of about three days, the price of Bitcoin went below 10,000 dollars after being up towards 20,000 dollars at the end of last year. We saw some alt coins and ICO tokens out there dip upwards of 30, 40, even 50 percent in value. While on the following days, Bitcoin and other alt coins did recover, not to their previous peaks, but they recovered back from such a large drop, some haven’t recovered completely with tokens such as Ripple still only being at about 50 percent of their previous all-time high just a week ago. Not that anybody tried to warn people that Ripple is just all hype, right? There’s been a lot of speculation about what drove this crash with multiple theories out there. The first is that some of those Bitcoin future contracts that were on the market were expiring last week.

People were throwing around the idea that if people were cashing out of those on the public market, it might’ve affected the price. This theory was quickly debunked though because those futures contracts really didn’t see a lot of volume in terms of money. Also they settled in cash and not hitting a public exchange that would drop the price like that. Two other big theories came out of Asia.

The first being that Chinese regulators are thinking of banning Bitcoin mining. This would be huge if it does happen. It kinda would make sense given that a lot of the money that the miners are making out of their mining operations isn’t necessarily going back into the Chinese economy and is probably going offshore into other ICO companies that are all across the world at this point. We have no confirmation if that’s gonna happen though. We’ll just have to wait and see. The other big news out of Asia being that South Korean regulators are starting to think about just banning all exchanges that exist in the country as of right now. Again, this is just a rumor and there’s no official news coming out of the government just yet. It does kinda stand to reason that with this huge boom in popularity, especially in Korea, that regulators are doing their homework and taking note and trying to come up quickly with some sort of solution to the problem.

There is a lot of illegal activity most likely happening in these markets in Korea. Some of them don’t have fees on their exchanges. There’s all sorts of wash trading happening. It is a little bit of a worry. It wouldn’t personally surprise me if we do see regulators clamp down in some way over in South Korea in the coming months. That being said, it probably wasn’t just a single one of these things driving the market correction last week. It could well be a combination of these things together or it could also be some news that we don’t even know about ’cause it’s all happening behind closed doors. That’s often the case when it comes to financial markets because if somebody knows something, either legally they can’t tell other people or they don’t want to because it would erode any advantage they have in that market.

As I mentioned, Bitcoin did recover magically from this massive downturn it saw in the last week. Many people are theorizing and in some cases proving that this was correlated to a fresh printing of Tether, or USDT, flooding the market. For those that are unaware, Tether or USDT, which you’ll probably see if you use any of the popular exchanges, is simply a cryptographic token that’s built on the top of something called the Omni Protocol. This is just a centrally managed token on this protocol that is backed by the Bitcoin network. In a nutshell, there’s a company called the Tether Corporation who are offshore somewhere.

They control and can print this money at any point in time they want. The whole gist of it though is that they say every tethered token or USDT is backed by USD reserves sitting in a bank somewhere. The creation of Tether can kinda be drawn back to a company called BitFinex which also run a very large Bitcoin exchange. Details are scarce on these companies. It’s hard to find out who’s pulling the strings. There’s a lot of evidence that suggests Tether and Bitfinex are really the same company or being run by the same people. You’ll notice if you use exchanges like Bittrex, Poloniex or some of the Asian exchanges as well, when you’re cashing your Bitcoin or Ethereum or any of these tokens out into USD, you’re not actually getting USD that can be transferred to a bank account, you’re getting USDT tokens.

In many cases, this is because these exchanges simply couldn’t get banking relationships for their exchanges. Unlike something like Coinbase or GDAX where you actually link your American bank account, you don’t do that with things with Bittrex and Poloniex. They just offer this USDT token in its place. I think what a lot of people fail to understand with USDT is that there’s actually no way currently to redeem it for USD into a bank account. The Tether system was hacked late last year and as a result, they’ve actually closed down the creation of new deposit addresses on their system. Even if you did have a thousand dollars worth of USDT sitting on an exchange like Bittrex, there’s no way to transfer that over to the Tether website and cash it out for USD in any way. Even then, before that hack happened, I’d actually never seen any evidence of somebody successfully converting USDT into USD through the Tether Corporation.

There’s only one or two exchanges which actually let you exchange USDT for USD, Kraken being one of them. They actually let the Tether token float which is a little bit weird. The reason I say that’s weird is ’cause the only way that the USDT token is pegged to one US dollar is because the exchanges literally hard code it to be one US dollar. Whereas on an exchange like Coinbase or GDAX where you’re actually dealing with USD, which you can quickly liquidate back into USD and send to your bank account, with USDT, that’s completely separated. It’s just balances they’re moving around in a database somewhere. There’s no way you could then send that back to a bank account of any sort. Exchanges like Bittrex and Poloniex simply have the USDT token hard coded to equal one US dollar. For some reason, people using these exchanges just believe that. We know it’s a centrally controlled currency. It’s not really redeemable for anything. They say that it’s backed by these USD reserves but they’ve printed two billion Tether cumulatively up to today.

They’ve provided no audits or details of which bank in the world is allowing them to store two billion dollars in assets somewhere. What’s this got to do with the Bitcoin crash and everything recovering, right? Since the Bitcoin crash just five or six days ago, the Bitfinex or Tether company have printed more than half a billion dollars worth of this USDT token. They’ve just made it appear out of thin air. They claim that this money, this 500 million dollars, has actually been injected by large institutional investors out there somewhere. The only problem is we have no way to verify that money is actually being put into a bank account somewhere. What makes it even more suspect is when a new batch of USDT is printed, it then is quickly transferred over to the Bitfinex exchange and you see a whole bunch of buy orders put up for Bitcoin that drive the price back up. They usually do this in batches of around 100 million dollars. When the market is suffering and the price is down, an injection of 100 million dollars of capital on the buyer’s side of the book can really affect the way that the price goes back up.

The side effect of this is if you go to a website like CoinMarketCap, you’ll see just green everywhere. The reason for that is that you have to remember when you’re looking at all these alt coins and other tokens, their USD value is most often tied back to the Bitcoin exchange rate for that token. You can’t directly take some random token back into USD. That pair doesn’t exist on most exchanges. If they can make the Bitcoin price green, they actually make most of the market green because that’s the off-ramp for most of these tokens. This is all kinda crazy and I think it took some people by shock when after such a massive market downturn, this huge injection of capital through Tether would just magically pick the price back up. The theory, the hypothesis that a lot of people have, is that the Bitfinex Corporation and Tether, whoever they are, are manipulating the market and trying to push the Bitcoin price back up whenever it falls a little. The problem is because it’s all centrally controlled and we have no audit trail, there’s no way to know who’s telling the truth or whether they’re actually doing that.

It really just smells a little bit fishy. It’s really hard to see how this shakes out or where it ends because Bitfinex and Tether can just keep printing more and more USDT without anybody controlling it except them. The biggest threat I can personally see is if a regulator comes in and says this USDT thing’s really fishy. You US-based exchanges, i.e. Bittrex, you have to de-list it. If that happens and Bittrex or one of these other big exchanges are forced to remove all USDT pairs, then everybody who had their money in USDT is completely stuck. As I said, there’s no current way to send that tether back to the Tether Corporation and redeem it for USD into your bank account.

If you suddenly can’t trade it back into something like Bitcoin and Ethereum, then send it to GDAX and then get USD through that method, then you’re kinda left just holding a bunch of this token that overnight could be worthless. If this happens, suddenly you have two billion dollars worth of this liquid asset that’s being held by people who thought they were holding USD but actually weren’t. There’s a really good account on Twitter called Bitfinex’ed. I’ll link it below.

I recommend that people follow that account. It can get a little troll-y from time to time as with most crypto. I think it’s important that people keep a rational objective opinion about this and stay informed. The last thing you want is to be a bag holder of this thing that suddenly overnight isn’t pegged to the US dollar anymore, not that we know it ever really was.

Changing the topic and another interesting trend we saw this week was OG developers from the crypto space leaving their corporate interests behind to get back into the technology side of things. As someone who’s really interested in the technology, this excites me. It’s good to see these characters come back and not be focusing on the price or investing in stuff as much anymore. The first piece of news that came out was that Ethereum co-founder Vitalik Buterin had actually left Fenbushi, which is an investment firm he was part of. They are actively involved in investing in ICOs and some of the really early ones as well. He wants to get back to focusing on proof of state, Casper, shotting, all this good stuff that’s gonna help Ethereum scale over time. I really honestly think that’s the best use of his time as a community advocate for that kind of stuff. Even more recently, we heard that Greg Maxwell, who’s one of the foremost Bitcoin core developers, is leaving his company Blockstream also to focus on Bitcoin core development more.

Blockstream, if you all remember, was a big company that was doing something called side channels a long time ago but then ultimately just turned in a way to fund the Bitcoin core dev team in a way with many of the members of the core dev team sitting on the Blockstream team as well. Blockstream have recently moved in a more enterprise, partnering with banks direction. It’s really nice to see Greg move away from that and just focus on the open source project and making it scale finally. On that note, we’re already starting to see some of the fruits of that labor with a paper being released this week about Schnorr signatures. Greg Maxwell and some other devs from Blockstream released this paper, which essentially explains how Schnorr signatures can be integrated into a future version of Bitcoin and what it means for scalability.

In a nutshell, a Schnorr signature is an algorithm which allows for more compact signatures. More specifically, it means that when you sign a transaction, you don’t have to sign every input in that transaction. You can sign them together instead of separately. This gets even more powerful when you’re talking about multi-signature wallets where currently you have to have multiple signatures per input, which bloats out the size of transactions. This means it’s gonna cut down on all the space that signatures take up in a current transaction, which reduces the size of the transaction ultimately. Combined with segregated witness, this means that you’ll be able to fit more into blocks and the whole network should see an improvement in scalability as a result. This is really cool to see. I hope it comes out sooner rather than later. I’m really looking forward to seeing these developers that are getting back into the open source community and focusing on that instead of corporate interests ’cause I think that’s the way forward.

That’s the only way that we’re really gonna get their full attention on scaling these solutions. That’s it for this episode of Crypto Weekly. I hope it explains some of the stuff that’s happened in the last week. If you have any questions, just drop it in the comments below and I’ll try to get back to you soon. If you did find this video helpful, hit that like button. If you want weekly updates, click below.

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