This is a play on the libertarian refrain to “Audit the Fed” as a call for a transparent accounting of how much US dollars are being printed, when, and why, and what is backing such printing. Some would think “oh not another article lamenting the printing of tethers.” No. I try not to write on a topic related to valuation unless I derive and process numbers to make a case either way. And many have already written an ample bit about tethers and the doubt behind whether they are being backed by actual dollars or being printed from nothing.
What Are Tethers?
Tethers are positioned as a blockchain currency stand-in for the US dollars, backed 1 to 1 by US dollars. Unlike blockchain based cryptocurrencies that are minted based on some mathematically deterministic supply formula, the tether is supposed to be printed in exchange for every US dollar taken in to back the tether.
Without any proof that indeed each tether is backed by dollars as purported, this potentially creates a money printing scenario. Unlike with fiat where money printing happens on the supply side, this printing potential occurs on the demand side. And unlike supply side printing, it results in greater deflationary pressure on the price of cryptocurrencies. And if this is occurring it is just as dangerous or even more so, potentially.
So we decided to engage in a mathematical analysis of bitcoins demand to see if we will see the evidence of unfeasible demand side printing. (As mentioned in my prior articles, the blockchain is a fundamental mathematical analyst’s dream because the numbers are all freely available on the blockchain to extract and analyze for trends. And math can sometimes tell the stories and provide the evidence for what sometimes a hunch or common sense might have been telling us.
Some Prior Tether Warnings
The writings of Bitfinexed has provided some of the most extensive analysis and articles regarding Tethers, including:
- Unconvincing evidence of the existence of an actual bank that is dealing with Tethers sufficient to be banking up to the USD 2 billion of tethers that should be backing the 2 billion tethers (USDTs on many exchanges) in existence
- The lack of an independent audit of such backing (tether has an internal memorandum on their site cited as proof but is not an audit and the firm that produced the memo was terminated from completing a full audit.)
- The firing of the prior independent auditor that was supposed to present independent proof as mentioned above.
I actually also looked at Steem and also see fellow Steemian articles on tethers including by @jerrybanfield (here) and @cryptoverse (here), as well as several Youtube videos. Those draw from some of the above odd facts as well as the credulity of that much printing of tethers to have been truly backed by actual dollars in deposit. So below we attempt a look at this issue on the evidence of an analysis of the demand side.
Demand Side Analysis of the Bitcoin Network
In prior work, models of the demand side of bitcoins as a function of the unique daily addresses (DUA) on the network was presented. And noted the discrepancies that sometimes point to bubbles in the value of the assets. Recently, as noted in that article, there has been significant and persistent deviation is due to artificial demand, especially after watching the current tepid recovery. Particularly, where there is actually currently now no return of demand by new users coming into the network at the growing rate that characterized the network over the prior 9 years.
Here is the Tether supply and market cap charts from coinmarketcap that several of the above articles already deemed unlikely to be sustained by a real audit:
Tether Supply and Market Cap Have Gone Up to 2.2 billion Tethers the Past Few Months
We examined several blockchain variables and honed in on two metrices – the ratio of the estimated transaction volume per day and the number of users based on all wallet addresses, and the ratio of estimated daily transaction volume to daily unique addresses. These two metrices have potential for revealing possibly unrealistic or artificial transaction volumes.
7-day averaged Estimated Transaction Volume USD/Daily Unique Addresses
7-day averaged Estimated Transaction Volume USD/Wallet Number of Users
What those chart simply show is that from some time between April and May 2017, the average trading being done on exchanges regardless of whether USD or USDT was being used suddenly doubled and nearly tripled, respectively, compared to new addresses being opened and total number of accounts on the blockchain. And without any commensurate rise in BTC values during that time. So essentially on average bitcoin traders began trading roughly doubled what they used to from that month. There are several assumptions that can make this feasible and there are possible factors that may have influenced this; but bottom line is that this would be quite unlikely for such a non-transient shift.
What Should the Community Demand Next?
The entire cryptocurrency community would benefit from real transparency on this issue. This would be good for everyone including operators of tethers as well, if indeed the printed tethers can be proven backed by actual dollars, as expected. The community was supposed to be about transparency and mathematically deterministic supply (and demand was never supposed to be printed in the first place.) Demanding for full transparency on tethers would do a lot in fostering a healthy market.
What If Tethers Can Not be Audited Fully
What if a full transparent audit can not be achieved on time as tether organization seems to have expressed in discontinuing the prior auditor’s activities? Or what if a full audit would result in a market crash? If tethers were operating on a fractional reserve basis, then one possible path to closing the gap would be to possibly continue to lift up the market, sell at the top, which would be followed by a drop; and repeat. This is speculative but Bitfinexed published what seems to be compelling demonstrations on a micro-level for possibility of market making at points, here. If true might take some time depending on how deep the reserve is, but either way the possibility of this results in an even riskier market than it would already be.
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