ABERDEEN, SCOTLAND – “Could this possibly be true?” a reader asks.
It’s quite a question. They’re effectively asking if the price of one bitcoin could rise to $4.38 million.
I must say, that is quite the price forecast. Bitcoin gets wild price targets flung at it regularly (both high and low), but four million bucks is easily on the high side. Yet, despite the seeming lunacy of the figure, it’s an interesting thesis which has led to it.
I thought I’d have a rummage through the postbox to start us off this week – I’ve received some great responses to my letters in recent days, and I thought you’d be interested to hear what the rest of the readership make of the topics we explore here at Capital & Conflict.
But back to that question…
[Bitcoin] is a currency, among other things. Fiat currencies represent their national economies. BTC, being international, represents the world economy. If you want to know why it’s rising, divide world GDP by 21 million. That, very roughly, is where BTC is heading, over many years. What if it is an asset being dragged upwards towards its ‘true’ value? Could this possibly be true?
World GDP in 2020 was $91.98 trillion. Divide that by the max supply of BTC (21 million), and you end up with $4.38 million – an “optimistic” outlook for bitcoin investors, to be sure.
It reminds me of a forum post from the late great Hal Finney, one of the original contributors to the bitcoin project who may actually have been the original Satoshi Nakamoto:
As an amusing thought experiment, imagine that Bitcoin is successful and becomes the dominant payment system in use throughout the world. Then the total value of the currency should be equal to the total value of all the wealth in the world. Current estimates of total worldwide household wealth that I have found range from $100 trillion to $300 trillion. With 20 million coins, that gives each coin a value of about $10 million.
So the possibility of generating coins today with a few cents of compute time may be quite a good bet, with a payoff of something like 100 million to 1! Even if the odds of Bitcoin succeeding to this degree are slim, are they really 100 million to one against? Something to think about…
A great software engineer and strong believer in the merits of cryptography as a force for good, Finney was the first person in the world to receive a bitcoin transaction (and the first to mention bitcoin on twitter – a post which shall hopefully remain on the site for posterity).
Finney died of ALS in 2014 – he had been selling bitcoin he had mined to fund his medical treatment. His body is currently preserved in ice so that he may be revived if future medical technology is capable of such wonders.
If Finney actually was Satoshi, it would explain Satoshi’s enduring silence and the fact that none of Satoshi’s hoard of BTC has been spent for years. While Finney denied speculation that he was Satoshi while he was alive (and there are numerous stylistic differences between the pair), he’s easily one of the most compelling suspects in the Nakamoto case.
But back to the question at hand – will bitcoin become an asset that absorbs the value of global human economic activity? If it does, it’s got an awful long way to go in terms of both price and acceptance from institutional gatekeepers. For me to imagine such a scenario, bitcoin would need to have not only have been formally allowed to exist in peace by governments, but to be actively accepted by them. Bitcoin at that point would need to have become a form of prime collateral within banking, or a strategic reserve asset hoarded by state treasuries. Is this possible? Maybe – but that’s a long way from where we are now, with more hurdles than the eye can see…
Which brings us to a less optimistic comment from a reader:
“The Sunday papers are full of Bitcoin successes ….’how I made £100K’ etc etc and of course the target prices of £150k etc etc. Blockchain is the future but there is going to be a lot of spilt blood along the way…”
We may be about to see some of the aforementioned “blood” spilled. Late last week, another pseudonymous individual going by the less imaginative handle “Crypto Anonymous” published an article called “The Bit Short: inside Crypto’s Doomsday Machine”, in which they claim that this entire bitcoin bull market is a fraud.
The argument they are making – which we’ll go into in a second – is nothing new. What’s important is that the article is going viral. It’s all over Twitter, and is being widely read throughout the fund management industry. Bitcoin is very sensitive to market sentiment, especially narratives, and the popularity of this article may cause a pullback in the BTC price as the classic “Fear, Uncertainty and Doubt” (FUD) dynamic emerges.
The argument made by Crypto Anonymous (take a read of it here) is that the bitcoin price is going up because fake dollars are being printed to buy it. It’s the old Tether-fraud story, which we’ve written about on multiple occasions over the years, most recently in The Night Trade (6 January 2021).
To quickly sum up for those who aren’t familiar: Tether (symbol: USDT) is a “stablecoin”, a digital currency issued by an organisation of the same name that is supposed to be pegged to the US dollar. For each Tether created, there is meant to be a real dollar held in a bank account to back it. As everybody believes that one Tether = $1, Tethers are exchanged and traded on crypto exchanges like real dollars. And as its easier to send Tethers around exchanges, much of all crypto trading takes place with Tether rather than real dollars. Crypto exchanges that can’t be bothered with the banking regulations that come with facilitating fiat (“real”) money just use Tether instead.
But what if Tether is lying about holding any real dollars, and is just printing Tethers out of thin air (like the Federal Reserve does with real dollars)? They could just be buying bitcoin with Tether, and then selling that bitcoin for real dollars. It would be a license to print money, but without the license.
Could this possibly be true?
In short: yes, it could. But as I said in The Night Trade, I don’t believe this is the case. Tether is like a wildcat bank in the 1800s – an unregulated financial institution that is playing fast and loose with the rules while giving the market what it wants. I don’t think it’s just printing money and outright defrauding people.
In 2019, the organisation outright declared that they could only back 74% of the Tethers outstanding with actual dollars – and everybody still kept using Tether. It is a dollar native to the internet – an innovation with huge utility. Forget the Federal Reserve launching a digital dollar, Tether has beaten them to the punch. The digital dollar is here already: it’s called USDT.
The narrative that the entire crypto space is one massive ponzi/pump ‘n’ dump scheme being orchestrated by Tether comes around cyclically in crypto. As I say, this theory is not new. Hell, I made the same argument that Crypto Anonymous is making in this very letter back in 2017!
(Just reading that old issue of Capital & Conflict gives me nostalgia. There I was, surprised, that bitcoin could go up by a grand in one day. Oh, to be young again… For those curious, see Bomb-making for beginners [7 December 2017], and scroll down to “Double Fiat Money”.)
Way back then (it feels like a lifetime ago), there were only 814 million Tethers in existence. Today, over 24 billion USDT have been printed. Back when Tether was 3% of the size it is today, there were the same fears that it would take down the entire crypto space.
This may just be the latest rerun of the Tether story, which shakes out some of the newcomers, causes a sudden drop in the BTC price, and then everything carries on as normal and Tether keeps printing away. Cautiously optimistic, this what I suspect will occur.
But say Tether has been a fraud this entire time. After all, Bernie Madoff managed to spin his scheme for a long time before it all came tumbling down. And what’s different this time is that the New York attorney general is running a fraud investigation on the organisation.
If they reveal that Tether is in fact just printing fake money with no USD backing, the fallout would be severe. As so much crypto trading is made using Tether (as previously mentioned, many exchanges just use Tether rather than actual dollars), if it were declared worthless a massive source of daily liquidity would suddenly dry up.
Ironically, this could cause the value of BTC to rise as traders pay whatever Tethers it takes to get them off their hands… but that would require somebody else to accept the now worthless Tether in exchange for bitcoin, which I find hard to imagine.
All the exchanges that rely on Tether instead of actual dollars, and all the cryptocurrencies that are traded mostly in USDT (rather than fiat) would be in big trouble. It’d be like the bankruptcy of Mt Gox (formerly the world’s largest crypto exchange which went bust in 2014 due to fraud) but even larger, as the cryptocurrency space is so much bigger now.
This wouldn’t compromise the integrity of bitcoin at all, of course. In fact, bitcoiners would then use Tether as an example of why bitcoin is the ultimate currency, which cannot be printed and debased. But such a debacle would stain the space for a long time – and I reckon it would cause a big BTC price drop, just as Mt Gox did. Although the bitcoin network was not at fault during the Mt Gox fraud, the BTC price still dumped as sentiment soured, and it took a long time for the price to recover.
To repeat, I don’t think this is what’s about to happen. But whatever does end up happening with Tether, I think in the near term we’re going to see a lot of fear regarding Tether in the press and amongst the crypto community, which will lead to a pullback in the bitcoin price.
All the best,
Boaz Shoshan
Editor, Capital & Conflict
PS Sorry for the rambling note today, I didn’t intend for this to be quite so long. I’ll be back later in the week with some more of the thoughtful responses I’ve been getting in the mailbag. Tomorrow you’ll hearing from my colleague Nathan Tipping, who’ll be taking a look at the UK stockmarket through the eyes of Oscar Wilde…
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