This is the third video of a beginners' guide where we will break down step-by-step how the traditional financial system is structured, how the cryptocurrency market is structured, what stablecoins are, their role in the cryptocurrency market, and why stablecoins will both drive massive global adoption of cryptocurrencies, while also potentially threatening mass global adoption of cryptocurrencies.
Our goal by the end of this video series is for us to understand the traditional financial system’s relationship with the cryptocurrency market, and if a crypto collapse can happen, how and when it could happen, and what we can do to protect ourselves as investors in the space.
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Is the cryptocurrency market a card house that could collapse at any moment? And if so, what’s underneath the card house? Well, if you tuned in to the first two videos of this series, we know that it may frightfully be another card house…
Hello, I’m Crypto Casey and this is the third video in a three-part series where we investigate whether or not the cryptocurrency market, as well as the entire global financial system, is indeed on the verge of collapse.
This is a beginners guide where we will break down step-by-step how tether, the largest and most pervasive stablecoin, may have become a metastasized cancer that is too large and pervasive to simply remove without causing the entire cryptocurrency market to collapse,
Here is a visual representation of the current structure of the cryptocurrency market: a card house with tether as the bottom base level, propping up everything else. For now.
In this third and final video, we are going to pull it all together and explore why the structure of the cryptocurrency market may be a card house on the verge of collapse, courtesy of: Tether, other stablecoins, lack of regulatory oversight,
and the fact that its foundation is the inverted card house that is the current state of the traditional financial system.
Our goal by the end of this video series is for us to understand the traditional financial system’s relationship with the cryptocurrency market, and if a crypto collapse can happen, how and when it could happen, and what we can do to protect ourselves as investors in the space.
If you haven’t yet, click on the link above to check out video two where we learn about the structure of the cryptocurrency market and the crucial role stablecoins, like tether, play in its system.
Awesome. Let’s hit video three.
Chapter 3: The Crypto Card House Collapse
Just a quick recap for a more seamless transition between the first two videos: currently the crypto markets are still highly correlated with the traditional markets and on an abstract, conceptual level, the crypto markets are still utilizing the traditional global financial system as a foundation.
And here’s a visual representation of the current state of the US financial system: an inverted or upside down card house. The lowest rows representing less risky assets, and highest rows representing the most risky assets.
From bottom to top, we have a few real US Treasury Bonds, above those we have rehypocated bonds and real estate, then mortgage-backed securities and commodities, next stocks, bonds, and equities, and finally options, futures, and derivatives.
And as we reviewed earlier, the structure of the cryptocurrency market is a right-side up card house whose foundation is the traditional financial system inverted card house.
Which when put all together looks something like this. In this video, we are going to focus mostly on the bottom row of the crypto card house: tether. So let’s break down the situation together in 5 sections so we can get a better understanding about the current state of affairs in the crypto markets.
Section 1: Tether vs Lehman Brothers
If we consider the straw that broke Lehman Brothers’ back in the last global financial crisis, which was 1.2% of their portfolio that consisted of commercial paper going into default, that should be extremely worrisome.
As we discussed in the last video, 50% of Tether’s reserves consist of commercial paper, which is unsecured corporate debt, to which companies? We don’t know.
And unlike a regulated entity like Lehman Brothers that has to list asset values using amortization schedules and similar to ensure accuracy of the asset's current valuations, Tether is able to list the value of its commercial paper as the purchase price, not what the commercial paper is worth at this time.
So they very well could be purporting that 50% of their reserve assets are commercial paper at the price they initially purchased it for, meanwhile since then, the loans are in default, making them worthless.
So we’ve got a regulated entity, Lehman Brothers, that had 1.2% of their portfolio go into default which triggered the last global financial crisis.
And we have Tether, with 50% of their portfolio of the same type of assets that destroyed Lehman, except we have no idea who the corporations are that Tether lent to and we have no idea about the current status of the loans.
A 1.2% default affected the entire global financial system by triggering a run on Lehman Brothers which was stopped and mitigated by the government stepping in and guaranteeing the loans: the bailout.
Consider the size of the cryptocurrency market compared to the entire global financial system, which is quite insignificant at this time, and then consider that the third largest cryptocurrency by market cap is Tether, and 50% of its reserve assets could be worthless.
That is more than enough to cause a systemic collapse of the crypto market at any time and there is no government that is going to step in and save the day. But wait, it gets darker.
Section 2: Tether’s Majority Holders
So we know how pervasive Tether is in the crypto markets, but what’s even more disturbing is: how most of the Tether tokens in circulation are in a very small number of addresses, who owns those addresses, and where they are located.
Check it out. Over 65% of all tether tokens are currently held through Chinese exchanges like Huobi and Binance, which is lovely considering the massive drama With China versus crypto, and the massive recent drama with Binance.
If China bans Tether, meanwhile over 65% of all Tether is held up in Chinese exchanges, what do you think they’re going to do with all that Tether? Yeah. Get rid of it. Not good.
Also, out of the 3.3 million total Tether addresses, the top 100 addresses hold more than 45% of all the circulating tether. That means less than 0.00003% holds over 45% of all the tether tokens.
It would not take many people liquidating their tether to end the musical chairs game that is the cryptocurrency market right now. But it’s even worse than that.
Get this: the top 10 addresses, which accounts for a whopping 0.000003% of all the existing tether addresses, holds and controls over 25% of all of the circulating tether tokens.
This means if one person or entity or whoever is in control of one of these 10, 10! Wallets, decides to liquidate all their Tether, it would start a massive run on Tether to redeem for dollars that are most certainly not available for redemption thinking back to Tether’s measly 2.9% cash held as reserves.
So when the music stops, there will not be enough chairs for everyone to sit in.
The fate of the entire crypto market is extremely concentrated among a few people, likely in a country that is on the war parth to ban cryptocurrency at large. Big yikes, guys. Big big yikes.
Section 3: Tether in Trading
So 50 to 60% of all bitcoin trades are for Tether. Which, considering the fun facts we just shared together previously is a scary situation for the price of bitcoin.
Trades aren’t just back and forth between tether and bitcoin and other cryptos, trading can also consist of margin and leverage trading. And due to lack of regulation and oversight, there is an unknown amount of leverage in the crypto markets right now.
As we go through this section, also keep in mind how we discussed in the last video how rehypothecation of crypto like tether via lending is absolutely out of control. And if you haven’t watched that video yet, you can check it out by clicking on the link above.
Okay cool, so as if lending out the same tether a million times over isn’t bad enough, let’s talk about how it relates to margin and leverage trading and how it exponentially multiplies by a staggering factor how bad a systemic collapse of crypto could be if there was a run on tether.
How Margin & Leverage Trading Works in Crypto:
Margin and leverage trading in crypto is gambling with money you don’t have. People borrow money, that has likely been lent out 5x over, to make a bet about the future price of bitcoin or other crypto, and then sit and pray for massive, massive profits that 9 times out of 10, do not materialize. Quite the opposite actually.
Check it out. Let’s say this person has $1,000 that they decide to gamble. And the exchange they go to use offers to lend them an additional $250 to gamble with for free.
Awesome. Free money to gamble with? Sign me up, right? And that they did. They took the $250 loan and gamble a total of $1,250 on the unknown future price of bitcoin.
Cool. And just to further set the scene, when this person gave the exchange their $1,000, the exchange credited their account with $1,000 worth of faguzi fugazi fairy dust tether tokens,
and took the real $1,000 cash to either reinvest in likely rehypothecated treasury bonds, pay for real expenses like office supplies, payroll, etcetera or similar.
Oh, and that $250 they lent to you, was lent to them from another exchange where they also took some poor soul’s real cash in exchange for tether plus 10% interest to let them borrow it out. So who actually has the real original tether tokens in lending situations? No one knows.
But does it really matter because in the end, if an extremely small amount of people with an extremely large amount of tether decide to get out, no one will be able to redeem the tether for anything anyhow. Awesome. Back to the example.
So on the original exchange where the gamble in question is taking place, on their balance sheet, they show $1,250 worth of “assets.” $1,000 of which is tether, and $250 of which is rehypothecated tether. And the total of $1,250 of tether is only as good as its reserve assets, which is largely unknown, but probably worthless.
See how the card house situation is starting to play out? Right. So let’s say the gambler in our example bet that that the price of bitcoin would increase, and at the time of the bet, the price of bitcoin was $30,000. But, as luck would have it, unfortunately the price of bitcoin falls to $22,500, which is a 25% decrease.
What happens? Well the $250 they borrowed becomes due and is instantly wiped out. The $1,000 of tether they gambled is now worth $750 and considering they had to pay the $250 back that they never had in the first place, they only have $500 of tether.
Also notice how quickly the exchange's balance sheet went from a cool $1,250 asset to a paltry $500. Now, imagine this on a large scale where tons of crypto is being rehypothecated, a large percentage of the trading is via tether,
lots of entities have been borrowing against one set of real dollars to create digital representations of dollars out of thin air, and then a flash crash happens and their underlying asset values drop. Very unstable. The antithesis of what stablecoins should be capable of in crypto.
Section 4: Tether Printing
It was once believed that for every tether issued into circulation, it was from someone depositing a real US dollar into tether’s bank accounts.
So when a lot of tether was entering the crypto markets, people believed it signaled lots of money coming into the space. New investors with new money or existing investors with more money. People and companies choose to invest more capital in the space is a great thing.
However, over time, and since we now know that each tether token has never ever once in its entire existence been backed 1 to 1 by real dollars, and since we know its shady characters, business structure, and foul play, it’s become quite clear that tether has adopted Fed Chair Jerome Powell’s go-to move: *play movie*
That’s right. Printing tether out of thin air. And every time there was a massive increase in the supply of tether, it perfectly correlated with massive increases in bitcoin’s price. In fact, if you remember from the last video, over 50% of bitcoin’s price increase was due to Bitfinex and Tether manipulating the price.
Also, suspiciously, but rather unsurprisingly, tether is the only stablecoin that only increases in supply and doesn’t decrease. People aren’t redeeming tether for dollars or other crypto? Please.
They are, but tether tokens have been lent out and rehypothecated so many times, there’s no regulation or oversight, and so tether prints to their hearts’ desire to their few cronies that hold ungodly amounts of tether tokens. And what are they doing? Likely buying a lot of bitcoin and other crypto. And then what? Holding or selling for real dollars?
Who knows. But either way this is the main thing that vastly concerns me in the short term: we don’t know how much crypto valuations are propped up from debt - and not just debt: debt upon debt upon debt,
debt issued upon something that’s underlying asset valuation is unknown, risky, commercial paper, junk bonds, rehypothecated treasuries where the same treasury simultaneously exists on who knows how many other entities’ balance sheets as collateral for loans…
So, both aimless printing of tether tokens, as well as rampant rehypothecation of stablecoins at large is absolutely propping up the current prices of crypto today.
And when either people get scared and do a run on stablecoins or when stablecoins get the smackdown from governments, it will greatly affect the crypto markets. Let’s talk about how and when:
Section 5: How & When a Crypto Collapse Could Happen
Let’s talk about how a crypto collapse could happen.
I think the most likely scenario is that one or many of the few large addresses holding tether tokens dumps, causing mass liquidation of tether.
Why? Because everyone a part of the tether scheme knows they do not have underlying reserve assets backing all the circulating tokens, they feel the heat from regulators worldwide, and yes, for years and years at this point there has been tether fud, but it’s coming to a head and coming to an end soon.
They know it, their buddies running exchanges know it, so what would you do if you were a criminal committing a crime for so long that’s about to come to an end? Do you just let everyone else that’s not in on it pull out of the market first? Or do you and your cronies pull out first?
Right. So I think they will orchestrate a d-day and get out, causing mass liquidation and crash of the crypto market. It’s either that or the market loses confidence first and starts pulling out.
Or the government could wield its sword and cause a run to begin as well. I think they are less likely to do that because they know how inextricably intertwined crypto has become with the traditional markets. And a crypto crash could cause a breakdown in their precious stock market as well.
When could a crypto collapse happen?
It could be sooner than we think. Here are some reasons why: Tether’s next audit is due this month. And as we all know, the very first audit they produced for Q1 was extremely alarming.
Congress has given the SEC a July 28th deadline to address crypto regulations, and you know they are especially keen to sort out the stablecoin fiasco.
The US is approaching its debt limit and Congress is running out of time to address that. The Fed continues to buy treasuries, which is increasing the money supply.
Reverse repo activity that we discussed in video 1 suggests that there is way too much counter-party risk for financial institutions to park excess cash anywhere except for the Fed, which is creating deflationary pressure in the economy.
Too much liquidity is in the financial system without adequate collateral in circulation,which is causing banks to choose not to lend, stifling economic stimulation.
Asset prices are bubbling. Prices of goods and services are increasing. Supply and demand for goods are simultaneously dropping, and as always, the Last Friday of each month options expire.
On top of it all, we are in the midst of typical summer doldrums and lots of uncertainty awaits as the northern hemisphere enters into flu season in the wake of the covid delta variant situation.
Look. The tether things has been a long overdue, long time coming thing, but there is a perfect storm of events converging over the next couple weeks and months that have me confident that something will happen.
A crypto crash? Maybe. A slow bleed out over time in crypto? Maybe. Lots of boring sideways movement keeping us relatively stable? Maybe. A massive bull trend sending crypto prices parabolic? Sure, anything is possible.
Tether hasn’t been printing any new tether in a while, which is probably most of the reason we’ve been sideways for a while. But they could decide to start printing tether by the millions, massively stimulating the crypto market for a final hurrah to drive prices up before exiting.
Or better yet, I think this would be the best case scenario: Tether is slowly, carefully extracted from the market, while regulation and oversight are imposed, allowing other more trustworthy stablecoins to take its place, and preferably a lot of different ones so we don’t have one stablecoin that can corner the entire market like tether has.
Either way, I’m going with a crash or slow bleed out. I’m bearish on crypto for the short term. Especially uncertain about what the coming weeks and months hold. Still super bullish for the years to come in the space, but for now, let’s talk about how we can protect ourselves as investors in the space during these uncertain times.
Section 6: Worst Case Scenario: Crypto Collapse
So what happens if crypto collapses?
Well, some entities go insolvent. And people that have lent out their money, who have zero clue how many times it has been lent out and rehypothecated, when they go to redeem their loan, there may not be, and probably isn’t, enough actual dollars in the system to cover everything.
And it’s the same situation for most of the other stablecoins as there is no regulation or oversight at the moment, and even if decentralized stablecoins are available like DAI, the volume associated with them isn’t enough to keep things afloat if tether goes bust.
As we discussed in the last video, there is no FDIC insurance behind any stablecoins and any stablecoins stuck in the market when a mass run on them occurs, it will likely affect their dollar peg as we’ve seen in the past. This happened with Bitfinex exchange back in October 2019.
Bitfinex froze withdrawals and stopped allowing deposits of dollars into tether and the dollar peg went down to 85 cents. Sure, there was no market crash, but the value of tether went down by 15%.
The same and similar would happen as well. Tether withdrawals will be frozen. Exchanges could halt trading activity and likely all deposit and withdrawal activity. People will freak out and the price per stablecoin could fall below the dollar peg.
Anything you have on exchanges, be prepared to have access, deposit, and withdrawal restrictions all while the price of everything drops significantly and quickly to the tune of 80 to 90%. Literally be prepared to watch the value of your accounts drop, while there’s nothing you are able to do about it.
As entities like exchanges go insolvent, lawsuits get filed, people sign up for them, but in the end, lawsuits take years and if there’s nothing to recover, there’s nothing to recover. No stablecoin or crypto is backed by the FDIC.
The government will not come in and save you and with lack of regulations and most of these entities existing on a global scale, the legal system is too far behind to rely on if you lose your funds.
If restrictions are lifted, people will be so desperate they would take 50 cents per stablecoin than nothing at all if that’s an option.
Either way, you need to make a decision. If you are comfortable with the possibility of an 80 to 90% pullback and would hold for the long term anyways, talking a year to 5 years, want to avoid tax implications of selling, and want to keep your crypto, get it off of the exchanges yesterday and on to a cold storage hardware wallet.
Bear in mind that even if you have your crypto on a hardware wallet, the value and price that you see on the market, will be the same value and price of your investments in your wallet.
The only difference between leaving them on the exchange versus your own wallet, is if the exchange goes bankrupt and your crypto is still on the exchange, you will probably lose them forever and not be able to recover your funds.
On your hardware wallet, sure the value drops, but you still own the crypto,
You can scroll down to the description area below to access the correct and official sites of my recommended hardware wallets.
BC Vault is my personal favorite, another option is the Ledger nano backup pack. So Scroll down to check them out.
If you choose to stay in your crypto positions, also consider what you’re invested in. Could small and medium cap projects survive if post-crash we have a long nuclear bear winter?
Most won’t. So I would assess my portfolio and hold on to the larger cap, main cryptocurrencies if that’s how you choose to play out a potential crash.
Bear in mind that even if the crypto is on your hardware wallet, if a project fails and the token becomes worthless or if the project is very small, after a crash, there may not be any buyers available in the market if you choose to sell it. Rendering it worthless. So consider that possibility.
If you are not comfortable with the possibility of a significant crash in the short term, consider consulting with an accountant about the tax implications, and trade your crypto for cash and withdraw the cash to an FDIC insured bank account.
And if you’re a high roller, consider only putting a max of $250,000 per bank account as the FDIC only insures up to $250,000 per depositor.
If a crash happens or a slow bleed out happens, it would present great opportunities for jumping back in after we know more about what the heck is going on. Or if we rise and continue the bull cycle, sure you may miss some gains, but at least you got some sleep over the coming weeks and months, right?
Section 7: Crypto Casey’s Play
This is not financial advice. This is what I decided to do based on what I think may happen and my unique, current situation.
Tether is so entrenched in the crypto market, and considering the totality of all of the information we discussed over the course of this three-part video series, I can’t in my wildest imagination figure out how we can avoid a substantial collapse if or when tether goes bust.
I also can’t in my wildest imagination see how tether would be able to continue on its current path for much longer considering the current perfect storm brewing we discussed earlier.
Bear markets are perfect for builiding. We shake out the crypto tourists, the fundemental investors stay like we always have over the last several years, and we build.
We build our knowledge about the technology, about finance, investing, economics, psychology, the government, business structures, geopolitical relations, history, everything that affects cryptocurrency, where it's headed and how it will get there.
With that knowledge, we can build income streams that help us maintain our wealth over time regardless of what market cycle we are in. If we enter another extended bear market, most of you will quit crypto altogether, only to come back for the next bull cycle.
If you would rather use a bear cycle to build your knowledge in crypto, consider protecting your ability to generate income in the space by learning more about the advanced technical concepts of blockchain to become a developer in the space.
Ivan on Tech’s academy is a great resource to consider, and if you use the link below, you can access the academy at a discounted price, so scroll down, and check it out.
My play, considering all of the uncertainty ahead in the short term that may create extraordinary buying opportunities if you’re a long term, fundamental investor in the space, is selling all small and mid cap altcoins, cashing out 60% of my positions, and keeping the cash on the side for the short term.
The 40% I’m holding consists of bitcoin, ether, chainlink, polkadot, and matic. And yes, I know I’m a big proponent of “don’t try to time the market,” but again, it looks like a weird, perfect storm may be underway, so I’m acting more cautiously for the time being.
If I lived in a country with untrustworthy banks and an already hyperinflated, largely worthless fiat currency, I would probably just keep my bitcoin and major crypto on a wallet. Getting it off exchanges if you want to keep crypto is imperative right now, in my opinion.
Again, not financial advice. This is the play I put into action for my unique position. Hopefully this video series will give you some things to consider when assessing your own unique position during these crazy times as well.
And behold for the last time in this series, the structure of the current traditional financial system in the form of an inverted card house, that also currently serves as the foundation of the entire cryptocurrency market card house. The crypto card house most certainly is courtesy of tether.
Awesome. Congratulations for making it through the final chapter of this video series. I hope it helps us all better understand and appreciate the current state of the crypto market so we can implement ways to protect our investments.
This is the final video in a three-part video series, so make sure to check them all out to get the full scoop. If you enjoyed the video make sure to like this video and subscribe to my channel for more crypto content.
So do you guys think there will be a crypto market crash soon?
Or am I being too bearish?
What’s your plan of attack over the next month or so?
Let me know in the comments below.
Be safe out there.