Why is the bitcoin price going down?

Bitcoin’s price has artificially been driven up primarily by an elaborate fraud with the cryptocurrency called Tether. As long as this continues, Bitcoin’s value will fluctuate violently as pump and dump schemes are executed.

Tether is a crypto that’s being generated at will by Tether Limited. It’s pegged to the dollar at a 1:1 ratio, which means they’d have to have 1 real dollar in reserve for every Tether in circulation. They claim they do, but it’s glaringly obvious that they’re lying.

The real problem is that Tether is majority owned by Bitfinex, one of the largest crypto exchanges in the world. This is a dangerous conflict of interest. What many people think is happening is this:

1. Unbacked cryptocurrency is being created out of thin air by Tether, without any real money actually backing it. It’s then transferred to exchanges like Bitfinex, where it’s used to buy crypto. This fake money is used as collateral for margin trading, greatly amplifying the effect.
2. Bitcoin’s price goes up. People are tempted into buying “hot” coins for FOMO. Wash trading helps paint the tape too.
3. Bitfinex charges you fees for transactions, and hoards increasingly larger amounts of crypto.

Tether has minted half a billion’s worth of tokens just in the last 3 months. Wash trading then gives the illusion of liquidity and high demand for cryptocurrencies, especially Bitcoin.

Tether is responsible for the current [2017] Bitcoin rally, which started back in april when it was worth about $1,000 USD and continued to about $19,000. At the time it started, there were less than 10 million Tethers in circulation, but over the last 8 months they have minted over a billion dollars worth of them. This has pushed the price for bitcoin up at an alarming rate. What is even weirder is that right around the time their supply exploded, all US banks cut them off, which means US customers had no way of wiring money to them when buying Tether tokens. Yeah. They’re a company that issues USD-backed coins by the billions, but can’t bank in the US. Sounds like the perfect place a bunch of serious investors would pour 1 billion dollars into.

The suspicion, of course, is that it’s Bitfinex and other exchanges “buying” Tethers. Then they throw it into the crypto ecosystem, which they control a good chunk of, and wash trade with it, supposedly at a value of 1 USD.

People who have bought crypto are now playing a game of musical chairs, because when you buy Bitcoin, you are essentially in an auction where your opponents can bid with fake money, and they get to say when the game is over. Or the authorities.

This was fun while cryptos were going up, and everyone was making “money”. Not so fun anymore.

The last of several Tether floods, in december (over 200 million), managed to pump Bitcoin up to over $19,000. My guess is that (aside from their usual scam) they were trying to protect Bitcoin’s price from the new CME futures. However, their printing shenanigans have since stopped being enough to keep up with the bears. Close to Christmas they issued another 100 million that had no effect. Tether was spread way too thin and drawing too much attention. Hence last week’s [December 2018] 30% “market correction”, which was actually whales unloading and cashing in.

I doubt the crypto market can take another hit like this. For now, cryptos will rally again for a few months and reach a market cap of maybe 800 billion at best [this prediction was actually spot on], and then it’ll become impossible to keep pumping, and many whales will abandon ship, this time for good. They’ll dump Bitcoin in favor of some other crypto, or maybe exit the market entirely.

There’s also the latent risk that Bitfinex gets “hacked”, busted by law enforcement, or becomes insolvent. That would instantly trigger armageddon.

EDIT:

Some people have pointed out that there are other factors that have caused Bitcoin to drop, mostly BCH trading in Coinbase. While outside factors may be responsible for smaller dips over smaller timescales, I’m talking about the big 30% “corrections”, the last of which happened last week.

The thing about Tether pumping Bitcoin is that it inflates the entire crypto market as well. Bitcoin is where margin trading with Tether has concentrated, and since the symptom is apparent exuberant liquidity, the effect spreads to other cryptos when Bitcoin is traded for other coins. The entire market is priced in terms of Bitcoin, because it’s not that easy to directly buy altcoins with USD, due to regulation. This is why the risk in the crypto market is systemic. And there will be no governments bailing exchanges out if things go wrong.

Others have said that I’m being too fatalistic, and if all of this unravels, it will not be “armageddon”. Even if Tether is a bubble, they say, it will just be a minor correction if it gets exposed. I disagree. While Tether’s market cap is “only” 1 billion dollars, margin trading and speculation greatly compound its effects. Also, if wash trading is a problem, you shouldn’t really look at market cap. You should look at volume. Market cap is an illusion, and if the current volume is mostly wash trading, then Bitcoin is far more elastic and sensitive than you think.

We’ve already established there is a conflict of interest in crypto. If there really is fake money in the system, then how much bigger is the supposed “market cap”, compared to the actual money that has been invested? 10x? 100x? 1000x? That’s why a much better indicator of what the market is actually doing is volume, not market cap.

EDIT 2 (10th Jan 2018)

I was looking at coinmarketcap.com. The following table is ordered by daily volume:

Look at Tether’s volume. Most other coins (including Bitcoin) have a daily volume of about 5–7% of their market cap. Tether has 220%. That means that, on average, every Tether token changes hands more than twice every day. This is unheard of, and makes no sense unless you consider fraud. And it’s right there, in plain sight. But nobody is talking about it. All you see in the news is clueless headlines about “Crypto making massive gains” or “Is the current crypto sell-off over?”, when you can read the market like a book just by looking at the trading volumes of these fraudulent exchanges.

Tether is less than 1% the size of Bitcoin by market cap (a “measly” 1.4 billion), but its trading volume is roughly equivalent to 1/6 of Bitcoin’s, 1/3 of Ethereum’s, and more than half of Ripple’s. It’s the 4th most traded coin in the market. This, to me, is evidence of wash trading.

Think again if you believe that such a small coin “can’t possibly influence something as big as Bitcoin”. It’s not the marketcap which gives you an idea about what is wrong with the market, it’s the fake volume.

EDIT 3 (16th Jan 2018)

We are currently in a 20%+ market dip. Tether’s volume reached 5.5 billion (a staggering 3.5x its market cap), temporarily positioning itself in 3rd place by trading volume.

These are the top 10 most traded Bitcoin pairs:

Out of the first four, three are related to Bitfinex/Tether.

EDIT 4 (23rd Mar 2018)

It’s been 4 months since I posted this answer, and it still gets many views (especially when Bitcoin starts to drop and people start to google about it).

A lot has happened since January.

• Subpoenas were issued against Bitfinex and Tether.
• Roughly $ 400 million were seized by polish authorities in a case related to drugs and money laundering. Rumors are the money belonged to Bitfinex, and a user of their platform even got questioned by police.
• Bitcoin is trading below 9k
• Volumes are drastically lower than what they once were.
• Tether is now #2 on volume, with a daily volume a ridiculous 1/3 [EDIT: now 1/2] of Bitcoin’s.
• Either Bitfinex or Tether are involved in up to 70% of Bitcoin trading, despite still not allowing US customers on their platforms.

What was once a not-so-apparent fraud is now blatantly obvious, and the accusations have grown louder and louder. Many analysts have posted comprehensive analysis online, exposing the wash trading and spoofing with actual data, videos and screenshots. At some point someone will shut Tether (and the exchanges wash trading with it) down. It’s not a matter of “if”, but “when”. Sadly, they will take Bitcoin down with them.