Hi everybody, short issue this week because our beautiful baby daughter has entered the world.
I’m going to disappear for a little bit but the newsletter will keep on next week with some fun content you’ll really enjoy.
In the meantime, here’s a few odds and ends. First, from the mailbag.
One Snippets reader had a really interesting take worth sharing:
One confusing thing about Tether is how hard it is to borrow. You'd think that if Tether holders shared this concern, they'd want to either sell their USDT or lend it out. But the peg has held (i.e. somebody out there, maybe just Bitfinex, but maybe others) is willing to sell one USD for one USDT. And it's hard to borrow. Last time I looked, there was under $10m worth at each of the major trading desks, at a rate in the teens.
So the mystery is: who is the natural holder of USDT who doesn't want to sell and doesn't want to lend? My answer was originally Bitfinex: if Tether isn't fully backed, their only viable exit strategy is to pump up Bitcoin, and hope they can somehow sell enough Bitcoin to redeem USDT. Which probably wouldn't work, but a currency redeemable in USD that's backed less than 1:1 in USD definitely wouldn't work, so it's the better strategy. (Assuming you're morally bankrupt, and in this scenario the Bitfinex guys definitely are).
The kink is that there's another constituency that, allegedly, wants to own USDT and doesn't want to lend: money launderers. Specifically, what I've heard is that some wealthy Chinese people keep money in USDT because they know it's transferable and can't be easily seized by either the US or Chinese governments. That makes Tether an asset like Vancouver/Hong Kong real estate, or fine art: you'd almost rather buy the overpriced but liquid version because at least you know every other person with a similar set of criminal incentives to you, and similar buying power, is doing the same thing, i.e. you'll have somebody to sell to.
This, or something like it, is probably what's going on, because otherwise Tether would have collapsed by now.
Which doesn't mean there isn't a trade here. Long BTC/short USDT works, because as long as Tether exists it can still supply "cash" to the bitcoin market, inflating prices. Meanwhile, if Tether blows up Bitcoin goes down, but not as much as Tether does. The risk is a short squeeze in Tether. (And this is one reason I would be reluctant to touch it in an institutional context: imagine explaining to your investors that you lost their money shorting something ostensibly backed 1:1 with dollars.)
One news item worth highlighting: this could have been a MASSIVE story but there’s been weirdly little chatter about it. It sure looks like… WhatsApp had an encryption back door all along? Uh oh. (All this after two years’ ago’s big argument when The Guardian reported that WhatsApp had an encryption backdoor (which was not based on good reporting), telling people “encryption is useless, don’t bother with it; which is also terrible advice. Anyway, well, it looks like they were right in the end. But not for the right reasons!) Anyway, there’ve been shockingly few pieces about this current security breach and its implications but it’s made some people really nervous about what it implies. I am NOT at all thoroughly versed in all sides of this story and there may well be major pieces of it I haven’t seen, but what I’ve seen so far is, uh, food for thought to say the least:
Other reading links:
Have a great week,