The Bit Short: Inside Crypto’s Doomsday Machine

Prologue: Tether & company

The trade


The shock

Source: Coinlib BTC.
Source: Coinlib ETH, LTC, ADA, and BCH.

The panic

Source: Coinlib Coinbase Pro data.
Source: Coinlib Binance data. (Note: Excludes Binance US.)
Source: Coinlib Bit-Z data.
Source: Coinlib HitBTC data.

The deep dive

  • On February 26, 2019 — two months before opening its official investigation — the OAG requests a large number of documents from Tether Ltd. The purpose of the request is to help the OAG understand how Tethers are being issued, backed, and accounted for, and how Tethers are flowing through the crypto ecosystem.
  • From the beginning of the official investigation on April 25, 2019, through to July 9, 2020 — a period of nearly 15 (!) months — Tether Ltd. issues a series of legal challenges to the investigation that appear designed to delay their response to the OAG’s document request.
  • On July 9, 2020, the New York Supreme Court dismisses Tether Ltd.’s final challenge on appeal, effectively forcing Tether Ltd. to comply with the OAG’s document request. What’s more, Justice J. Gesmer’s opinion eviscerates all aspects of Tether Ltd.’s arguments (good commentary here), suggesting that Tether Ltd.’s appeal was never intended as a realistic challenge to the documentation request at all. But it could, plausibly, have been part of a strategy to delay the document disclosure by any possible means.
Source: Coinmarketcap USDT.
Source: Coinmarketcap BTC.

The exit

The epiphany

The smoking gun

Source: Travis Kimmel via Twitter.
Source: Travis Kimmel via Twitter.
Source: Anti-Washing Center via Twitter.

The big picture

  1. Bob, a crypto investor, puts $100 of real US dollars into Coinbase.
  2. Bob then uses those dollars to buy $100 worth of Bitcoin on Coinbase.
  3. Bob transfers his $100 in Bitcoin to an unbanked exchange, like Bybit.
  4. Bob begins trading crypto on Bybit, using leverage, and receiving promotional giveaways — all of which are Tether-denominated.
  5. Tether Ltd. buys Bob’s Bitcoins from him on the exchange, almost certainly through a deniable proxy trading account. Bob gets paid in Tethers.
  6. Tether Ltd. takes Bob’s Bitcoins and moves them onto a banked exchange like Coinbase.
  7. Finally, Tether Ltd. sells Bob’s Bitcoins on Coinbase for dollars, and exits the crypto markets.

Epilogue: In the land of the blind

Can we break this fraud right now?

How can we stop this from ever happening again?

Why did I write this?

  • Patrick McKenzie’s excellent blog post gives a clear picture of the Tether situation up to October 2019.
  • Matt Levine dedicated an issue of Money Stuff to Tether.
  • Cryptocompare has helpful historical data on the volumes of different currencies flowing into Bitcoin.
  • I found the following Twitter accounts extremely insightful: @coloradotravis, @Bitfinexed [private], @DrHOSP1, @BennettTomlin, @patio11. (Note that Twitter appears to be intermittently suspending certain accounts that raise questions about Tether. There is a small chance some of the accounts listed here may be, or may become, temporarily inaccessible.)



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