What is the worst that may occur in this bear cycle for the cryptocurrency market? Could it cause more than just a crypto crash, affecting global banking system as well? Hello, Welcome to “The Proficiency Post” and in this post, we’ll explore one of the worst-case situations that might negatively impact the cryptocurrency markets and affect traditional financial markets as well.
Crypto Worst-Case Scenario
Now, let’s take a look at the crypto worst-case scenario. If you’ve been following the crypto space for a while, you’ll know that Tether’s history is notoriously shady. Tether collapse and how it would severely damage the crypto markets have been discussed so frequently that the scenario has been termed TetherFUD — fear, uncertainty, and doubt.
Tether, the largest and most widely used stablecoin, may have become a metastasized cancer that is too large and widespread to be removed without causing the entire cryptocurrency market to collapse. Currently, cryptocurrency markets are highly correlated with traditional markets. On a conceptual level, the crypto markets continue to rely on the traditional global financial system as a foundation.
If we consider the straw that broke Lehman Brothers back in the last global financial crisis, which was 1.2% of their portfolio going into default, that should be extremely concerning. Because, as of the time of this article, according to the most recent breakdown of reserves, approximately 25% of Tether’s reserves consist of commercial paper, which is unsecured corporate debt to which companies—we do not know.
If you look at trading volume on exchanges, over 90% and more, closer to over 95% of all trading volume is done using Tether across the crypto market. Moreover, a small number of wallets control the majority of Tether’s circulating supply.
In other words, if just one or two wallets attempted to redeem all of their Tether at once, it would collapse the cryptocurrency markets. For the first time in its history, Tether experienced the largest amount of liquidations it’s ever seen. Resulting in its market cap falling by almost $10 billion in just a few weeks from an all-time high.
In just 14 days, more than 12% of Tether’s market cap vanished, and the great majority of those who dumped Tether weren’t regular people like you and me. After the stablecoin panic, Crypto Whales abandoned Tether in favor of USDC. The failure of UST or Terra LUNA prompted large Ethereum blockchain investors to abandon USDT in favor of the perceived safety of its biggest competitor.
Here’s a chart of the number of millionaires in USDC versus USDT as it suddenly swaps billions of Tether for USDC. So, do you think they were just frightened by the recent Terra LUNA event and the dollar Tether experience at the time, or do they know more?
Whales have more insider knowledge than the general public, but only time will tell. However, while Tether has certainly been undergoing severe stress tests recently and performing well. If liquidations and Tether redemptions continue, Tether will only continue to perform well so long as there is enough cash in the bank for people and institutions to redeem.
And so long as the other assets backing it are liquid and still have the same or higher value than when they were acquired. According to their most recent breakdown, cash, and bank deposits are only about 5% of their total reserves. As I’ve mentioned, Tether has been involved in all shady activities. We still don’t have an audit after years of existence. We only have these attestations, which CPA firms in the Cayman Islands sign off on as accurate.
Tether refuses to provide more transparency about its reserves when asked. When legal action was taken to force transparency, Tether pleaded with US courts to keep their reserves hidden from the public, claiming that they have proprietary business relationships that give them a competitive advantage as the main reasons they don’t want to show their cards.
Is this another of their lies, or is it finally—after all these years—the truth? I’m banking on the former. So, what comes next?
What is the best-case scenario?
I think this is the best scenario: Tether is slowly removed from the market while regulation and oversight are implemented, allowing other more trustworthy stablecoins to take their place. Ideally, a variety of them, so that we don’t have a single stablecoin that controls the entire market, as Tether does.
What would be the worst-case scenario?
The worst-case scenario is a Terra LUNA event with Tether. Tether is four times as big as UST when it comes to market cap and far more pervasive as we discussed with the small number of wallet holders accounting for over 95% of liquidity on all exchanges. When you factor in margin lending and unlimited rehabilitation of Tether, who knows how much actual Tether is circulating.
Let’s just say you have a hundred dollars worth of Tether and you want to lend it out on Gemini exchange for interest. Gemini then lends that money to someone else who is also able to lend it out for interest. This can happen in advent items. This means that for every Tether you see on exchanges and that you possess , there could be 10 or 20 or even 100 or more people looking at the exact same Tether.
It’s a crazy game of musical chairs right now, with a lot of people and a limited number of chairs. So what happens if Tether causes a crypto collapse? Well, some entities go insolvent. People that have lent out their money have zero clue how many times it’s been lent out and rehypothecated.
When they go to redeem their loan, there may or may not be enough actual money in the system to cover everything. It’s the same situation for most of the other stable coins out there because there’s no regulation or oversight at the moment. Even if decentralized stablecoins such as DAI are available, the volume associated with them is insufficient to keep things afloat if Tether fails.
There is no FDIC (Federal Deposit Insurance Corporation) insurance behind any stablecoins. Any stablecoins that remain in the market after a massive run on them will most likely affect their dollar peg. As we’ve seen in the past, even only a few weeks ago, Tether withdrawals would cause panic among users, which would cause exchanges to stop trading and almost certainly all deposit and withdrawal activity.
As a result, the price per each stablecoin would fall below the dollar peg. Prepare yourself to have access, deposit, and withdrawal limits for anything you had on exchanges, even though the cost of everything is falling drastically and quickly by a factor of 80% to 90%. Prepare yourself to actually witness the value of your accounts decline while incapable of stopping it.
So, as entities like exchanges go insolvent, lawsuits are filed, and people sign up for them, but 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 intervene to save you. With a lack of regulations and the majority of these entities operating on a global scale, the legal system is far too behind to rely on if your funds are lost.
People will be desperate if restrictions are lifted that they’ll take 50% per stable coin or nothing at all as an alternative. We saw that just by lowering UST to zero. So, best-case scenario or worst-case scenario, if you believe Tether’s days are numbered and its demise will resemble a sudden collapse rather than a slow bleed-out, you must make a decision.
If you are comfortable with the possibility of an 80% to 90% pullback and intend to hold on for the long term, we’re talking a year to five years, and want to avoid the tax implications of selling and keep your crypto, get it off the exchanges and onto a cold storage hardware wallet. Keep in mind that even if you have your crypto on a hardware wallet, the market value and price will be the same as the investments in your wallet.
The only difference between leaving them on the exchange and keeping them in your own wallet is that if the exchange goes bankrupt and your crypto’s still in the exchange, you will most likely lose them forever and will not be able to recover your funds. Sure, the value of the cryptocurrency on your hardware wallet drops, but you still own it.
If you choose to stay in your crypto positions, also consider what you’re invested in. Could small and medium cap projects survive a crash and long-term nuclear bear market? Most won’t. So I would assess your portfolio and hold on to the larger cap main cryptocurrencies if that’s how you choose to play out a potential crash.
Keep in mind that even if you have crypto on your hardware wallet if a project fails and the token becomes worthless, or if the project is very small after the crash, your crypto will be worthless. If you choose to sell, there may not be enough buyers in the market, rendering it worthless.
Consider that possibility as well. Bear markets are perfect for building. We shake out the crypto tourists, the fundamental investors stay, like we always have over the last several years and we build. Build our understanding of technology, finance, investing, economics, psychology, the government, business structures, geopolitical relations, history, and everything else that has an impact on where cryptocurrency is heading and how it will get there.
With that knowledge, we can create income streams that will help us maintain our wealth over time, regardless of the market cycle. If we enter another extended bear market, most people will abandon cryptocurrency, only to return during the next bull cycle.
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