Thread by @Crashonomics1

The Destruction of Cryptocurrencies
The market in cryptocurrency is about to be rocked (down another 70%+ ). Here is my hypothesis:

To trade cryptocurrencies, you need to exchange fiat for digital coins, and to do it in size with liquidity it is a two-part transaction. 1/12

Fiat to stable coin, stable coin to token, and the reverse (token to stable coin to fiat) to cash back out.

That reverse transaction is the Achilles heel of the cryptocurrency world and why we are on the verge of an additional $1 trillion dollar wipe out. 2/12

Stable coins are the liquidity bridges of the crypto world and they are shaky if not fraudulent bridges, that only work well in one direction.

Using Tether as an example - give $1 in fiat and get one Tether back. Its reserves are unaudited so Tether could print 1 Tether 3/12

or hypothetically 3 keeping 2 for its own uses (mainly purchasing more Bitcoin). That $1 could bolster reserves, give liquidity to traders cashing out of crypto, or go into Tether's (the company) pocket. This works well as long as there is increasing demand for crypto. 4/12

And pushes prices dramatically higher as each fiat dollar is turned into 3 dollars of Bitcoin purchasing. However it all falls apart when the flows reverse. Like an old time run on a bank, when people begin to realize they can't get their money back the panic begins. 5/12

Since there are not as many $ reserves as there are Tethers the first people to cash out are the only ones to cash out. And when Tether the company senses a run is beginning they have no incentive to try on hold the peg.

As they can just take the money (all 11 employees). 6/12

And go to a tropical island (without extradition).

Many crypto traders argue that if the Tether peg breaks it will be good for crypto prices as everyone will sell Tether and buy coins. This is partially right but mostly wrong. 7/12

Coins prices may rise in relation to fiat, but there would be tremendous pressure on other stable coins, as investors in mass try to cash out of crypto. Other stable coins pegs would break and it would likely be impossible to transact at prices better that 3 Stable Coins/$ 8/12

or probably much worse (closer to 6 to 1). Bitcoin may go to 60,000 but if it takes 6 stable coins to get a dollar, you are realizing a 10,000/$ actual price, and more likely the other exchanges will just close than honor their peg. Meaning no conversation back to fiat. 9/12

In the last crypto down draft MicroStrategy issued $500mm in bonds to buy Bitcoin, supporting the price but just as importantly providing $500mm in liquidity for anyone looking to exit the market, like JPMorgan in the pre-Great Depression days of old. 10/12

If prices start dropping again this is unlikely to be repeated.

Titan just went to $0 and there is a good chance it is going to happen to all stable coins. This is an unhedgeable risk, besides getting out now while there is still some liquidity. 11/12

P.S. Did Tesla sell some of it's Bitcoin and go to back to fiat, or did it just sell and go into stable coins? They may have been checking the wrong liquidity. Just wondering. 12/12

@threadreaderapp unroll