On today’s show we are talking about the meaning of investing versus speculating. In 2017 the global value of all bitcoin in existence soared from $20B to about $320. Bitcoin was making headlines all over the world and it seemed like crypto currency had transitioned from the technology world into the mainstream.

One of the benefits of cryptocurrency is that the transaction history is fully contained in each transaction. Theoretically someone could analyze the transaction history and perform an audit of all transactions. Practically speaking, nobody’s ever done it because it is a huge amount of work.

That is, until recently.

But before we dig into that, a little more background is needed.

There’s another cryptocurrency called Tether. Tether’s main feature is that it is tied to the US dollar. For every Tether coin in existence, there is supposed to be a US dollar in a bank account backing that coin. Since most cryptocurrency at that time were quite volatile, cryptocurrency investors overwhelmingly would purchase Tether with US dollars and then buy another cryptocurrency with Tether, whether it was bitcoin or Etherium or another currency.

The makers of Tether insist that new tether are created by demand with the backing of purchases in US dollars from end users.

Researchers at the University of Texas conducted deep research on the influence of Tether on the price of bitcoin. They loaded all of the bitcoin transactions and all of the Tether transactions into a single database and started looking for patterns in the data. They developed a thesis that Tethers had a regular pattern of coming into the market whenever the price of bitcoin dropped. They also noted that the pattern of buying was much more orderly and consistent than other market activity. They also found that after this surge in Tether buying, the price of bitcoin went up. All of these market moving transactions went through a single exchange called Bitfinex. It turns out that Bitfinex is owned by the same three people who own Tether.

Bitfinex is an exchange that offers its users complete anonymity. You don’t need to provide any identification to open a Bitfinex account.

The researchers found that almost half of the $300 billion of price increase in bitcoin was linked to these suspicious transactions involving Tether , Bitfinex and bitcoin. That’s a $150 billion dollars of profits that have a cloud of suspicion over them.

The NY attorney general has started investigating these transactions as well. The folks at Tether have been asked to prove that there is in fact a paper trail showing 1 US dollar backing every token that was minted.

Now I want to be clear. Whenever money is involved, you will find fraud lurking in the shadows. The financial world has seen fraud in banking, price fixing in Libor, fraud in construction, the list goes on and on. Cryptocurrency is not the problem per se. But it takes a deep investigation to uncover fraud in cryptocurrency especially when it is an inside job.

There is no way that a single individual could manipulate the price and value of hard assets like gold or real estate. There is no single marketplace for trading in those assets. Moreover, the intrinsic value of hard assets is based on broad market fundamentals and not minute to minute or second to second price arbitrage.

The underlying problem of course is that bitcoin has no intrinsic value. There are no market fundamentals that make bitcoin or any cryptocurrency more valuable a minute from now, or a week from now compared with today. So the arbitrary assignment of value is pure speculation which in my mind is very distinct from investing. In order to be considered money it has to perform two things

  1. It has to be a store of value
  2. It has to be a means of exchange

Today bitcoin is neither a store of value nor a means of exchange.