Quite an exciting turn of events has come into play in the cryptocurrency markets. Bitcoin has dropped from nearly $65,000 down to $35,000. This is a 53% drop. In this same period of time, the Laissesz Faire algorithm drawdown has been not much more than 14% from the same highs. Quite an impressive feat, and ultimately the algorithm’s time to shine.

Tether Issues

Tether, (a stable-coin cryptocurrency) was unlikely able to provide details of its transfers and bank accounts in the time ordered by the New York Attorney General. There is no coincidence that this massive Bitcoin selloff has come on the day after this report was due. I highly suggest you re-read this article below (January 11, 2021), where I mention the tail-risks associated with BTC, how the algorithm mitigates these risks by avoiding drawdowns >20%, and specifically where I mention Tether being a red flag.

The Tail-Risks Associated with Bitcoin and Cryptocurrencies

What is Tether?

USDT is a “stablecoin” — a cryptocurrency whose price is supposed to be pegged to the US dollar — managed by a company called tether.

Initially, tether said they enforced the peg by having each USDT be backed by a USD in a bank account. Then tether ran into all sorts of hilarious hijinks over the years, many of which we only found out because they were made public in NYAG litigation, including:

• Having all of tether’s money in their lawyer’s personal bank account (May 2017)
• Not having any bank account anywhere in the world for 6 months to receive money in. Yet still emitting $400m new tethers in that period. Their lawyer’s personal account had, at most, $60m at any point. Bitfinex had two institutional deposits in that whole period, neither of whom purchased USDT.
• Failing to complete an audit and settling on an attestation (An audit verifies where the money comes from. An attestation is just an accountant saying “there was money in a bank account on that date”) for “transparency”. The morning of the attestation, tether moved $380m from sister company bitfinex into a bank account the morning of the day of the attestation.
• Losing $900M to their money launderer, and covering those losses by commingling bitfinex customer funds with tether reserve funds (2018)
• Finding the last bank on earth, Deltec Bank from Bahamas willing to do business with them after Wells Fargo and HSBC fired them as clients. Remember HSBC has the kind of risk tolerance leaving them to willingly deals with drug cartels. No bank wants tether as a client.

Just read section 2 and 3 of the NYAG settlement. It’s a blast. The best recap on the tether saga is by Amy Castor, but Patrick McKenzie also has a good write-up. Note that Patrick’s piece is quaint now — it was written back in 2019 when tether’s balance sheet was $2B. Tether now has over $58B on their balance sheet

As far as we know, there was no point in history at which USDT in circulation were backed 1-to-1 by USD in a bank account. At this point, they stopped even pretending — each tether in circulation is backed by… tether’s “reserves”.

In the chart below; the blue lines are USDT coming back into tether’s blockchain address.

This is means people are recently withdrawing, a lot.

Is the Bull Market Over?

This tether event is likely a black swan event for BTC, that will create a top or a large correction. However, BTC is extremely cyclical and powered by extremely sound money economics and inherent scarcity. Corrections of this magnitude have at the least created a long term consolidation period in the crypto markets and at the worst, larger corrections followed. This current volatility is a welcome presence for the algorithm however; because it profits and protects much more in high volatility, untrending environments. BTC is supported by many institutions and world players, and is likely not in any real long term trouble unless the stock market begins to fall as well in the backdrop.

For now, I’m not concerned and I remain confident the algorithm will continue generating consistent profits and reducing the downside risks of Bitcoin.

More updates soon with current algo performance vs. BTC!

Happy investing,

Alex