In this article, I'd like to talk about a scenario that I think has increasing chances of happening in the crypto markets. But before you go thinking this is an article about whether Tether is solvent and has money in the bank or not, it's not about that.
I want to talk about a popular trading strategy with more advanced crypto traders. And why it may be a mistake moving forward.
Safe Haven
Stablecoins have many use cases and are basically designed to peg the price of a good or service to a stable price. As a result of their price stability, crypto traders swap out their Bitcoin or altcoins during times of downward movement in the market.
The reason for that move is obvious. To maintain value.
Then, once the storm has passed, investors simply swap out into Bitcoin, etc, at a cheaper price and make gains. This is basically how you make gains in a falling market.
This is a common strategy in the crypto markets and I've done it before to good effect. It works. The fact that it works so well and is a common tactic, however, means that there is a vulnerability in the trading strategy.
As it works, no one is really thinking how it may go wrong. Terribly wrong.
The Real Reason You Should HODL
Up until now, the crypto market has been populated with retail investors. Low volume traders made up of libertarians, anarchists and tech geeks. Up until now, tethering your Bitcoin has been the normal thing to do in a high volatility market namely because your competition is low income, low value investors. So you can easily redeem your stablecoin for Bitcoin as there's plenty on the table.
There's plenty. For now.
But the truth is that the crypto market is fast changing. It's no longer about retail investors and early adopters. The crypto market is on the cusp of a new, bigger player entering the space. Wall St and the big investment houses who have huge amounts of capital behind them. Dwarfing the retail traders piggy bank by several scales of magnitude.
The reality is, there is new competition entering the space for the limited supply of Bitcoin. So is tethering your bitcoin really a safe haven?
The Great OTC Bitcoin Heist
Recent estimates are that the OTC or "over the counter" market is equal to the current market cap of the entire retail market as displayed on CoinMarketCap.com.
If this is true, then approx 100% more ( double ) capital exists in the crypto space than is reported. But is not accounted for as it does not go through the retail exchange order books. It gets accounted for elsewhere.
Which is exactly why you can have the current scenario. A falling retail market despite a rising OTC market. Made up of big investors who are busy buying up Bitcoin to back their financial products and services. Which they have to do if they are going to, by law and regulatory requirement.
So the big players have to buy large amounts of Bitcoin to compete with other big players. Creating an institutional FOMO effect, buying Bitcoin "just in case" crypto becomes a huge industry and asset class.
Given the low total supply of Bitcoin at 21 million, it would be a good strategic play by the big players to hoard bitcoin as a strategy to block the competition and knock them out of the Bitcoin-backed futures market. Which is what I expect to be happening right now as the price of Bitcoin plummets and retail investors sell off their Bitcoin...
Do you see the trend?
Retail investors parking Bitcoin in the piggy bank and it being sold en masse to investment houses? Do you still want to park your Bitcoin in Tether? HODLing, for this reason alone, is probably the best play from now on.
Musical Chairs, Disappearing Crypto
As I said earlier, tethering your Bitcoin was a safe play back when you only had retail investors on the playing field. But, from now on, you have big players buying up Bitcoin. To the tune of $360m as was reported in the news about one OTC trade that became public.
Let alone what Facebook, Google, the banks, governments, etc do to get a piece of the action. Buying up just incase crypto goes big or the dollar goes bad or both.
The burning question is this. Will you, dear reader, be able to buy your Bitcoin back after you have tethered it? It's a game of roulette in my mind. Russian roulette.
I imagine a "musical chairs" scenario one of these days whereby retail investors park their bitcoin, with the expectation of buying it back... only to find that Binance has sold it OTC. I predict a time when large amounts of retail investors will be left without a chair when the music stops.
The Bitcoin will be gone. It won't be in the order book to be bought back. Leaving lots of sad children crying over spilt bitmilk.
Don't say it can't happen.
I expect that it will indeed happen as more large volume buyers enter the space and buy up the limited supply of 21M Bitcoin in existence. Scooping up the parked Bitcoin that retail investors have left on the table, thinking that it is safe in the piggy jar.
As I said at the beginning of this article, this is one possible scenario. But to be honest now that I have written this article, I think it's more of a probability than a possibility. The "daylight robbery of Bitcoin" and the musical chairs scenario will be a headline at some point on CoinDesk.
So consider this the next time you tether your Bitcoin.
Thanks for watching,
Brendan Rohan - Indie developer of 'next gen' natural medicine from Melbourne, Australia
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DISCLAIMER: This article and all information on this channel & all content is offered purely for educational & entertainment purposes. Always do your own research when investing money and seek the help of a registered financial advisor.