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Comment by fastball | Hacker News Reader

To me that math doesn't add up very well.

Let's assume that 5 minutes from now, Tether drops to zero. Turns out Tethers were approximately 100% unbacked.

There are currently ~$80B USDT in circulation. Even if you also assume 100% of USDT holders were also Bitcoin maxis who were using USDT as a "stable store of value" when they periodically want to exit their BTC position, the market cap of Bitcoin is still ~$500B, so the $80B -> 0 drop is still only 16% of BTC's market cap (and obviously USDT is not only being used to exit BTC positions but also ETH and every other crypto besides).

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This isn't how it works. You need to look at how much of the flows into BTC (supporting the price) are coming from Tether. You will find this is a whole lot more than 16%. So if it drops to zero 5 minutes from now (not going to happen, but just to use the same scenario), then all those flows which supported the price drop to zero. A comparison between the relative market caps doesn't tell you much, it's the buying volume it supplies.

The 24 hour trading volume for Tether is $175B. The 24 hour trading volume for BTC is $80B (as I write this). Tether is the money in the system.

That's not really how it works either. If the 24hr USDT volume is $175B, that just means people are trading the same USDT for other things multiple times in a 24 hour period. That's it. But two people cannot use the same Tether to buy different things at the same time, so market inflation due to USDT can never really be beyond its market cap.

Tether is a vehicle, not the money in the system. People use Tether because it can be traded against your favorite coin on your favorite exchange. For example Binance (the largest crypto exchange) doesn't offer any USD pairs, so if you are someone with a lot of dollars you buy some USDT with your USD at 1-to-1, then you go trade that USDT for whatever you want.

USDT causes a crash in crypto based on two properties: actual fraud / funny money shenanigans and market sentiment. I was only really addressing the former in my analysis, because "market sentiment" is basically impossible to do anything useful with in a future-telling sense.

Thats not really how it works either :).

If you and I both agree to trade 0.000001BTC @ a price of $1,000,000/BTC, meaning the total value of our trade is $1, and we both know that the supply of bitcoin is 19,000,000 coins. Does that make the "Market cap" of bitcoin 1.9Quintillion dollars? Obviously not.

Market cap is a historically bad metric to track when comparing things like this.

So back to your question at hand, how would a $80B USDT market cap topple a $500B market cap. Well, first we realize based on the above silly example, $500B isn't necessarily the real value. If Bitfinex (tether) has been printing USDT and using that to buy bitcoin, then the market cap of BTC is inflated by an asset effectively worth $0.

Once this realization sets in, panic selling starts, and there is an overwhelming greater number of sellers than buyers, and it doesn't take $500B worth of trades to topple a coin with a $500B market cap (if that market cap is inflated by hopes and dreams).

Market cap is not the sum of all money put in, but the total supply multiplied by the latest price. The entire market could, conceivably, be supported by only a few billion in real dollars. I won’t try and guess the correlation between USDT price and BTC price, but if USDT goes to zero, it’ll be a lot more than a 16% hit — before even considering USDTs broader role in the market.

Especially since it’s the primary form of liquidity.

It's more about the lack of confidence in crypto ecosystem and other second order effects (bitfinex going bankrupt, all others exchange on shaky ground etc) rather than the direct selling of btc/usdt

Given that almost all of BTC’s daily exchange trade liquidity is based on having USDT and especially for margin… you best believe it’ll implode. Not to mention every other cryptocoin.

You can’t just use market cap in that way. USDT collapsing would send BTC back to the Stone Age

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