A question, or some version of it, that keeps popping up on social media lately is, “How can $24 billion worth of tethers move a $650 billion bitcoin market cap?”
This is “a blitheringly stupid question on multiple levels, starting with basic arithmetic,” bitcoin hater David Gerard said on Twitter. “It’s also a perennial dumb question.”
The question is being put forth by bitcoiners in an attempt to put people’s minds at ease about Tether. The thesis is that if tethers were to vanish—something that could happen if the U.S. Department of Justice were to give Tether the Liberty Reserve treatment—it would have little impact on bitcoin’s price, so you should stop worrying and keep buying bitcoin.
Someone posed the query recently on r/buttcoin. I am going to take a stab at sensibly answering the question in three parts starting with, What is market cap?
1. Market cap is meaningless nonsense
Market cap is a nonsensical number when it comes to bitcoin. It’s calculated by multiplying the last transaction price of bitcoin by the number of bitcoins in circulation—currently $35,000 x 18.6 million.
That doesn’t mean that people bought every bitcoin in existence for that price. The vast majority of people who own bitcoin bought it at a far lower price than what it is today. It also doesn’t mean that if everyone suddenly decided to sell all of their bitcoins, each bitcoin would bring them $35,000.
In fact, it doesn’t mean that bitcoin has any value at all other than the hope that some bigger dummy will stroll along who is willing to pay more for it than you did. Bitcoiners like to imagine that bitcoins are valuable because there will only ever be 21 million of them. That makes them scarce.
Beanie Babies were scarce in the 90s, too, with some fetching upwards thousands of dollars on eBay. But by the end of the Beanie Baby bubble, no amount of scarcity could make them desirable. They became worthless
Market cap is just another way to make something that is worthless appear valuable.
Market cap came out of the traditional finance world. And then websites like CoinMarketCap came along and began applying the term to bitcoin. In the stock market, market capitalization refers to the total value of a company’s share of stock. But while companies have an intrinsic value, bitcoin does not. There is nothing behind bitcoin. It’s not a company. It is not a thing. It is simply a number in a database.
Here is an example of how silly market cap is when applied to crypto. Say I create 1 million CastorCoins and start listing them on some little-known offshore exchange for $1. Suddenly CastorCoin has a market cap of $1 million dollars. Does that mean I have a million dollars? No, it does not.
Or, as u/Ifinallycracked puts it on r/buttcoin: “If a bog roll contains 100 sheets and I manage to sell one sheet for a dollar, that doesn’t make it a $100 bog roll. Apply same logic to Bitscoin market cap. Success.”
Once you grasp that the bitcoin market cap does not mean that people have spent $650 billion on bitcoin, $24 billion worth of tethers—which represents 3% of the total bitcoin market cap—becomes a lot more significant.
2. Price is determined at the margins
The price of bitcoin is determined at the margins. If you want to drive up the price of bitcoin, you don’t have to buy every single bitcoin at the current price level. You simply have to scoop up the ones that are for sale.
Money flowing into bitcoin is what keeps the price afloat. If demand increases and people are willing to pay more for bitcoin, that pushes the price up. The more dollars people throw at it, the higher BTC will go. And it doesn’t matter if you are buying bitcoin with real dollars on a banked exchange like Coinbase—or fake dollars on an offshore exchange like Binance, Huobi, or Bitfinex.
Right now, the latter is more prevalent—there are far more tethers flowing into bitcoin than actual dollars. In fact, 55% of all bitcoin is currently traded against tethers while only about 15% trade against real dollars, according to CoinCompare.
This is what makes the current bitcoin bubble different than the last. In 2017, when the price of bitcoin ran up to nearly $20,000, there were a lot more real dollars in the system and only 1.5 billion tethers in circulation. Now, it’s mostly tethers pushing up the price of BTC.
3. Bitcoin is illiquid
Bitcoin is relatively illiquid. According to data from Glassnodes, 78% of all bitcoin are not moving. In other words, of the 18.6 million bitcoins currently in existence, only about 4.2 million are in constant circulation.
At least 3 million bitcoin are lost because people like this guy can’t find their keys. (Just because you are the former CTO of Ripple, that doesn’t make you clever when it comes to safekeeping bitcoin.) And there are still plenty of folks holding on to their BTC in the hopes it will go stratospheric. Strong hands!
As a result, it doesn’t take a large buy or sell request to move the price of bitcoin. Printing billions of dollars out of thin air and using it to put supply-side pressure on a market as thin as bitcoin forces the prices up. Conversely, if enough people were to get panicky and rush to sell their bitcoin—weak hands!—the results could be catastrophic. Literally, the entire market cap can go to zero in a moment.
The whole point of Tether is to push up the price of bitcoin and other cryptocurrencies, and then move those assets to OTC desks and banked exchanges, where they can be turned into fiat.
Update on August 16, 2022, to remove an analogy that nobody understood at the end.
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