Cryptocurrency fans and detractors alike have seen the recent turbulence to hit the crypto markets – but their takeaways couldn’t be more different.
For the crypto faithful, the recent downturn is nothing but a market correction leading to a new buying opportunity.
For us skeptics, however, the latest crash is different from other downturns, as the hit to stablecoins indicates the entire house of cards is about to collapse.
That complete collapse of crypto – what I’ve dubbed the #megarug pull – has clearly not happened yet. While the Terra/Luna stablecoin scam imploded, their larger sibling, Tether, seems to be weathering the storm.
The big question for both sides of this story, therefore, is whether the #megarug is imminent, or has the crypto market dodged another bullet? And how can we tell?
Peeling Back the Layers of the Ponzi
I’ve explained before how crypto is a Ponzi-like scam – similar to traditional Ponzis in many ways, but differing primarily because with crypto, there is no single con operator. Instead, there are a relatively small number of ‘whales’ serving as operators – large holders of crypto that represent the power behind the operation.
In spite of any differences between Bernie Madoff and the crypto whales, crypto is enough of a Ponzi to follow the scam’s four basic phases.
Phase 1: The Build-Up
In the early phase of the Ponzi, the operators must promote the scam in order to sign up early marks. The build-up phase for crypto as a whole is long past – although every time a new variation on the scam comes along, the operators must do what they can to convince marks to ‘get in early.’
Phase 2: The Pay-Off
The pay-off is the phase in a con where the marks think they are coming out ahead. For Ponzis, the operators take money from new investors to pay off any older ones who want to get out. If operators have done a good job with the build-up, marks wanting to get in exceed those getting cold feet.
During the pay-off, new ‘investors’ are easy to find, because the ‘number goes up’ promise drives enough FOMO for marks to suspend their common sense enough to participate.
For a while it seems that everybody is a winner – new investors see their stakes growing, people who decide to cash out make a profit, and the operators have been salting away their proceeds.
Clearly, the money coming in is more than enough to cover existing marks, and the difference is the reason for running the con in the first place.
Phase 3: The Scramble
Recruiting new marks in order to have the funds to pay existing marks eventually reaches a plateau, where it’s increasingly difficult to maintain the promises to existing marks. That’s when the scramble begins.
The scramble is a period of increasing desperation for the con operators, as signing up new marks becomes more urgent while simultaneously becoming more difficult.
Operators will do their best to delay the scramble as long as possible – but eventually, something triggers a change in sentiment. It could be a saturated market, a shift in the economic climate, or in the case of crypto, a collapse in the Luna/Terra stablecoin scam.
During the scramble, however, the con operator must make a critical decision: whether to dip into their proceeds to cover withdrawals. Doing so will extend the con, potentially leading to a larger take in the long run, but using up proceeds in this way can also lower the final take should the operator go too far.
This dilemma is where Tether finds itself now. Its dollar peg slipped – not the Armageddon that Luna/Terra faced, but still enough to shock the market. As a result, the whales behind Tether stepped up to the plate and covered redemption requests, avoiding (or delaying) a collapse.
What we don’t know, however, are the specifics of those redemptions. Were they all in fiat, aka real money? I sincerely doubt it. We know Tether’s backing include all manner of non-money assets, including commercial paper, various crypto coins, and traded IOUs with other scam outfits like Celsius.
Be that as it may, it may seem that Tether dodged the bullet this time. Or did they? That’s the billion-dollar question.
Phase 4: The Collapse
One of the first rules of the confidence game is make sure it’s the marks that part with the money, not the operators, in spite of appearances. Presenting the appearance of putting the operators’ assets at risk, of course, is all part of the con – as long as it’s part of the scam.
Here’s a thought experiment for you. Let’s say for the sake of argument that you agree Tether is a con, and furthermore, that you’re the whale behind it. Your assets are mainly smoke and mirrors, but you do have a substantial nest-egg of the real green.
The scramble comes along, and to delay the collapse, you have to come up with some cash to keep the con running. What do you do? Use your fake assets to delay the collapse? Take real money out of your pocket instead? Or do you take the money and run, precipitating the collapse?
No doubt the Tether whales did indeed use some real money to cover redemptions. My theory is that far more complex shenanigans were going on behind the scenes to prop Tether up, but we may never know the specifics.
One thing is sure: no whale will give up its stake (or even a good chunk of it) simply to keep the con running another day. At some point, they will all have to take the money and run.
That’s when we’ll see the #megarug. And boy, it won’t be pretty.
The Intellyx Take
The most basic reality of the Ponzi is that the collapse is absolutely inevitable. It’s never a matter of if. It’s only a matter of when.
When, of course, is the question. Predicting it is nigh on impossible – but the one bit of wisdom I can contribute is that the scramble will always precede the collapse.
If you see signs a Ponzi has made it to the scramble, therefore, get out. Right away. It may already be too late.
© Intellyx LLC. Intellyx publishes the Intellyx Cloud-Native Computing Poster and advises business leaders and technology vendors on their digital transformation strategies. None of the organizations mentioned in this article is an Intellyx customer. The author has never owned, nor does he intend to own, any cryptocurrency or cryptocurrency derivatives. Intellyx retains editorial control over the content of this article.