First Mover: Risks Nobody’s Ever Seen, From the Fed to Tether (and GameStop)

Bitcoin (BTC) was lower, though staying in its range over the past six days, between roughly $30,000 and $33,000.

Cryptocurrency traders and analysts planned to keep an eye on an expected Federal Reserve announcement Wednesday at 2 p.m. in Washington (19:00 UTC), detailing the U.S. central bank’s latest monetary-policy plans as the coronavirus continues to ravage the economy. At a scheduled press conference afterward, Chair Jerome Powell will likely field questions about the U.S. central bank’s $120 billion-a-month of bond purchases – a key focus for bitcoin traders betting that the ongoing money-printing could eventually lead to inflation.

“Bitcoin seems poised to consolidate a little more, but if the Fed is not dovish enough and the dollar rebounds, the $30,000 level could easily break,” Edward Moya, senior market analyst in New York for the London-based foreign-exchange brokerage Oanda, said in emailed comments.

(NOTE: CoinDesk’s Nathan DiCamillo talked to top economists including Ken Rogoff and Claudia Sahm about this week’s Fed meeting. The takeaway was that while no major announcements are expected Wednesday, Fed Chair Jerome Powell and his colleagues at the central bank will soon have to tackle the thorny issue of how to keep inflation from spiraling out of control once the economy opens back up. Full story: How Bitcoiners Should Watch the US Federal Reserve Meeting on Wednesday.)

In traditional markets, European shares slid and U.S. stock futures pointed to a lower open. Gold weakened 0.4% to $1,843 an ounce.

Market Moves

With bitcoin trading in a range, why not spend a little time discussing the potential market risks surrounding tether (USDT), the largest dollar-linked stablecoin? After all, as CoinDesk’s Daniel Cawrey reports, a lot of cryptocurrency traders and industry executives would rather ignore the topic altogether, even though in some ways it’s become more important than ever.

Tether has become a key source of liquidity for cryptocurrency traders in recent years, since the tokens can easily be moved around in blockchain-based digital markets.

But doubts have persisted for several years about the stablecoin, primarily related to a lack of full audits of the reserves backing the tokens. In 2018 a pair of academics wrote in a peer-reviewed research paper that tether minting might have helped inflate the bitcoin market during the 2017 bull run.

So one question is what might happen to bitcoin prices if ungainly revelations on tether emerge. Multiple ongoing investigations, including from the U.S. Department of Justice (DOJ) and the New York Attorney General’s office, have dogged the stablecoin company, as detailed by Cawrey.

What makes this a more pressing issue now is the industry’s recent fast-paced growth, which might just magnify the risks: The outstanding amount of tether has roughly quintupled over the past year to about $25 billion.

Outstanding units of the U.S. dollar-linked stablecoin tether have roughly quintupled over the past year to about $25 billion.

Source: Coin Metrics

Tether General Counsel Stuart Hoegner told CoinDesk, “We work with regulators and law enforcement agencies around the world to help their investigations and help them understand our business.”

For their part, authorities have stepped up regulation of cryptocurrencies as the industry’s market capitalization climbed above $1 trillionfor the first time. In the U.S., the Office of the Comptroller of Currency said this month that federally regulated banks can use stablecoins for payments and other services. U.K. officials released a paper and request for commentary on the use of stablecoins in finance.

Kevin Lehtiniitty, chief strategy officer of Prime Trust, a Nevada-based trust company that has worked extensively with stablecoins, told Cawrey he thinks officials might be planning a framework around stablecoins backed by the regulated banking system – in an effort to weed out possible systemic risks. For now, he says, most cryptocurrency traders are probably just ignoring those risks.

“What are the odds that it’s going to crash in the next few hours that I’m holding?” Lehtiniitty said. ”And that’s that is the world’s dumbest excuse. But I hear it time and time again from over-the-counter and trading partners, other folks, and it drives me nuts.”

Bitcoin Watch

Daily price chart for bitcoin showing recent trends.

Source: TradingView/CoinDesk

Bitcoin is locked in the $30,000 to $35,000 range for the fifth straight day in a sign of caution ahead of the the Federal Reserve meeting, which could inject volatility into financial markets.

The Fed is expected to leave the interest rate unchanged near zero and maintain its liquidity-boosting bond-buying plan at around $120 billion/month. The status quo decision is unlikely to elicit a reaction from bitcoin and markets in general.

However, if Fed’s chairman Powell drops hints of an early tapering (gradual unwinding) of stimulus programs, stocks could drop and the safe-haven dollar would likely draw bids, pushing bitcoin lower.

“BTC may face selling pressure if Powell signals an early taper,” Darius Sit, co-founder and managing partner at the Singapore-based QCP Capital, told CoinDesk.

The Fed has made it clear since August that it intends to keep interest rates low for some time even after inflation climbs above 2%. According to FXStreet’s Yohay Elam, Powell may indirectly signal a willingness to buy more bonds by calling for increased fiscal (government) spending, in which case liquidity plays like bitcoin and gold would shine. President Joe Biden is pushing for a $1.9 trillion stimulus package, and the government might have to rely on the Fed for at least part of the extra funding, as noted by Elam.

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