Are Cryptocurrencies The Next Subprime?

Are Cryptocurrencies The Next Subprime?

It’s not a matter of having a short-term memory.

Most still remember what happened more than 10 years ago when the greed of the few mixed together with the indifference of the many brought the worldwide economy to its knees. The wounds are still fresh… Some even witness or at least read about the dot-com bubble, 20 years ago and about the irrational mania of exponential & unimpeded growth.

It could very well be a matter of simply NOT caring anymore.

All one cares about in today’s system is just re-inventing the wheel and advertising it as the new means of transport that will undoubtedly send us to the Moon.

Most cryptocurrencies are such wheels that, instead of going to the Moon, will make many of us experience another downhill battle to rock-bottom. Just like more the 10 years ago…

Subprime & The 2007 – 2009 Financial Crisis

One famous proverb says: ‘The road to hell is paved with good intentions.’ Everyone was well-intended in the early and mid-2000s, not long after the dot-com bubble.

Observing the patterns of the previous years, many came to the same conclusion: real-estate is a neat way to make money & protect your wealth in case of unexpected economic outcomes. Banks rode the wave, yet it wasn’t quite enough. They had to find new financial resources to increase the amount of credit available, thus to include more and more people, including those who simply couldn’t access loans before, for various reasons (low income, unreliable payment history, etc.)

Soon enough, a new niche emerged and came to the banks’ rescue: shadow banking. Shadow banks are financial institutions that virtually work like banks, but aren’t quite in the same legal jurisdiction. As a result, they can work their way around the system and finance the banks in need of resources (at least on paper).

All ‘real’ banks immediately took the bait and started packaging their loans into ‘attractive’ bonds known as Collateralized Debt Obligations (CDOs) or Mortgage-Backed Securities (MBS).

MBS, for example, had mortgages of different risks grouped into tranches. As time went by, theses so-called bonds had more and more risky mortgages with a high rate of default, given to people with low credit scores.

These risky loans are commonly known as subprime and are the main reason why the house of cards fell apart in 2007.

Cryptocurrency Shadow Bank Case: Tether aka USDT

Tether Stablecoin Homepage

Satoshi Nakamoto invented Bitcoin apparently to fight the very people who are now in control of the cryptocurrency market. To ‘bank’ the ‘unbanked’ through a decentralized e-payment system, free from the oppression of the real-world banks.

However, along the way, we looked away and the people Nakamoto despised took over.

They are now working very hard to re-create the CDO/MBS system from the first decade of the 21st century.

They already have a shadow bank up and running in Tether. USDT is providing the necessary resources for all cryptocurrency market to function, just like the shadow banks of the 2000s did to inflate the subprime bubble.

Tether is just as opaque as those financial institutions who made an effort to hide the actual risk of the assets they were shilling in the 2000s. Thus far, Tether failed to provide a full and transparent audit and constantly shifted its position whenever its real-money ‘reserves’ were brought forward. From 100% backed by the US Dollar (1 USDT means 1 USD is in the company’s real bank accounts), they currently say their tethers (currently standing at over $4 billion) are backed by their reserves.

We can’t even say for sure if at least 75% of their tokens are equivalent to real money in the bank. What are the risks? Who knows?

Moreover, the company behind the notorious stablecoin is looking for new ways to ‘diversify’ and issue tokens on other blockchains that offer more ‘flexibility’ in terms of privacy.

Meanwhile, one of the major Tether players in the cryptocurrency exchange business tweets (Spoiler Alert: USDT is part of the offer):

CZ Binance Tweet on August 26, 2019

Cryptocurrency Subprime Case: DAI

Maker's DAI Stablecoin Homepage

Tether may be the shadow bank but are cryptocurrencies the subprime tranche in the new MBS bond?

If we look at the CoinMarketCap numbers, we clearly see Tether is the daily volume winner on a daily basis, having won its main battle with Bitcoin. A third of the total cryptocurrency market daily volume is closely tied to Tether, according to data from late August 2019.

Top Cryptocurrencies as of August 27, 2019
Top Cryptocurrencies as of August 27, 2019

Another third or so is closely tied to Bitcoin. Yet, a closer look at Bitcoin markets reveals a clear Tether dominance (top 18 markets have USDT pairings; in the top 50 we can only see 3 pairings with FIAT).

Bitcoin Markets on August 27, 2019
Bitcoin Markets on August 27, 2019

What do all these stats tell you about Bitcoin & cryptocurrency market as a whole? Can we at least assume the underlying risk or at least approximate it in some way? With Tether calling the shots behind the scene, few actually can and those who can will definitely NOT reveal it to you.

Then, there are also newer so-called stablecoins like DAI.

Dai is worth $1 BUT it’s not backed Fiat in a bank account. It’s actually backed by a group of other risky cryptocurrencies.

At the peak of the subprime bubble, in 2006 and 2007, in their ever-lasting search for more creative ways to make money, banks were already selling credit derivatives backed by other credit derivatives which were backed by some other credit derivatives backed by the actual loans granted. This kind of convoluted thinking turned the whole US financial machine into a complex system with no way of knowing if something is actually broken and if such a break could bring the whole system to a halt.

If we look at assets like Dai, we may see similarities. Dai is a ‘stable’ cryptocurrency backed by risky and volatile cryptocurrencies which are backed by… what? Since Tether dominates the market and refuses to be transparent, we can claim there is much risk involved in USDT also. Therefore, what makes Dai stable, in the long run?

Can Dai be the new version of a ‘synthetic’ MBS bond with loads of subprime assets buried underneath? Most definitely.


What do you think? Can the cryptocurrency market implode just like the subprime bubble did, over 10 years ago? Does the cryptocurrency market pose a systemic risk for the entire economy? Let us know in the comment section below!


Images courtesy of Pxhere, Tether.to, Twitter, MakerDAO.com & CoinMarketCap.

Florian Gheorghe

Freedom Evangelist, self-employed for over 8 years, consciously trying to break the status quo one step at a time. Writing is my ultimate escape, action is my only option.

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