Tumbling Bitcoin's last useful business — money laundering — under threat from Tether

Even for a man known for his love of hyperbole, Donald Trump's landmark crypto legislation in July was a stretch.

Labelled "the Genius Act", its passage and the anticipation of its signing lit a fire under the price of Bitcoin for the first nine months of this year, carrying it to unimaginable levels.

Then it flamed out.

While the blockchain-based Bitcoin is far and away the world's most popular cryptocurrency and has gained widespread acceptance in traditional financial circles, it has suddenly hit turbulence.

That's partly because the US president's attempt to shield the crypto sphere from regulation has had some unintended side effects, particularly for Bitcoin. 

Trump's new legislation has helped undermine Bitcoin's last useful purpose and delivered a fillip to an increasingly popular alternative called stablecoins.

While Bitcoin remains on the radar as a useful tool for those operating in the shadows — including crime gangs dealing drugs or weapons and shady governments needing to shift reserves — this role has been usurped by stablecoins, particularly one known as Tether.

Since mid-October, Bitcoin has plunged from a record $US126,000 ($192,600) to well below $US90,000, a drop of more than 30 per cent. It recovered slightly over the weekend but investors, particularly those who have jumped aboard late, have been left reeling.

Conceived almost 18 years ago by the mysterious Satoshi Nakamoto, or someone acting under that name, Bitcoin has never realised any of its stated goals and has no useful purpose.

It hasn't replaced the global financial system and is rarely used in ordinary, legitimate transactions.

Increasingly volatile, it is no longer considered a store of wealth. And now it seems likely that even those engaged in nefarious dealings are shying away from it.

All of which begs the question: why are our superannuation funds bothering to dabble in it?

To date, only AMP has put its head above the parapet to admit it has taken the crypto plunge. But among self-managed super funds, there has been growing acceptance, with reports that up to $1.8 billion has been tipped into the cryptoponzi.

The rise of stablecoin

Those behind Tether are adamant. They do not condone illicit trading or the use of their stablecoin for illegal or illegitimate purposes.

Initially conceived as a way to straddle the divide between traditional fiat currencies like the US dollar and the brave new world of cryptocurrencies, would-be investors were encouraged to put their cash into Tether before investing in cryptocurrencies. It was fast and efficient.

Its backers guaranteed that one US dollar would always equal one Tether stablecoin. To do this, the company bought US government treasuries along with gold and other assets to back the cryptocurrency.

Tether, the company, says it has $US135 billion invested in short-dated US government bonds, ranking its holdings as the 17th largest in the world, ahead of South Korea, as Yahoo Finance reported in late October.

As such, it is becoming increasingly important to the Trump Administration, which sees its continued purchases of US government bonds as a new source of funds and a foil to Beijing's winding back of purchases.

As a stablecoin, Tether operates differently from most others in the crypto world.

Unlike Bitcoin, which has a publicly available ledger, Tether offers users an avenue to fly under the radar.

Where Bitcoin transactions can be cumbersome and expensive, Tether is fast and cheap, primarily because it avoids pesky rules and global banking regulations, all while offering the security of being pinned to the US greenback.

It now dominates trading across borders from the bazaars of Istanbul to Beijing and the barrios of Rio de Janeiro, allowing profits to be laundered globally and transfers hidden.

Research firm Chainalysis calculated that last calendar year, around $US41 billion of crypto linked to illegal activities were exchanged across the globe as stablecoins cut costs and time while avoiding scrutiny.

A wide-ranging investigation by The Economist newspaper, entitled How Tether became money launderers' dream currency, highlights how the stablecoin has managed to bypass the checks and balances in the global financial system.

"It is the financial equivalent of being able to turn up at the airport, open a secret door and go straight on to the plane, without any X-rays, passport inspections, customs controls or intrusive questions," wrote the article's author Oliver Bullough.

"There aren't many other products that are as useful to criminals, and as much of a threat to the financial system, that have been allowed to flourish with so little regulation." 

Bitcoin steamroller flattens the faithful

The rout began on October 10.

That was the day Donald Trump announced a new round of 100 per cent tariffs on China. While he reversed the decision a few days later, as he usually does, the damage had been done.

Bitcoin tumbled. And the falls quickly accelerated, driven by what's known as "leveraged positions".

These are Bitcoin purchases that are funded by debt. It has been a long-standing practice among share traders and usually referred to as margin lending.

It works like this. You borrow $100 to buy your shares, or in this case, your Bitcoin. If it rises in value, happy days. But if your portfolio goes backwards, and is worth say $90, you'll be asked to stump up the $10 difference.

If you can't, your stock is sold from under you and you have to repay your loan, with interest.

During the October crypto meltdown, many traders were using platforms such as Hyperliquid, an automated, non-custodial, smart contract operator. As Bitcoin prices fell, it began selling large amounts of the cryptocurrency, creating a cascade.

Around 160,000 traders had their holdings stripped from them, the biggest single trader dropping $US96.5 million.

The controversial figure Andrew Tate, a high-profile crypto investor and promoter of "financial sovereignty", reportedly had $US700,000 worth of coin sold as his balance was consumed by the losses.

Caught up in the tech bubble

There are plenty of reasons to be concerned about the future of the US economy and the position of the US dollar as the global reserve currency. America's ever-expanding debt and its ongoing budget deficits are front and centre of those worries.

But Bitcoin won't be challenging for global dominance. It no longer even pretends to be in a position to replace the greenback.

It is now behaving less like the digital gold it was once hailed as and increasingly like a high-risk, high-volatile punt. And it is getting worse.

During the past five years, it ran in tandem with the technology-heavy Nasdaq index in New York about half the time.

In the past month, that correlation has grown to about 80 per cent, confirming its status as high risk rather than safe harbour.

Should US technology stocks come asunder in the coming months, Bitcoin will follow.

There are increasing concerns that, given its growing acceptance among financial institutions, a plunge in Bitcoin could add to selling pressure elsewhere as traders sell assets to repay debt.

Like gold, it produces no income. But gold is a tangible product that has an extensive array of uses and has been highly desired by humans for thousands of years.

The gold price, while doubling in the past few years, has remained relatively stable, shoring up its position as a safer store of wealth.

Bitcoin was born during the tumult of the global financial crisis, took hold during the social media-driven paranoia of the pandemic and was catapulted to respectability during the second Trump ascendancy.

Devotees who have hung on over the years have struck it rich.

But two questions remain: What can drive it from here? And, why do crypto bros measure their wealth in US dollars?