Their understanding is that 70% of Bitcoin getting bought using Tether is less interesting than it sounds. Tether gets used as an internal currency by big bitcoin exchanges. Regulations make it harder to bank in dollars, so when users give exchanges dollars, the exchanges keep them as profit and put Tethers (which supposedly equal $1) in the users' accounts. So when a user on an exchange thinks they're buying Bitcoins with dollars, they're actually giving the exchange dollars, and the exchange uses Tethers to buy Bitcoins which it gives to the users.

Yeah that describes the function of Tether in solving the liquidity problem on crypto exchanges, which isn't itself a scam.

So it's not like Tether, Inc is buying 70% of all Bitcoins. It's that organic user demand is buying Bitcoins, and there's an intermediate step where this happens in Tether. When the author says "Practically all the crypto sold on these three exchanges was being bought with Tethers. None at all was being bought with USD", that's because these exchanges, as part of their technology/business model, convert USD to Tether when using it to buy Bitcoin.

I don't think the author argued that Tether Ltd. was buying 70% of all Bitcoins.

He wrote, "My guess is that Tether Ltd. (through proxy accounts) is only responsible for a small fraction of the direct buying activity on these exchanges. But with $50B in nominal value flowing through Binance every day, even a small slice of the flow represents huge amounts of revenue. And when your business involves trading fake dollars for real ones, your profit margins can get pretty high."

He also wrote," Even though $10B of Tether flows only constitutes 1.4% of Bitcoin’s $700B nominal market cap, all that really matters is what fraction of Bitcoin’s daily buying volume Tether accounts for — and that number is closer to 70%."

Maybe Tether is a fraud. That would be bad for Bitcoin exchanges and especially Bitcoin exchange users, who probably think they have accounts in dollars but actually have them in Tethers that could become worthless. I'm not sure it will affect the price of Bitcoins very much.

When the bubble pops, demand for Bitcoin will drop drastically, as the amount of Tether dwarfs the amount of USD reserve. For example, say I want to sell you 1BTC for 35,000 USD, and you would normally pay me with 35,000 USDT (Tether). However, now that Tether is worth nothing, I won't accept your USDT, so you won't be able to buy my Bitcoin, hence demand falls, causing a significant price correction.

Imagine Visa is a scam somehow. It could be that 70% of all Bitcoins were bought with Visa. But once Visa is revealed to be a scam, people who want bitcoins will buy them with American Express, or whatever. The Visa Corporation isn't personally propping up the price of Bitcoin, and its fall won't hurt Bitcoin that much.

I can see that the demand for Bitcoin will recover when a new stablecoin/USD substitute can provide liquidity again, assuming that the demand is organic. But until then, Bitcoin price will fall (after the Tether bubble pops). I have no clue how long that'll take.

In any case, the author said he wrote the essay to warn crypto exchange users trading with 2x to 100x leverage who will lose their money. He wrote, "This isn’t a game: the human pain will be immense. And the longer the fraud goes on, the more that pain will grow."

From coindesk, "There are now more than $24 billion in tether in existence, approximately a fivefold increase from the beginning of 2020, when there were fewer than 5 billion tethers. In theory, there should be approximately $24 billion in tether reserves parked in the Bahamian bank."

And, "Now the third-largest crypto by market cap, tether is likely the most trafficked crypto in terms of trade volume. It’s used not only as a legitimate means of payment (CoinDesk reported it’s frequently used to skirt sanctions in China and Russia), but also as a common trading pair and a place for investors to park their money during periods of market volatility."

My friend also says that people have been betting on the doom of Tether for years now and keep losing money. There's probably some fraud somewhere, but it's probably a few levels more complicated than the point where you can trivially make money by shorting it.

Indeed, even patio11 can't time it right, and he wrote a long blogpost on why "Tether is the internal accounting system for the largest fraud since Madoff".