The second is true.
"Teacup" is just a term coined by byb's and puppymills to make the breed seem rare.
But when you are breeding such small dogs you run into major health problems (same goes for breeding giant dogs).

The standard for a chihuahua states that the chihuahua is supposed to be under 6 pounds. That's it. So a 2 pound chihuahua is just a small chihuahua. It is not a "teacup" chihuahua.

Sorry, I don't know if that made any sense. The term teacup just sets me off and makes my blood boil.