Could Tether Crash the Crypto Market?

The most popular stablecoin, Tether, has always been regarded with a degree of uncertainty and skepticism within the cryptocurrency community, due to its lack of transparency. If the rumors are true, and the USDT token is not collateralized, it could lead to a massive crash in the cryptocurrency market, and lead to a domino effect much greater than the $60 billion market capitalization of USDT.

Stablecoins have been instrumental in the proliferation of DeFi and cryptocurrency exchanges. Instead of users having to go through a bank every time they want to exchange their crypto for dollars, they can use a stablecoin, which is a token that is pegged 1:1 to the dollar, and effectively hold USD in their exchange accounts without the hassle of typical US bank account regulations. Without stablecoins, cryptocurrency trading would be much more complex for the average user, and it would be impossible to hold a stable asset while waiting for the right time to buy.

One of the best examples of a reputable stablecoin is USDC, which was created by Circle. They are incredibly transparent and ensure that each dollar that is backed by a dollar held in a bank by running monthly audits whose results are made available to the public. This type of transparency is crucial to creating a stablecoin, as it guarantees holders that money is not simply being printed out of thin air, and that it has an actual backing. This is one of the reasons that USDC has become one of the fastest-growing stablecoins, and is widely accepted on almost every major exchange.

The only stablecoin more widely accepted is Tether, which was created in 2014 by the Bitfinex exchange. Due to its first-mover advantage in the stablecoin sector, it is accepted on practically every exchange, and consistently has the most volume of any cryptocurrency, reaching an average of $50 billion traded daily. 

Even though it may appear like all stablecoins are created equal, this is far from the truth. Tether is incredibly controversial in the cryptocurrency community due to their lack of transparency and allegations that they are propping up the market by minting USDT without having a dollar backing, effectively printing money out of thin air that is used to buy Bitcoin and other cryptocurrencies. 

Throughout Tether’s 7-year history, they have been consistently asked to prove that they are holding the proper collateral, but either refused to be audited or promised that an audit would come soon. No audit ever happened, until the New York Attorney General filed a lawsuit against iFinex, the company behind Bitfinex, in order to force an audit to take place, and reveal other information about the secretive practices taking place behind the scenes. In the audit, which took place after iFinex stalled for over a year, it was revealed that before 2017, Tether had no banking accounts anywhere in the world, meaning that Tether's billions of dollars were not backed by any tangible assets. 

This is further backed by a paper from 2018 by  John Griffin and  Amin Shams that claims that the 2017 cryptocurrency bull run was fueled by unbacked USDT.

Furthermore, the audit revealed that Tether now only holds about 74% of the required collateral, meaning that each Tether should be worth $0.74 instead of $1 based on its reserves. Another massive issue is that these reserves were not even in cash, but instead multiple different financial assets, none of which are detailed in the report and could be made up of a number of junk assets.

Another piece of evidence against Tether comes from Jim Cramer, host of CNBC’s Mad Money, and his skepticism about Tether. On his show, he educated his users about Tether’s suspicious backing, and noted that 65% of their holdings are in commercial paper. This should make them one of the biggest holdings of commercial paper in the world, but they have not been able to disclose what they hold and they are not recognized or known by other big buyers of commercial paper.

All of these issues could lead to a mass selloff of Tether in the future, when holders realize that the asset is not what it appears to be.

If this happens, the crash will have consequences far surpassing its $60 billion market capitalization. At first glance, it may seem like the main impact will be that $60 billion is wiped from the total cryptocurrency market cap, which would not have a major effect on the $1 trillion market. However, the much more likely scenario is worse: all the holders of Tether would begin selling it for Bitcoin and other stablecoins, effectively creating $60 billion of sell orders on exchanges. Even the world’s biggest exchanges could not take this level of demand, and it is likely that the price of Bitcoin and other assets would collapse as the monetary tool that has allegedly been propping up their price begins to lose value.

Even though this seems like it may be the beginning of the end for the cryptocurrency market, it is far from the truth. Getting rid of Tether while the crypto market is still relatively immature would be the best-case scenario, as it ensures that any future growth from Bitcoin is purely due to honest investing, and not price propping. Ideally, Tether will slowly lose market dominance as people move to other better stablecoins, and we never have to see the asset crash. If it does crash, there will most definitely be short-term volatility in cryptocurrency, but crypto will be capable of bouncing back stronger than before. 

By Lincoln Murr

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