Tether and Bitfinex Besieged by Panicky Withdrawals

Tether is the world’s largest stablecoin, supposedly backed 100% by U.S. dollars.

Bitfinex is its sponsor, one of the world’s largest crypto exchanges.

And right now, they’re both suffering a kind of “run on the bank.”

Here’s the sequence of events, which began just a week ago …

The New York Attorney General applies for a court order to investigate Bitfinex’s suite of interrelated companies, alleging “ongoing fraud” to the tune of $850 million.

Immediately, the word spreads like wildfire throughout the crypto blogosphere.

Investors panic.

Some dump their Tether in exchange for other stablecoins. Some dump their Tether in exchange for Bitcoin. And still others pull their money out of Bitfinex entirely.

And suddenly, the whole crypto world is worried that Bitfinex will be forced to shut down.

In a moment, we’ll tell you how to avoid the dangers. But first …

What’s the source of the problem?

Actually, we already answered that question long ago.

Back in February 2018, we warned that there was no evidence that Tether was really backed 100% by U.S. dollars. No audits. No transparency.

A few months later, we pointed out suspicious activity at Bitfinex.

And we immediately followed up with another warning about how it could cause dislocations in the crypto marketplace.

For a while, it seemed few people paid much attention.

But now it’s happening, just as we warned.

It turns out, Bitfinex has covered an $850 million loss in its operations by “borrowing” investor funds that were backing Tether. This is what the New York Attorney General alleges. And, indirectly, this is also what the folks at Bitfinex have admitted.

Their defense is that they have the money elsewhere. Regardless, we feel that funds earmarked for Tether backing should be sacrosanct. They should be segregated; never comingled with other accounts.

The unfortunate reality is that much of this crisis could have been avoided if there had been clearer disclosure. Market participants might accept the process. They just don’t like surprises. So when people find out, they naturally panic.

The next big question …

What are the consequences?

Some crypto investors fear that the Bitfinex troubles could lead to a situation akin to the traumatic failure of the Mt. Gox exchange in 2014. A lot of people lost a lot of Bitcoin back then. The whole market plunged into a year-long decline.

But we disagree. Back in 2014, Mt. Gox dominated the space with over 70% of the world’s crypto trading volume. Today, Bitfinex represents only about 5%. So even if Bitfinex continues to have troubles, the impact should be far smaller.

Trouble is, Tether is quite big. It enjoys about 20% of the world’s crypto trading volume, second only to Bitcoin’s.

So this is where we think the bigger risk lies.

What would happen if Tether collapsed? Too soon to say. But recent history reveals a possible silver lining:

Last year, in mid-October, we also witnessed a Tether scare. Like today, investors suspected shenanigans related to Tether’s dollar backing. And like today, they panicked, dumping their Tether in torrents.

What saved that day is this: Instead of switching from Tether to U.S. dollars, investors switched from Tether to Bitcoin.

So as Tether’s value fell, Bitcoin’s value rose. Then, as investors got over their shock, the markets returned to normal.

And in the last few days, we’re witnessing a similar pattern: Again, we have a Bitcoin rally in parallel with the run on Bitfinex and Tether.

That’s good news. The money stays in crypto, and Bitcoin investors reap the benefit. So we hope it will continue.

The moral of the story:

Ironically, stablecoins like Tether are simply recreating the same kinds of counterparty risks that helped cause the Debt Crisis and that cryptocurrencies were supposed to eliminate in the first place. They are not the future of crypto. They could ultimately go away.

In the meantime, how can you avoid the risks?

First and foremost, recognize stablecoins for what they really are: A loan to a bank-like institution that’s acting as a custodian for your assets and that may not be safe.

Second, avoid stablecoins. If you want stability, why hold an asset that may or may not be backed by fiat money? You might as well just buy the fiat money directly. Instead of Tether, just hold U.S. dollars.

Third, don’t stash your cash or crypto on exchanges. Exchanges also involve significant counterparty risk. Like a bank, you have to trust that they’re safe. Like a bank, they can sometimes play games with your money, lending it out to third parties or even using it for high-stakes speculation. But unlike a regulated bank, there’s no transparency.

Fourth, move the bulk of your digital assets to a hardware wallet that you own and control.

Fifth, be sure to copy the private keys of your wallet to a safe physical medium. It could be as simple as writing it down on a piece of paper. Or better yet, a metal sheet designed especially for this purpose.

Most important, remain vigilant. There are massive opportunities in cryptocurrencies, but only if you know how to avoid the risks.

An important part of our mission is to warn you about them ahead of time.

Best,

Juan