The Great Tether Controversy, Part I
Of all the cryptocurrencies in the world today, Tether wins the prize as the most controversial. It has gotten some of the worst press and, except for the biggest coins, the most attention.
This is especially true in recent weeks, thanks in big part to a study that University of Texas researchers released one week ago.
My response is this special two-part series — Part I to review and refresh my earlier Big Picture analysis, and Part II to respond to the University of Texas study.
The Danger of Tether
This is a cryptocurrency that’s supposed to be backed by the U.S. dollar in a one-to-one ratio. In other words, the idea is that there’s only one dollar of USDT (Tether) for every dollar they have in deposits.
Why is this important? Because a lot of exchanges rely on Tether for their markets. “Crypto-only” exchanges like Binance or OKEx (which dominate crypto trading) do not accept fiat. So they use Tether as an equivalent to the USD.
Just to give you an idea of how important the stability of Tether is for crypto trading today, let me cite this stunning factoid:
Tether is the third-largest cryptocurrency by trading volume, behind Bitcoin and Ethereum, which are also used as liquidity. Thus, most exchange pairs are against Bitcoin, Ethereum or Tether.
The big issue: There’s never been an audit, and the folks behind Tether have been quite shady when asked. They have continuously claimed their tokens are backed 100% by actual dollars. Yet, they have failed to present any evidence to support this claim.
On social media, there appears to be consensus that what Tether is actually doing is running a fractional reserve system.
In other words, most observers claim they DO NOT have the dollars to back up all those Tether coins.
I tend to agree. It’s just too suspicious, and I encourage you to check out this Twitter handle if you want to learn more about the suspicious activity related to Tether and its “sponsor” Bitfinex, one of the largest crypto exchanges.
Some other critical facts:
Fact #1. Tether is the only “cryptocurrency” with trading volume that regularly exceeds that of its market cap.
Fact #2. This means the entire Tether supply changes hands regularly, sometimes more than once a day. In economics, we call this the “velocity of money.”
Fact #3. This is important to know because it tells us that Tether is used for trading A LOT. It’s one of the main sources of liquidity in the crypto markets.
Fact #4. Liquidity is the lifeblood of a market. It’s what makes prices stable, and seamless trading possible.
Fact #5. The consequences of hanky-panky could be far-reaching. What happens if Tether does turn out to be fraudulent? Or what happens if a major government determines that cryptocurrencies like Tether are being used by exchanges to avoid regulations? What if this large source of liquidity suddenly evaporates?
I don’t want to speculate on what the exact sequence of events would be if there were a “run” on the Tether company — if investors rush to redeem their Tether for U.S. dollars.
Suffice to say if that liquidity rug is pulled from under the market’s feet, the consequences WILL NOT be good.
Conceivably, it could cause exchange failures. It could drive investors to liquidate their positions, causing sharp declines in market prices.
It’s hard to say. But we do know one thing for sure: This type of liquidity event has a silver lining. It can help expose all sorts of shenanigans that went by unnoticed before.
“Only when the tide goes out do you discover who has been swimming naked,” as Warren Buffett likes to say.
So, this Tether story isn’t FUD (“Fear, Uncertainty and Doubt”). And there are real reasons to be concerned.
What’s the best way to protect against this sort of event?
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Second, do NOT keep your crypto on the exchanges, especially those that use Tether.
Third, no matter which cryptos you buy and no matter where you trade, do not use USDT-based pairs.
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Don’t lose sight of this long-term picture. Take advantage of low prices to accumulate.
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