Is the FUD surrounding Tether holding back institutional investment into crypto?

If you’ve been around the cryptocurrency world for long, you’re more than likely familiar with the fear, doubt, and uncertainty surrounding Tether Limited and their stablecoin, USDT (Tether).

The popular token, which is meant to be backed on a 1:1 basis with US dollar reserves, has a lengthy history of skepticism surrounding its accessibility to legitimate banking services, instability with its USD peg, and lack of transparency.

The verdict is still out on whether Tether is legitimate, and if it will survive or not. But even if it were to fall through, does it really pose enough of a risk to the cryptocurrency ecosystem to warrant sitting on the sidelines?

Why is Tether causing concern?

Before we go into how big a problem Tether might be for the cryptocurrency ecosystem, let’s briefly recap on why it has become an issue in the first place.

Tether is one of the market’s longest-existing stablecoins, and is very commonly used by traders to lock value into fiat currency terms. This is especially true on altcoin-dominated exchanges, which typically have not supported deposits and withdrawals in fiat currency.

Bitcoin exchange Bitfinex — which has many ties to Tether Limited — credits their users’ accounts with USDT when fiat deposits are made.

These major exchanges have given the Tether token quite a large role in the ecosystem, using it as a base currency for many exchange pairings.

Tether saw a rapid increase in the circulation of their tokens over the second half of 2017, which strangely enough occurred after their banking relationship was severed with Wells Fargo, who were in charge of their US dollar wire transfers.

A lack of transparency regarding their banking services following this has caused many to wonder whether US dollar deposits for Tether were even possible anymore, or if the new tokens had been minted purely out of thin air.

Ever since, Tether has been under the spotlight of many concerned eyes, who have pointed out several flaws in the way the company has been operating.

One of the key areas of concern have been their reserve holdings reports. Skeptics have believed these to be a very poor replacement for the “frequent professional audits” which are promised in the Tether whitepaper and on their website.

Take for example their most recent “proof of funds”, which was published just this week by their newest bank, Deltec Bank in the Bahamas:

The letter contains a whole range of worrisome features, which are unsettling Tether holders once again.

To begin, the letter clearly avoids addressing specific names in its introduction, as well as clearly avoiding being signed off by a specific person or legible signature.

Secondly, they have disclosed the “portfolio cash value” of Tether’s account, rather than outright dollars and cents. This implies that their reserves may be currently held in assets other than US dollars, which would go against Tethers claims, as well as question the liquidity of their assets.

Further, the letter throws in a disclaimer paragraph to remove any liability to the bank and its shareholders in connection to the letter’s contents.

If you think this may have been a one-off instance of a strangely worded “audit”, their previous attestation of funds was not so comforting, either.

Just how significant is the Tether token to the cryptocurrency market?

A common argument against the significance of Tether is that its market cap represents less than 1% of the total cryptocurrency market cap.

While this is true (at under $2 Billion versus a total marketcap of over $200 billion), the involvement of the Tether token in daily trading volume is a much better metric to consider.

The USDT token is an immensely traded base currency across several of the market’s most active exchanges, including Bitfinex, Binance, Bittrex, Huobi, and more. These exchanges all offer popular USDT-based markets which trade directly with the market’s largest cryptocurrencies.

If we take a closer look at total daily trading volume in the cryptocurrency market, a staggering $2.1 Billion of the total $10.8 Billion daily trading volume is done with Tether. This proportion is even higher when we take a look at Bitcoin trading volume, over 25% of which is done against USDT.

If 25% of all trading volume were to suddenly vanish for Bitcoin, it is safe to say we would encounter some problems. It’s safe to say that the risk Tether poses to the greater cryptocurrency ecosystem is significant enough to warrant substantial caution by larger investors.

Could new stablecoins capture enough of the market to save the day?

The lack of trust in Tether has spawned a whole new assortment of stablecoins, each contributing their own unique improvements to the stablecoin model.

Coins such as TrueUSD, PAX, DAI, and others have amassed a combined marketcap of over $400 Million — not quite as big as tether yet, but a good start.

Assessing their combined trading volume, however, shows that they are still little league players in comparison to the dominance of tether.

At the time of writing, TrueUSD and PAX have about $30 Million of daily volume, compared to Tether’s whopping $2.1 Billion.

In order to buffer any of Tether’s potential impact on the market, it is imperative that these coins establish easily-accessible, high-volume trading pairs with major cryptocurrencies across all exchanges.

Shorting Bitcoin to offset risk — a viable strategy?

An interesting question is, could one feasibly offset some risk or even profit from a Tether collapse?

The answer appears to be less straightforward than previously thought, as was highlighted by the recent break of the Tether-USD peg.

There is little doubt that a Tether collapse would be bearish for crypto in general, however what we experienced in the recent situation was a Bitcoin price rise rather than a drop.

But how could this be?

The answer lies in how people had to exit their Tether positions, which was to “sell” their Tether into cryptocurrencies — the most liquid of which is Bitcoin. This was their first step for a couple of reasons:

1. To get out of Tether, which could feasibly go to near zero

2. To get out of Tether exchanges, which would be most affected by a collapse.

This mass exodus from Tether actually pumped the price of Bitcoin considerably on Tether-based exchanges, such as Bitfinex:

This also somewhat dragged up the price of cash-based exchanges like Coinbase, however not as high due to Tether’s loss of peg:

This “test-run” has indicated that regardless of the overall impact a Tether collapse would have on the market (negative effect), major cyptocurrency prices would initially spike to unpredictable levels before dropping.

This poses a very real risk to leveraged short positions, and may rule out the feasibility of betting against the market in such an event.

Conclusion

Tether still has enough significance and trading volume in the cryptocurrency market to have very profound consequences in the event that something major happens to it. Plenty of doubt and uncertainty is still circulating in regard to the token and its operators, and rightly so.

USDT trading volumes represent a very significant proportion of total trading volumes (~20% of all crypto volume), and more than one-quarter of BTC trading volume.

Other stablecoins are on the rise and are steadily increasing in market cap, however their trading volumes are still extremely low compared to USDT, with much fewer/less accessible pairings on exchanges.

Tether poses substantial risk and concerns from major players are warranted. Large institutional investors may rightfully be sitting on the sidelines until the situation clears.