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Tether can’t fail without taking a Titanic bite out of the cryptocurrency market cap. That’s been the view of many crypto analysts for some time. And many have tried to find a way to hedge against the ticking time bomb that the USDT stablecoin represents. They may have failed.

A surprise start to the week for cryptocurrency has left traders uneasy. The market’s value had surged by over $20bn at one point as investors begin to pull out of Tether (USDT) and into alternative digital assets. Some observers have already suggested that a fluctuating Tether price might mean the product is about to enter liquidation.

Crypto was relatively stable over the weekend. The total value hovered at approximately $200bn following Thursday’s shock price crash, which wiped $16bn from the market. This began to change at around 06:00 BST as cryptocurrencies across the board gained value quickly; at just before 08:00 it surpassed the $220bn barrier, restoring last week’s losses. The market had fallen back to $212bn, at press time.

All of the top-ten biggest coins by market cap have experienced marked gains, except Tether. The USDT price has declined from $0.99 to $0.96 in this morning’s trading. Its trading volume has more than doubled within the same timeframe: from $2bn to nearly $4.5bn. Combined with a declining valuation, this suggests more investors are divesting out of Tether.

Tether USDT

Tether was one of the world’s first stablecoins. Developed towards the end of 2014, its value is supposedly pegged to fiat currency, like the US dollar, deposited and held in reserve by the project itself. One of its key advantages was it gave traders exposure to cryptocurrency, but without the high risk of investing into volatile assets.

The problem: the market has long had doubts that Tether has as much in reserve as it claims to. Incremental increases in the market cap – ostensibly mirroring the project’s reserves – had attracted little suspicion, but these became larger in 2017.

The USDT total value started out at just below $10m at the beginning of January 2017 and surpassed $100m by early June; by early November it had risen to $500m and ended the year at $1.4bn. This continued to rise throughout 2018, hitting $2.8bn by early September.

If true, Tether should hold just shy of $3bn of actual currency. Accountancy firm, Friedman LLP, was contracted to audit the accounts but this was dissolved at the start of 2018. Tether’s law firm, Freeh Sporkin & Sullivan, published a memorandum over the summer claiming the project did indeed have the money but that the reserves couldn’t be audited yet.

The uncertainty and unaccountable surges in the market cap have led many to conclude Tether was generating new tokens unbacked to fiat currency. Some claim the project is simply printing money.

How this links to the Tether price

Tether is a stablecoin that should be backed to the US dollar at a ratio of 1:1. This has not been the case recently. The price of Tether tokens fell below $1 last week to $0.99; today the price dipped to a low of $0.85 and has yet to recover parity with the greenback. It had recouped to $0.96, at the time of writing.

If investors lose confidence in USDT, it could create a run on the coin. As has so far been displayed, this may actually benefit the value of other cryptocurrencies, especially the more established ones.

Oddly enough, TrueUSD (TUSD), another fiat-backed stablecoin where funds are held in escrow and balances published daily, is up to $1.07. Its 24-hour trading volume has tripled over the course of the morning. This might be the result of a quick reaction by some investors, wanting to move out of Tether but still hold funds in a coin pegged to the US dollar.

Bitfinex has one of the largest Tether wallets around; many USDT investors keep their holdings on the exchange’s servers. Today’s move away from Tether is reflected in the disparity between the prices of traditional crypto assets – Bitcoin (BTC), Ether (ETH), XRP – on Bitfinex compared to other exchanges.

A screenshot taken earlier today shows the price for BTC on Bitfinex was at one point $500 higher than on Coinbase, which does not use Tether on its servers. There was a similar picture on Binance, which has USDT as one of its main trading pairs. BTC was trading at $7,000 on Binance’s servers at press time, approximately $300 higher than the average market price aggregated by CoinMarketCap.

Bitfinex Premium remains around $500. Every time they try to pump it the premium still remains higher when it settles down. pic.twitter.com/XEuZnfTKPV — Bitfinex’ed (@Bitfinexed) October 15, 2018

Is Tether untethered?

There has been no word from Tether themselves about why the price is not at $1. The project has been silent on its website and social media since late August. Without direct refutation, observers have already begun to predict its demise. Emin Gün Sirer has already suggested that today’s boost in the prices might be Tether’s ‘swan song’: a phrase that describes the final, noteworthy act before death.

That sweet sweet swan song, of all the prices being pushed up by Tether. When will we hear it again? — Emin Gün Sirer (@el33th4xor) October 15, 2018

Although its total value has dropped by $300m since the end of last week, Tether is still a top-ten project. It has a market cap currently valued at $2.4bn, making it the 8th largest cryptocurrency by market cap. There has been no confirmation either way that Tether either has, or doesn’t have, the fiat currency it claims to hold in reserve.

Without an actual fiat peg, the USDT price, like other cryptocurrencies, will move according to market sentiment. Negative publicity, like investors finding out there are not sufficient currency reserves to support the supply, will likely see a significant drop in value as investors move out. That the established coins, and Tether’s main rival, TUSD have seen a surge of interest this morning suggests this has already begun to happen.

Tether has been described as ‘too big to fail’ by some crypto analysts. But the world’s press thought the Titanic was too big to sink…

The author is invested in BTC and ETH, which are mentioned in this article.