You have probably been hearing a lot about Tethers recently, and most of it is probably bad. Everything from Tethers are just a harmless coin to Tethers are going to collapse the whole crypto sphere. But what I wanted to do here is to give those who are not familiar with Tethers or how they work, an objective explanation of what they are and also arguments for how they may be legitimate, and how they may not be. Readers of this blog probably already know my personal opinion on Tethers. But this article is for those who may not be familiar with what Tethers are to learn about the current situation/controversy.

Tethers were introduced as a stand in for USD on exchanges. Because most exchanges don’t allow for the easy conversion of crypto into fiat, the Tether was created as a 1:1 substitute for USD on exchanges. In theory, each Tether coin would be worth exactly 1 USD. The company behind Tether would back each one with a real dollar held in their reserves. When normal market trading happens, they would release more or buy back Tethers to keep the price at exactly $1.

The reason for this is so that you can essentially “park” your money in USD, which is more stable than cryptos instead of having to find a way to convert your crypto to fiat. So say for example you have turned a profit on your Bitcoin holdings and you want to take profits. With Tether, you can simply sell your Bitcoin for Tether on the exchange and now your money is essentially in USD, it’s just like if you traded it for cash to hold. It’s a simple and cheap way to convert your crypto into fiat for the short term. Since Tethers are always pegged at $1 each, if the cyrpto market falls, you still hold your fiat value. At least that was the original intention.

This is all a totally valid idea and one that was needed. The issue starts to come in if Tethers are being used to manipulate the market and are not in fact backed by $1 each.

What if the Tethers are not backed by real money – Most assets traded on a market such as cryptos have value for two reasons. One reason is their utility, and one reason is their perceived value in the future, which would be the speculative value. However, with a Tether, there is no expectation of a future rise in value, since they are pegged at $1. Also, they only have one purpose or utility and that is as a 1:1 stand in for USD. Once it is found out that it is no longer a stand in for USD, the value goes to zero if there is no actual USD backing it up because it has no other underlying value, speculative or otherwise. Tether has no utility value and has no speculative value at that point, so the value becomes zero. A Tether can only be one of two values. Either $1, or $0 if you remove the backing of USD.







Now the company claims that that they have a bank account filled with real USD to back up the Tethers they have released. However, many people have argued that this is not the case, as the company behind Tether has had many banking problems in the past and it seems strange a bank would simply keep giving them $30 million at a time several times a week as they have been doing. They also have yet to release a full audit which they promised for many months.

But, and this is because I want to be fair, It is conceivable that some bank would agree to terms in which they would loan out money to Tether to be held in a bank account at high interest if the borrower promised to never touch the money or withdraw it. There is some proof to support this. Recently an audit was put out regarding Tethers and it was shown that a bank account does in fact exist that holds some USD to back Tethers, but it could not be determined if the Tether corporation had access to it for the purpose of withdrawals.

As of now, over $800 million Tethers have been released. Over $100 million just this past week.

So ultimately, this is the question. Are Tethers really backed by actual USD or are they simply printed out of thin air and then used as fake money to pump up the price of Bitcoin in exchange for real money? A graph of both assets shows a strong correlation between rises in Bitcoin prices and the release of new Tethers. Although, just to be fair, it could be argued that as Bitcoin and other crypto market caps rise, there is a demand for new Tethers and this the reason for the new Tethers being printed. However, this would not negate the fact that they still need to be backed by USD.

One this is for sure, if the detractors of Tether are correct, the implications could very well be catastrophic. Every major exchange has a Tether trading pair market. A collapse of Tethers would cause a few, if not many, exchanges to go under as they could not handle a loss of one of their trading pair markets and still conduct business, especially if that loss caused customers to start pulling out their funds. So this would have an effect on everyone in crypto, not just those with money on exchanges as the value of almost every coin would start falling, and with exchanges going offline, there would be no way to trade out of it.