Tether: Should You Buy 97 Cents For a Dollar

Social networks play a huge role in the crypto. When Tether Limited stablecoin dipped, and someone posted a fake announcement about upcoming delisting of the digital dollar analog from the Binance, everyone just went mad. Markets were in the deep panic mode, that was bad enough to force tether hodlers to buy bitcoins on the 10 percent premium since they were afraid that their stable asset is about to have a stable plunge down into the oblivion.

What is the reason for this reaction? Just one fake post managed to cause a ruckus, bad enough to force two significant exchanges issue full stops of all Tether sales. We decided to look at the situation closely.

The initial idea of Tether is good, even reasonable: crypto dollars that will make any trader life more comfortable and more stable. And according to the claims, made by Tether Limited CCO Leonard Reel - each and every coin is backed by a real buck and company has more than enough money overall. But should we trust him? On the average - the community does not think so.

The reason is relatively simple - in their White Paper, Tether Limited promised regular audits. It still hasn’t delivered on that. The only thing that it has done to calm down some people is a “balance confirmation procedure”, that was performed by a law company called  Freeh Sporkin & Sullivan that, however, cannot be claimed an entirely uninvolved.

The procedure itself raises up some questions too. First of all - balance confirmation requires around 1\3 of all the papers that they need for an audit. So basically - this only a proof that they had the money to back them at the moment. $2.5 billion in cash somewhere. Furthermore - Freeh Sporkin & Sullivan is a law firm, a well respected and known company, but still - a law company. It’s evident that full audit from the “big four” company would’ve raised the level of trust and overall support from the investors and have given it a boost of liquidity. So basically - investing in the Ernst & Young would’ve paid off almost instantaneously. But they picked FSS instead. Which has one of its founding members, Eugene R. Sullivan as a member of the advisory board in one of Tether's banks. Furthermore - he has ties with the Saipan casino that was raided by the U.S Federal Agents. So it sure raises several questions.

But it’s also entirely possible that there is no foul play involved. Changpeng ZHAO, CEO of Binance, voiced following opinion on the subject: Tether Limited might be very secretive about their money because of the possible issues with banking. Traditional banks tend to freeze and ban accounts of the known crypto companies. Right now, only Singapore and Switzerland are making serious moves to normalize relations between conventional banking and crypto industry.

But overall price swings led to the moment when the community has lost its faith in Tether in general. USDT became a “Schrodinger's crypto”, that led market into the state of crypto schizophrenia. On the one hand - everyone is okay with working with it. On the other hand, they operate under the assumption that Tether will likely spontaneously combust at some point or another in the future.

The full collapse of the Tether is one big dip away, that will push hodlers into the skeptic’s camp. Basically it will look like this: Tether prices drop, and that causes all crypto to USDT pairs to grow. Traders will need more Tether to make transactions, and soon enough prices will raise above the 1:1 level. To keep the balance Tether Limited will issue more coins, it will hurt the price even more and in the long end this will lead to the total devaluation of the USDT.

Because of that reason, a significant percent of traders using platforms that work through USDT will want to withdraw mainstream cryptocurrencies, such as bitcoin, litecoin and bitcoin cash, trying to stop hemorrhaging money on the price swings. And hodlers will prefer to move to the fiat to crypto oriented exchanges. This will inevitably hurt trading platforms with big amounts of Tether on hand, such as Bittrex, Poloniex, and Bitfinex. And that will for sure lead to the withdrawal restrictions on the exchanges that will be affected by trader’s migration.

So, what hodlers should do with USDT? To get an answer to this question, we should look back in time, at the fall of the eurodollar system. Everything was fine, for years, even decades - but then the 2008 financial crisis came. At that very moment everyone realized that most of the assets, around 60-63%, we not backed by anything. Everything went so bad that the US had to bail out “Too Big to Fail” companies.

And experience gracefully tips us the following - no one is going to bail out companies that were hurt by the Tether hypothetical collapse. And the recent seemingly positive report on crypto that was published by BIS proves it: “Cryptoassets do not, at this point, pose a global financial stability risk”. In other words - no crypto company is big enough to be considered institutional important for the international economic relations. Tether is a way too small off a fish in comparison to them.