Getting up to speed on Tether

I recently read a couple of articles that were highly critical of Tether, the stablecoin that is (supposedly) backed by US dollars, and which has become a systemically important component of crypto currency markets.

The first was an excellent piece written by Patrick McKenzie back in October of 2019. It gives a good background for how and why Tether was created, and outlines the relationship between BitFinex and the shady Crypto Capital Corp. We’re also presented with a theory of what’s really going on behind the scenes, and what it could mean for the greater crypto currency ecosystem.

The second was a series of two posts written by tech investor Alex Danco, found here and here. He makes three allegations against Bitfinex/Tether; that they manipulated the markets during the BTC bull-run of 2017, that Tether has become a systemically important money-laundering mechanism within the crypto markets, and that Bitfinex themselves were scammed and that the whole charade is currently on the brink of collapse.

I highly recommend reading these pieces thoroughly for anyone currently or thinking about investing in crypto coins as 2020 gets underway. The evidence seems pretty damning, and this could easily turn out to be one of the bigger stories of the year in my view.

Since these articles were written, a few more things have also happened:

  • The market manipulation trial against BitFinex and Tether has been revised and refiled.
  • It looks like NFL-legend turned mastermind crypto scammer Reggie Fowler will plead guilty in the ongoing money laundering trial against Crypto Capital.
  • Victims of the QuadrigaCX scam are seeking to retrieve their assets from Crypto Capital.

Something fishy

I’ve also made the observation that daily volume of Tether (USDT) is currently in the 30-40bn dollar range, according to coinmarketcap.com. Considering that the market cap (coins in circulation) is supposedly 4.6 bn (6-9 times less), this seems highly suspect. Are we really to believe that there is so much trading activity that every USDT token in circulation changes hands 6-9 times per day? Either the volume numbers are inflated (e.g. wash trading or false reporting) or there are more tokens in circulation than what there should be (or both). Seems pretty obvious to me that something fishy is going on here.

Systemic risk

Any problems Tether might have pose a great risk for Bitcoin and the rest of the crypto markets. Here’s a summary of Bitcoin daily trading volume by exchange, sorted by volume (courtesy of coinmarketcap.com):

Bitcoin trading volume

As you can see, the vast majority of BTC trading is facilitated with USDT (Tether). To put it in other words, Tether-based demand for BTC is what’s currently propping up BTC. By the time it becomes obvious that Tether is having real problems to a majority of market participants, it’s probably already too late to hope for a quick exit. Billions (on paper) could vanish from the markets fast.

Some people seem to think that alternate stablecoins could come in and replace the role of Tether, thereby saving the day. But what would then happen to the people left holding the 4.6 bn dollar bag of Monopoly money? And any stablecoin with fiat backing will run into the same challenges that Tether faced when trying to find a banking partner (see the articles referenced initially).

Status quo

As for now, it seems BitFinex and Tether are able to limp along with Deltec as their banking partner. It’s absolutely clear that Tether isn’t 100% backed by USD (they’ve claimed to be over 70% backed), but what the real percentage is at this point is really anyone’s guess. As long as there isn’t a bank run type situation and Deltec is able to keep skirting AML/KYC regulations, the saga could continue for a while longer. But the fact that one of the main pillars of the crypto markets hinges on a Bahamian bank being able to continue skirting regulations is hardly reassuring.

Final thoughts

Personally, I would never invest in anything I didn’t have faith in over the long term. I’ve been burned a couple of times in the past, so this is a lesson I’ve had to learn the hard way. With Bitcoin (and crypto coins in general), there’s just too much uncertainty and scary scenarios on the horizon. So my advice to anyone thinking about investing in Bitcoin or any other crypto currency going into the new decade is clear; as long as Tether remains such a central part of the crypto markets, put your money elsewhere. If (or when) Tether goes, mayhem is highly likely to ensue.