Tether Risk Revisited
In this post:
- What is the biggest “stablecoin” in the crypto markets?
- Why do we compare Tether to central bank?
A month ago, we wrote about the risk that the stablecoin Tether plays in the cryptocurrency markets. In just one month, we have seen the market begin to ask the same questions regarding the availability to convert Tether back to dollars. This issue was brought up in mainstream media as well, which would have been unthinkable only 2 to 3 years ago.
I think it is worth revisiting the risk that Tether plays in the crypto ecosystem.
It’s easiest to get caught up by reading the first blog post. For those of you that have not, though, simply stated, that Tether is the biggest “stablecoin” in the crypto markets. Stablecoins are intended to act as dollar proxies, where their value is pegged 1:1 to the dollar. The idea is that someone has dollars but needs Tether to be able to trade within the crypto ecosystem. That person gives the dollars to Tether and they “print” a new Tether to give to that person.
This isn’t a problem if Tether is actually holding every original dollar they have taken in, but what if they don’t?
Therein lies the potential timebomb.
The reason this has the potential to be a big problem for the entire cryptocurrency market is that Tether has been acting as a central bank of sorts, providing stable liquidity to the entire market. This has a few effects, but the primary of which is increasing market-wide liquidity and providing an illusory read on how much liquidity is available. The second main effect is buffering risk, as traders “feel” safer knowing they can stop out a position in crypto back into a stablecoin.
In the event Tether is proven to not have the dollars to back the Tether in circulation, the façade of stable liquidity would quickly be erased.
The easy guess as to what happens next would be market-wide liquidations of all cryptos; however, we could see a rush into Bitcoin first. The reason for this move into Bitcoin is if Tether is found to be a problem, the market may see Bitcoin, and not other stablecoins, as the best and safest place to hide.
We should see Ethereum and altcoins being sold and converted to Bitcoin, which would provide a stabilizing force for Bitcoin (BTC) while the rest of the market sells.
If the problem is found to be more severe and long lasting, then we would later see Bitcoin be sold as well, likely back to other stablecoins such as USDATA Corporation (USDC) as traders look to zero out volatility, sell, and go flat.
To put it in a sentence… I would expect panic selling in the event Tether is found to not have the funds, with the initial panic possibly leading to Bitcoin buying as there would be no other place to go in the cryptocurrency space. If the news is long lasting enough, more than a week, then we would later see Bitcoin also be sold and the entire crypto market brought down about 30% to 40% from here.
What we have seen before is an exodus to other stablecoins and a mark down on those as folks go to exit… something like 95 cents on the dollar bid on USDC (which should always be 1:1 to dollars).
Although I am hyper-skeptical of Tether, I do trust the other stablecoins such as USDC and believe that as they grow, they remove some of the effects of Tether from the market.
Of course, it is also possible that they can continue to be kicked on Tether for another few years, but it does seem like its time has come.
Although this may seem initially bearish, and because of the panic liquidations that would ensue, it would be based on price… in my opinion, Tether blowing up would be the most positive thing that could happen to crypto in the long run.
It would remove a dark cloud of mistrust from the ecosystem if Tether either proved their reserves or couldn’t.
Crypto is better than fiat because trust is embedded into the system through mathematical verification, not through decree or force or an intermediary, like in the current financial system.
It will not be until Tether either puts up or shuts up that the trust in the cryptocurrency ecosystem can be fully restored. Once that happens, it’s going to the moon.