The market is losing faith in the third most actively traded cryptocurrency in the world. Known as Tether (USDT), this token was designed to have a 1-1 peg with the US Dollar. Supposedly, each Tether is backed by a US Dollar held in trust. There has always been skepticism about this claim, and the market has been abuzz with the news that the company behind Tether recently broke off its relationship with its auditors. Moreover, the supply of Tether’s has increased markedly in recent months, going from under 500 million tokens in circulation in the beginning of November 2017, to over 2.2 billion tokens now. The audit was meant to calm fears voiced by some market participants that Tether was printing un-backed tokens.
Now Tether is losing its peg to the dollar. At pixel time, the exchange rate of tether to dollars, known at USDT/USD is hovering around 0.9818.
This chart is taken from Kraken.com, the only exchange to offer a tradable USDT/USD pair.
Why does the Tether to Dollar peg matter? Because major exchanges, to avoid money transmission laws and other regulations, decided long ago to use Tether instead of Dollars as the base in many cryptocurrency trading pairs. For example, on Poloniex you can trade Bitcoin against Tether, not dollars. The change might not be noticable to new traders: BTC/USDT instead of BTC/USD. But the difference could be massive in the event of a complete breaking of the peg.
Here’s a list of the largest Tether addresses. Note the number of major liquidity centers on the list.
While its too early to tell if this breakage is permanent, its probably worth continuing to watch the USDT/USD pair closely, and also starting to think about what could happen if the peg becomes completely unmoored.
One scenario is that holders of Tether start to convert those into cryptocurrencies en masse. We would likely see a premium start to develop between “Tether” exchanges, like Bittrex and Poloniex, vs fiat to crypto exchanges like GDAX and Gemini. This is already starting to happen slightly in the prices. We would also see a rush of transfers of crypto out of the exchanges. This could put strain on exchanges that have been playing around with their reserves; basically you could see not one but multiple Mt. Gox’s. Hard to put an exact prediction on price movement in this scenario, but its clear to say that the market’s would become unhinged so to speak as a result.
Another scenario is that Tether turns up the printing presses into high gear and attempts to defend the price of USDT/USD on the only exchange where its listed, Kraken. One could easily envision a scenario where a short squeeze is engineered in the USDT/USD pair.
Another option is that there really are over 2.2 billion US Dollars sitting in trust for all those Tether. That is exactly the kind of thing an audit solves, however, so here we are. Keep your ears to the ground and your eyes glued to the screen, this one could get very interesting.
edit 1/28/2018#1: looks like this post has gotten a bit of coverage, and it seems my turn-up-the-printing-press scenario has been misunderstand by a significant enough minority of readers to warrant a follow up. (Some bad names were used.)
Yes, printing tether is long run dilutive, but consider the reality in which we live:
Yesterday, the USDT/USD pair on Kraken did $3.1 million in trading volume, and the entire sum of resting ask orders right now is less than $2 million in tether.
On the other hand, Poloniex did close to $51 million in trading volume in just the BTC/USDT pair. Someone could print 2 million tether tokens and sell them for BTC on Poloniex and no one would notice, because its a small fraction of the trading volume. In fact, there are many more exchanges which offer a BTC/USDT pair, so our would be central bank (tether) could conceal their operations even further by spreading it around. Next step is taking the BTC and sell it for real dollars. All they have to do then is park it on the bid of USDT/USD on Kraken and viola! Peg defended.
Of course in the long term this means there are even more tethers in circulation, making the long term situation worse, but since people get pricing signals from the one USDT/USD market, this type of operation could be very successful at defending/manipulating the peg for a time… until someone actually sells to those bids… This would be a “kicking the can down the road” response and not something that would actually be long term effective. But then thats not really different than using reserves to defend any other peg, just in this case its not a central bank or government which is doing the defending. Again, I should emphasize that this is all worst case scenario analysis.
edit #3 on 1/30/2018: So the news just broke on Bloomberg that the CFTC has served Bitfinex and Tether with subpoena’s and it seems to be causing the crypto markets to tank:
The U.S. Commodity Futures Trading Commission sent subpoenas on Dec. 6 to virtual-currency venue Bitfinex and Tether, a company that issues a widely traded coin and claims it’s pegged to the dollar, according to a person familiar with the matter, who asked not to be identified discussing private information. The firms share the same chief executive officer.