Tether - "Gateway Drug" and "Ticking Time Bomb"?

Tether (USDT) is the cryptocurrency representing the link between traditional currencies and the cryptocurrency market since Tether's value mirrors exactly the US dollar. The underlying idea is to provide a currency with the price stability of the US dollar and the operational benefits of a cryptocurrency, which defines Tether as the digital substitute for  US dollars. In this sense, Tether users are protected from the extreme volatility of cryptocurrencies but still exposed to the dollar's fluctuations. Tether's capitalization has increased very rapidly in the latest months, and today it's over $2,000 M.

Tether is supposed to be backed by a 100% US dollar reserve – as the company behind the currency puts it: "Tether Platform currencies are 100% backed by actual fiat currency assets in our reserve account. Tethers are redeemable and exchangeable pursuant to Tether Limited's term of service. The conversion rate is 1 tether USDT equals 1 USD".

Figure 1: Tether

Tether – a "gateway drug" and a "ticking time bomb"?

Conceptually, Tether can be considered as a bridge linking fiat currencies to cryptocurrencies. Its relative stability and features of a digital currency ("allowing you to store, send and receive digital tokens person-to-person, globally, instantly, and securely for a fraction of the cost of alternatives") make it an interesting choice of currency. For these reasons, there's always been a widespread sense of trust in the currency, and people usually don't expect to be exposed to any risks.

However, recently,  more and more people have become skeptical about whether Tether company is actually holding every token in reserve – a key feature of the currency's value proposition. Owning a dollar for each Tether sold serves as a guarantee for the users to get fiat back at any time they decide to sell Tether. This belief is crucial for the value of Tethers to be pegged to the actual value of dollars.

The company has been asked multiple times to prove that it actually holds US Dollar reserves, but so far, Tether has failed to prove that these reserves exist. In addition to this, Tether and their auditor, Friedman LLP, have recently dissolved their relationship which inevitably caused the crypto community to have even more concerns about the actual reserve detention to redeem the outstanding tokens.

As of today, Tether is the 14th largest cryptocurrency regarding  market cap, and if it were revealed that it is worthless or if confidence in its worth was increasingly questioned, consequences on the whole cryptocurrency market would be devastating. Today's confidence in Tether is pretty fragile and, if the market loses faith, Tether would suddenly become worthless, resulting in a $2 bn loss in market capitalization. Given this shock, investors would be likely to flee their cryptocurrencies into USD, threatened by the markets falling around them. Trust has always been a crucial factor when it comes to investments, and a lack of credibility towards the market would probably lead to a collapse  of the entire system.

Tether can certainly be defined as a ticking time bomb. The cryptocurrency market is highly dependent on Tether's existence and trust in it. If Tether is unable to prove the existence of its US Dollar reserves, or if the opposite is justified, trust in it will be lost, and the overall market may "implode".

See you next time!

Author:

Manuel Ehmann