
Quantifying the Effect of Tether - hendzen
http://www.tetherreport.com/
======
beefield
I just document my guess here what's going on.

Tether probably started exactly as they describe. At some point someone got a
smart idea that just storing that USD in bank accounts is stupid, let's invest
that to something more profitable. BTC is quite obvious choiuce of investment
here.

All is good until someone figured out that if BTC goes down, we are
technically insolvent.

Luckily there is a way out, as long as there are people taking USDT at its
face value. Keep on printing USDT and using that to purchase BTC so that the
price stays high/goes up. There is a limited amount of BTC, so there is a
backstop here, you have all the bitcoin of the world as your assets and amount
x of USDT on your liabilities. At that point you can say that hey, if someone
wants to convert their USDT to USD, it is easy, just buy some BTC with maybe 1
million USDT/BTC, and by the way, our just opened USD/BTC currency pair seems
to trade at 999 000 USD/BTC, so you can convert your money that way.

And USDT holders did not even understand that they were fleeced badly, but
just should have kept their BTC investments in the first place.

Now, admittably, there _is_ a small catch in this plan. What if people lose
trust on USDT? Well, god news is that at that point, USDT issuer has on their
accounts a significant sum of BTC (and unless they are _complete_ idiots), a
significant sum of USD. So it is likely that they figure out a solution for
themselves that may include linving rest of their lives on some remote
paradise island. USDT and BTC investors, then again, may not be so lucky...

~~~
bufferoverflow
The question is who are all those USDT buyers in this scheme.

And, assuming the trades are voluntary, why should we worry much about these
rich investors?

~~~
hedonistbot
Bitfinex and some other exchanges list their crypto prices in USDT and most
people trading on their platform probably don't realise this is not dollars.
So there's your guaranteed demand. As long as those buyers HODL there is no
pressure on USDT.

------
camus2
Tether story is extremely interesting in the crypto world because it goes
against everything crypto currencies like bitcoin were supposed to be:

\- it's completely centralized, a single actor emits tethers.

\- it's completely opaque as it relies on the trust that the actor that emits
tethers actually has the money to back the claim that 1 tether == $1, yet you
cannot redeem a tether for a dollar directly. Bitfinex TOS even say that they
don't have to give you dollars for your tethers, I'm not making this up.

Tether is shrouded in secrecy yet crypto traders happily trade them, despite
the fishy history of bitfinex a company no respectable bank wants to make
business with. How can anyone think this is going to end well?

~~~
lucozade
> Bitfinex TOS even say that they don't have to give you dollars for your
> tethers

That bit's not entirely true. I believe it was but hasn't been since Jan 1.
The actual wording is

"Tether will not issue Tether Tokens for consideration that is other Digital
Tokens (for example, bitcoin), and will not redeem Tether Tokens for other
Digital Tokens; only money will be accepted upon issuance, and only money will
be provided upon redemption"

There are various other caveats requiring you not to be a criminal etc but
that's fairly standard boilerplate.

As to the rest of your comment, I entirely agree.

~~~
camus2
So you are saying I can go to Bitfinex with my USDT and ask for real dollars
in place of my USDT and they will give me real dollars?

~~~
jpatokal
On paper, yes, that's exactly what they promise. In practice, they "suspended"
this last April:

[https://tether.to/announcement/](https://tether.to/announcement/)

------
cornholio
> data suggests that Tether may not be minted independently of Bitcoin price
> and may be created when Bitcoin is falling

That should be obvious during normal Tether operation - price movement
corresponds to increased liquidity. When funds move to dollars, Tether creates
tokens to defend the price, otherwise the sell side of the tether pairs will
dry up, forcing their price over 1$ where they would cease to be a stable
useful unit.

This market driven creation of tokens is the main way tethers are created
today. It's an open question if the Tether corporation has enough assets
between it's bank accounts and exchange accounts to redeem the outlays -
especially the exchange accounts are problematic, since they are of unknown
liquidity. So Bitfinex might owe 1 billion dollars to Tether, but Tether might
be in fact unable to cash them and unwilling to do so due to the close
corporate relation.

But this "report" is a statistical farce from someone who doesn't understand
anything about how it's supposed to work.

~~~
bhouston
> Tether creates tokens to defend the price, otherwise the sell side of the
> tether pairs will dry up, forcing their price over 1$ where they would cease
> to be a stable useful unit.

This makes sense as to why they have to create Tether during rushes out of
cryptocurrency, in order to stablize the price of Tether, but Tether seems to
print whatever they want, whenever they want. That behavior is suspect as
normally printing behavior is constrained by financial factors behind such a
company. Central banks of smaller countries have tried to peg their local
currencies against USD and other such things, but it often breaks those small
country central banks when there are big price fluctuations.

I am of the opinion that USDT is not backed by USD but they are basically
running a hedging operation, probably primarily invested in cryptocurrencies,
in order to cover their expected risk exposure. That all works until a black
swan event happens and then we realize that USDT is just a mirage and it is
forced to unpeg from USDT (and don't fool yourself that it will appreciate
once it is unpegged.)

Basically if you accept this claim that this is how USDT operates then it is a
buffer against BTC falling as it injects money into the system at specifically
those times.

And then because USDT is also backed by the same cryptocurrency (at least in
part, I am pretty sure it isn't backed by actual USD) that it tends to prop
up, we are into a incentuous circle that could potentially be popped.

It is scary as fuck that a lot of exchanges deal completely in
cryptocurrencies and then also USDT as the only "real currency", but itself is
also probably funny money.

I feel like I must be crazy because it seems like so much of this is a house
of cards with USDT at the center of it.

------
nstj
Another great article on this topic:

The Tether Conundrum: A Quick Backstory - [https://tonyarcieri.com/the-tether-
conundrum](https://tonyarcieri.com/the-tether-conundrum)

> I, and many others, suspect Tether is being used to effectively counterfeit
> hundreds of millions of dollars of perceived value, which are being
> immediately reinvested into Bitcoin to keep it from collapsing.

------
blocksceptic
Even if tethers are backed 1:1, the level of secrecy about the details means
it's hard to believe there isn't something illegal going on around them.

By holding tethers, best case scenario, you're exposed to a significant risk
that the underlying USD is eventually seized.

------
jpatokal
A simple figure to put this in perspective: there are currently
$2,248,665,722.36 (that's $2 billion) Tether in circulation, which are all
supposed to be backed 1:1 by USD.

[https://wallet.tether.to/transparency](https://wallet.tether.to/transparency)

~~~
prostoalex
It’s not crystal clear anymore that USD is the only backing, this Bitfinex
employee comment suggests it could be other cryptocurrencies (without
expanding on mechanics)
[https://mobile.twitter.com/Bitfinexed/status/935333097377329...](https://mobile.twitter.com/Bitfinexed/status/935333097377329152)

~~~
bhouston
I strongly believe that USDT isn't fully backed by USD. They have repeatedly
said it is but I do not believe it.

Now we have a bit of proof that Tether has been lying or misleading via this
Bitfinexed employee?

If it is backed by one or more cryptocurrencies that is better than nothing,
but it means that there is significant risks that in a large market correction
in cryptocurrency the backing of USDT can vanish from underneath it.

Back in the dotcom bubble nearly every company was causing the market to go up
because they were all spending VC. It was sort of an fragile ecosystem because
no one was making money, but everyone was spending it, and then the music
stopped and a good portion were wiped out.

The music could stop and USDT could run into significant issues.

I am reminded of the movie The Big Short. I do think there is a bet here (like
many others), but how to actually realize it and also how long will it take
for this to be exposed?

"The Market Can Remain Irrational Longer Than You Can Remain Solvent"

------
afishisafish
Some counter arguments
[https://twitter.com/IamNomad/status/956283471034449920](https://twitter.com/IamNomad/status/956283471034449920)

~~~
Nursie
Do you consider it credible that they have received, this year so far,
somewhere between 5 and 10% of the entire volume of fiat currency that has so
far been put into cryptocurrency in its entire history so far ? And between 10
and 20% since tether was launched? Without much in the way of formal banking
arrangements?

I don't really. And the more you look at their activities the more suspect it
looks, tether magically appearing in their hundreds of millions to prop up the
markets when they look like falling further, it all looks very, very much like
market manipulation and lies.

~~~
askmike
> Do you consider it credible that they have received, this year so far,
> somewhere between 5 and 10% of the entire volume of fiat currency that has
> so far been put into cryptocurrency in its entire history so far ?

Yes I do: if we look at the top exchanges volume wise according to
coinmarketcap[1] we can see that 5 out of 10 exchanges only support USDT as
anything resembling any type of FIAT, and another one has a direct market for
USDT into USD (Kraken).

Number 2 on the list is an exchange (Binance) that was launched less than a
year ago and does (according to their own data) 3.5 billion USDT in daily
volume and according the tether blockchain owns over 500 million tether
(technically their users own them).

\------

So yes I do believe a ton of money is flowing into the tether ecosystem
(mostly to these new exchanges that don't do FIAT like Binance, Bittrex,
Poloniex, Huobi, etc).

[1]
[https://coinmarketcap.com/exchanges/volume/24-hour/](https://coinmarketcap.com/exchanges/volume/24-hour/)

~~~
blocksceptic
Where is the audit? Where is the balance sheet? At which banks are those funds
held?

Even IF those tethers are 1:1 backed today, they won't be once uncle sam
figures it out.

~~~
askmike
> Even IF those tethers are 1:1 backed today, they won't be once uncle sam
> figures it out.

I 100% agree, this is also the reason why there is no public audit ;)

------
tgb
Those p-values aren't very convincing since I don't see any multiple-
hypothesis-testing correction. There's probably still a couple that are
significant, but you can't test 24 hypotheses and impress anyone with a
p<0.05.

------
thisisit
Here's a thought - Bitfinex has been one of the largest exchange. Today's
coinmarketcap says they had 500 million in volume. Assuming 0.11% charge that
is nearly 50k in fees today or 15 million a month. And this is just in
bitcoin. I assume that they are doing equally good in other pairs too. So, if
someone is funding them with an eye to become the biggest player in the market
like Uber, Amazon etc, this might be feasible.

Or they can be taking out a line of credit on the future cash flows from the
exchange fees.

Without knowing the full picture this might be just speculation on whether
they have the money.

The unwinding might come from their funding (or line of credit) running out.
At least that is my theory.

What other reasons can cause their downfall?

~~~
Nursie
>> Here's a thought - Bitfinex has been one of the largest exchange. Today's
coinmarketcap says they had 500 million in volume. Assuming 0.11% charge that
is nearly 50k in fees today or 15 million a month.

This month alone they have created 850 million in tethers, with complete
opacity about where they might come from. I don't believe that's funding, I
think it's printing tethers from nothing.

------
CyberDildonics
[https://bitinfocharts.com/bitcoin/address/3D2oetdNuZUqQHPJmc...](https://bitinfocharts.com/bitcoin/address/3D2oetdNuZUqQHPJmcMDDHYoqkyNVsFk9r)

Here is bitfenix's cold wallet. It is a single address that contains BTC worth
1.6 Billion USD. Bitfenix has had enormous banking problems. I think the most
likely answer is that they are backing tether is btc. As they print more
tether and/or btc goes down, the amount of btc they have separates from their
liabilities.

------
svara
A lot of people here on HN agree that Tether is shady. Honest question: If
that is so, why is it trading so stably around 1 USDT / USD?

~~~
jVinc
Purely on the theoretical and speculative level lets go through this. Consider
that someone wants to "cash out" their tether. They put it up for sale at 1
USD. Now either the people behind tether buy it at 1$, or it goes to someone
who's offering 0.99$ in the hopes it'll be sold later at 1$ (eg. the rate
falls). But you say, how can the people behind Tether afford to buy it if they
haven't actually been backing their issued Tether?.... Well the answer is it's
just one dollar we are talking about, they have plenty of cash, they can
afford to give you a dollar to maintain the exchange rate.

But what then when everyone tries to get out at the same time? Well then in
the case that they aren't lying, they can just use the USD backing the Tether
to maintain the exchange rate. If they are lying, then we see a run on the
bank and everything collapses. They get out fine because they were
manipulating the market and made tons of cash moving first on BTC, then on the
alt-coin of the day, and got out before the downwards tendency caused everyone
to want to cash out.

Essentially market manipulation in it's finest, a Ponzi-scheme with people
printing their own currency to pump-n-dump not just on one entity, but the
entire crypto-space. That's one hell of a story!

~~~
empath75
What will most likely happen in the event of a run on tether is that all
cryptos will rise exponentially on bitfinex as people try to cash out using
anything they can, and they’ll crash everywhere else as bitfinex and their
users attempt to cash out their cryptos before everything falls over.

------
csomar
The reason tether boomed lately, is that the crypto market has boomed.

The reason tether has added plenty of $100m USDT while the price is going
down, is that people have been selling lately.

People are selling on different exchanges that supports USDT and have no
crypto/USD pairs. This creates massive demand for USDT as lots of people are
selling. This means that there is an actor who is buying all these cryptos
with USDT.

If USDT was fake, and given the size of the crypto market we should see a
significant premium on the price on USDT exchanges. However, the inverse is
happening. Prices are in Sync. Prices on USDT exchanges are almost always
lower, although it is less than 1%.

So whether USDT has 1:1 backing in real dollars or are using other assets:
These assets are very well backed. The price has dumped 20-30% in a single day
lately and USDT has yet to diverge. The price has dumped over 50% from the top
and the price has yet to diverge.

Based on that, you should forecast a massive rally in the coming weeks/months.
People who panic sold are very unlikely to withdraw the USDT (both because of
the restrictions and because they probably wants to buy lower). I could see
bitcoin price going to 40-60k very soon.

PS: This is not financial advice. Trade at your own risk.

~~~
Nursie
>> The reason tether has added plenty of $100m USDT while the price is going
down, is that people have been selling lately.

This makes no sense, other than unless you agree that the mass USDT issuance
is indeed an attempt to manipulate the market and prevent a crash.

Usually what would happen if people want to sell is the price of BTC or
whatever altcoin they want to sell would have to come down to where the buyers
want to buy. Instead it looks like Bitfinex are conjuring up tethers from
nowhere and propping up the price.

>> If USDT was fake...

We wouldn't necessarily see anything until confidence in USDT ws somehow
damaged. That hasn't really happened yet.

------
alex_hitchins
Pardon my ignorance here, but are they (Tether) not doing what the established
banks are doing with Gold, as in paper money being backed with something of
value, normally precious metals? Not saying it's right, just trying to work
out if it's a similar sort of situation.

~~~
api
Paper money was once backed by gold, but today it's backed by "nothing." In
reality that nothing is some combination of the GDP and the military might of
the nation states that issue it.

------
etaty
The reason you can't redeem Tether is KYC, and AML laws. Tether the company
doesn't want to deal with small accounts. What you have in a token tether is a
share of an offshore account. It could be all fake, but knowing how much
crypto exchange are making in fees, they are making more than enough money.
They don't need to create a ponzy. Now if they release an audit, some govs
would be interested to pressure some banks.

