I'm no expert but mulling it over.... If Tether is big enough that the price of BTC is effected by it, such that investors feel they can cash out and that is part of their risk calculation, then a tank in Tether would also cause a drop in BTC.
If Tether is backed by loans and not hard cold cash that's a risk and effects the value.
If someone is able to buy Tether on credit, and the credit is actually backed by BTC then there could be a loop.
I'm not sure about the likelihood of this but if Bitfinex is overleveraged somehow then anything is possible. At least I think that was the argument.
But is $845m enough to pump the entire crypto market by billions in market cap? Maybe there are secondary effects here, like increasing peoples confidence in crypto because of a false sense of liquidity, or something like that.
Market cap defined as price * total supply is a fallacy because it does not account for liquidity. Order books are fairly [0] thin even at the larger exchanges that you only need to buy/sell a few thousand BTCs to have a significant impact on price. If you consider the potential of wash trades it gets even easier. Bear in mind that up to 1/3 of all bitcoins mined could have been lost[1] and only a small amount of actively traded anyway.
A good parallel would be that Tesla is valued by the market at 500+ billion, but it's impossible for all shareholders to sell their shares for 500 billion because there are no buyers with 500 billion in cash waiting to buy Tesla stocks, and if anyone tried the price will crash after the first few percent has been dumped.
If traders lose faith in Tether, they would sell Tether and buy Bitcoin in a flight to safety. Bitcoin prices would rise as traders try to get out of Tether.
Conceivably, a crisis with Tether could affect confidence in the entire cryptocurrency ecosystem, which would put downward pressure on the Bitcoin exchange rate.
It's not clear which of these factors would dominate, so it's not clear what would happen to exchange rates.
But currently Tethers trade 1:1 for USD on multiple exchanges, so markets aren't showing evidence of lost confidence.
> If traders lose faith in Tether, they would sell Tether and buy Bitcoin in a flight to safety. Bitcoin prices would rise as traders try to get out of Tether.
That might be the outcome, however:
- If there would be the slightest bit of panic btc transactions would be congested for days.
- If people would loose money by Tether their btc margin positions would be getting closed.
- Because they loose faith in one crypto they would by another?
If Tether is garbage, the only way to get your money out is by converting Tether to something worth real money.
We saw this in Mt. Gox. When USD withdrawals failed and people suspected Mt. Gox was insolvent, the only way to get money out was to buy BTC and withdraw that. The Mt. Gox exchange rate inflated because everyone knew dollar balances on Mt. Gox were worthless.
If Bitfinex is insolvent and Tether fails, we'll probably see panic selling across the market as people start fearing Bitcoin is a giant tulip scam.
>If traders lose faith in Tether, they would sell Tether and buy Bitcoin in a flight to safety. Bitcoin prices would rise as traders try to get out of Tether.
The Tether:Bitcoin rate would rise, but I’m not sure that the Bitcoin:USD price would follow suit.
If Tether is backed by loans and not hard cold cash that's a risk and effects the value.
If someone is able to buy Tether on credit, and the credit is actually backed by BTC then there could be a loop.
I'm not sure about the likelihood of this but if Bitfinex is overleveraged somehow then anything is possible. At least I think that was the argument.