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This is pretty big news; the entire cryptocurrency economy relies on tethers being valued at par, given that they're how billions of dollars of liquidity are denominated. While rumors and suppositions about Tether have swirled for quite some time, that was also true of Mt. Gox before the fall, and those of us who have been saying loudly that they're insolvent have not been widely believed.



Anyone in the cryptocurrency space with half a brain knew something was up the minute they refused an independent audit. It was only a matter of time before someone brought charges and/or Tether collapsed.


Which does make it rather curious that the music's kept playing, so far. Is "common knowledge" that it's probably a complete fraud (like this filing should give) required to pop the tether bubble? Or will even this not be enough?


Let's not think of it as a bubble. Let's think of it as Wyle E Coyote running off a cliff and forgetting to look down, because that seems to be the modus operandi of the average HODL.


But HODLers don't really care about tether, do they? Isn't tether mainly used for traders who want to temporarily move out of crypto and use tether for that?


It's been suggested that a large percentage of the crypto market cap is based on tethers which have been used to prop up prices but also used to hedge against falling BTC prices. Essentially, bitfinex prints tether whenever the price of BTC drops, and in the meantime, people use these printed tethers to hedge against BTC (and buy back in when the price trends upward again).

So there are many iterations of compounded phantom value folded into the market cap of BTC. If tether is found insolvent, essentially 80% of the value of BTC disappears overnight.

The entire value of the crypto market depends on people's belief that one tether is worth 1USD. Or so the theory goes.


I've heard that theory, but I can't say I understand it. Let's say USDT goes to 0 instantly. All traders lose their parked money. I can see a crash from panic and from people recouping their lost safe money, but what else does it have to do with with cryptocurrencies?


If USDT would go to 0 instantly many things would happen (a few of the biggest BTC fiat markets would not be able to operate, such as binance's main BTC market). As a practical example big traders would obviously sell their tether straight into crypto on those markets. But since they don't want to be exposed to that much crypto they would sell the same amount on other exchanges (such as Coinbase). In these chaotic events the biggest traders will fly to safety for most on their books (actual fiat, or hedged via derivatives).

But that's not the potential issue being described: Tether is supposed to be worth 1 dollar. A lot of big crypto markets run on tether. If it turns out that a lot of crypto was bought with synthetic dollars (tether) that turned out to be a lot less than a dollar, that would mean the price of many crypto projects got to where it is by imaginary money. In another word: overpriced.


If you're running off a cliff and you know there's a safety net to protect you, it makes the act of running off a cliff safer. Ergo, more people will run off the cliff.

What happens when that safety net vanishes as hoards of people are running off the cliff?

Edited to add:

This isn't really a theoretical issue, either. Risk is part of the price of a security. Something that has a high risk, may be valued less by investors. Often other investments will carry the same amount of reward but less risk.


People have been yelling that Tether is a ponzi fraud since it launched in 2015.

And yet it still trades 1:1 to USD today, after the court filing was released.

So is there some magic force that keeps the fraud running, and prevents market participants from cashing out their Tether in the mother of all bank runs?

If you hold Tether why wouldn't you sell?

Or is there more to the story than just "Tether is an obvious fraud"?


I don't understand cryptocurrency markets at all, but, could there be something where the only people participating in the USDT market are those who are at least somewhat confident that USDT is what it claims to be and therefore are pricing it at $1?

What do you get out of participating in the market if you expect Tether to be fraudulent? You'd personally price it at zero, then, right? Can you profitably short it, or does everything just break down if you're right?

That is, if you hold USDT and want to sell it for cheap, who is going to buy it for cheap-but-nonzero?


> if you hold USDT and want to sell it for cheap, who is going to buy it for cheap-but-nonzero?

The market price for one Tether is currently $0.9984 because traders are buying at that price.

So if anyone holds Tethers and believes there's greater than 1% probability that it goes to zero, the rational trade is to sell.

The fact that the price holds at parity tells me that Tether is not an obvious fraud.


There is complacency among the exchanges though. You really believe all that volume and price action is legitimate? Exchanges want tether to be worth what they say it’s worth, 1 USD. The alternative is a massive crash in tether and therefore bitcoin price therefore altcoins price therefore profit (trading fees) for exchanges. The scam can go on much longer than you/anyone can imagine.


It's basically a giant game of chicken AFAICT, because tether is so endemic to the market that if the market as a whole gives up on that valuation then everything goes boom.


It's basically a giant game of bullshit - just the latest iteration of "Never give a sucker an even break."

When you have nothing to trade but trust and hope, people who take advantage of trust and hope are always massively rewarded.

Occasionally someone crosses the wrong people and jail time ensues, but if you're politically adept enough to avoid that - at least until you die and/or disappear - no career pays as well as financial fraud.


How do you think this would work exactly?

If traders begin to lose faith in Tether, wouldn't they sell Tether and buy BTC, ETH, XRP, BCH, LTC, EOS etc.?

So wouldn't that cause the USDT price to decline to $0.97, $0.95, $0.90, $0.75, etc.?

And at the same time the demand for BTC, ETH, XRP, BCH, LTC, EOS would cause their prices to rise, wouldn't it?

I suppose at some point, after the $3B of Tether is liquidated, people could lose confidence in the entire market, but until that happens wouldn't cryptocurrency prices increase rather than decrease?


Something like 80% of trades on the market currently involve tether, and tether accounts for ~$3 billion of (presumed) cash-like holdings. If it collapses then liquidity of the market is going to be severely hit, and the people trying to exit to fiat are likely to cause a variety of bank-run type situations.

These will be exacerbated by exchanges which have been run in bad faith and which do not have either the cryptocurrency or fiat reserves they claim (see Quadriga CX for a recent example).

Either way, it's going to be interesting to watch.


> it still trades 1:1 to USD today

On exchanges of questionably integrity. And where it is impossible to reliably short the instrument.


> impossible to reliably short the instrument

I see this a lot, if you can't sell short then the price can't decline?

If I held Tether and thought it was worth less than $1.00, I would sell it.

If most people think it's worth less than $1.00, they would sell it and the price would drop to reflect the risk.

Why doesn't this happen? Is is just crooked exchanges posting phantom orders? If so, why don't smart traders sell into that and liquidate?


The problem is beliefs aren't homogenous. If 99% the world that tesla was worth $0 and 1% thought it was worth $100, then without short sellers the price would trade much closer to $100 than 0. But if there are short sellers than the beliefs of the market start to average out more.

Also there is empirical proof short selling matters because during the banking crises they banned short selling which causes certain bank stocks to jump up, and then when they allowed it again the prices fell like a rock.


You mean Kraken? There are many OTC lending markets that allow for tether shorting.


Seems like counterparty risk would make this a bad trade; if Tether collapses, the whole system is likely to follow.


I don't think many people assume it to be this binary: if Tether doesn't have have dollars behind every USDT. Buying USDT below $1 is simply buying debt. If you believe they will at some point in the future be able to give you a dollar for every tether, buying under $1 is very smart.


Participating in a Ponzi scheme can be profitable if you get out early enough, perhaps people are expecting Tether to stand a bit longer.

Alternatively, perhaps people expect the revelation that Tether isn't fully backed to proceed like the dollar going of the gold standard. It comes with a lot of noise, but the thing keeps working because people keep using it. In this scenario, Tether essentially becomes Bitfinex fiat. That would be a really cool dystopia.


You can keep dumb money flowing by screaming fud a lot and appealing to emotion.


Yep. Most smart people, even the most diehard fans, knew tether was at the very least, extremely shady.


Correct, sometimes wishful thinking clobbers rational thought

Hence there might be tears


> the entire cryptocurrency economy relies on tethers being valued at par, given that they're how billions of dollars of liquidity are denominated.

this doesn't make any sense unless tether is a required intermediate step to liquidating cryptocurrency, which it's not.


That’s one of the problems. Liquidating “crypto to fiat” is not that easy.


Depends on the amount. If you suddenly have 1 billion $ worth of BTC to liquidate, then yes. It might not be so easy, but this is the same with any asset, stocks, bonds or commodities. If you want to liquidate less, why not use established exchanges? Last time I checked their limits were quite high.


Sincerely, but if they were completely backed up and valued at par, they wouldn't call it theter, they would just be using USD.




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