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This is much worse than not having reserves. In reserve banking there may be insufficient liquidity to handle a significant withdraw event but theoretically the money in the bank balances, it is just not liquid because it is lent out.

The situation with tether is much much worse. About 30% of the money invested in tether is gone and unlikly to come back. The books do not balance, it is not a timing issue, it isn't a liquity issue tether or bitfinex is insolvent.

This is important to realize, tether or bitfinex is insolvent/bankrupt if that 850m is truly gone. It is covering up this with loans between related parties, but the legality of those loans is probably questionable at best but bitfinex and tether are intertwined such that they likely have shared liabilities legally.

Someone is bankrupt right now. Maybe both.

The fact that tether or bitfinex isn't dropping or outright dead confuses the hell out of me. Is it so critical to crypto now and so central that even if it is involvement we have to believe in it or the sake of this whole market? This market isn't rational or I must be missing something.

I think a lot of people who have accounts at USDT-only exchanges may not realize this affects them. Tether has been marketed as a replacement for the dollar and a safe place to park your wealth when you are "out of the market" in cryptocurrency. Because it's not viewed as a crypto or speculative asset in itself, people might see the headlines but not make the connection that potentially all their assets on a USDT exchange are at risk of becoming inaccessible.

Also, unattended arbitrage bots might end up equalizing the price now but becoming major bag-holders later. Right now, the spread between the Coinbase & Bitfinex BTC prices is > $300. The logical response of an arbitrage bot is to buy Bitcoin on Coinbase (spending USD) and sell it on Bitfinex (receiving USDT); they provide the Bitcoin liquidity that people who want out of Tether need. This creates a counterflow of BTC from Coinbase to Bitfinex, spending down their dollar reserves at Coinbase and accumulating a Tether hoard at Bitfinex. If the bottom falls out of Tether, their accumulated profits (and any capital invested) becomes worthless.

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