The cryptocurrency market is losing confidence in Tether

Posted: 15 October 2018 11:46 am
Cryptocurrency trading
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Current market conditions suggest Tether has taken another turn for the worse.

Tether is ostensibly backed 1:1 by real US dollars, but this has never been confirmed by an independent audit.

The most worrying part isn't that Tether hasn't explained why it can't get an audit; it's that Tether has explained why, but its reasons don't pass the sniff test. A refusal to comment could have been chalked up to Tether's usual opacity, but by giving what looks like a false excuse, it starts seeming more like Tether's willing to lie to people's faces. And if it's willing to lie about why it can't obtain an audit, it might be willing to lie about other things... such as whether Tether is actually backed 1:1.

What's Tether's excuse?

Tether has said its books are just too complicated – because it involves cryptocurrency – and that major accounting firms are unwilling to handle the complexities of crypto and still deem it too risky to touch.

This is ridiculous because of a couple of reasons:

  1. Tether has said its backing funds are held in legitimate bank accounts or with other appropriate custodians. If that was true, it would be about as easy as an audit gets. But Tether's previously dissolved relationships with the Friedman LLC accounting firm suggest that its accounts are anything but simple, contrary to what it claims.
  2. The big four accounting firms, and many more, are neck deep in cryptocurrency and have been for years now. For example PwC Hong Kong, right in Tether's home town, has actually been accepting bitcoin for about a year now. It started doing so specifically because it was working with so many cryptocurrency-related businesses.

Based solely on these reasons, one might reasonably decide that the most likely explanation is that Tether is flat out lying about its backing. And in this case, that's much more concerning than simply being opaque.

Studies have said that Tether conceivably could have enough funds to back the coins in circulation, but that doesn't explain why Tether appears to be lying.

These reasons and others have led to a widespread distrust in Tether. But so far, this has mostly been a slow-burning level of mistrust in the background, manifested as growing demand for more transparent and fully audited alternative stablecoins, rather than outright bank runs.

But today's market movements suggest that the cryptocurrency markets have reached a new level of mistrust.

Here's what Tether is doing on Kraken, for example, according to CoinMarketCap.

The most important number there is $0.973000. It means people are currently selling their Tether (USDT, which are supposedly worth a neat $1 each) for 97 cents. And they've been doing it by the millions over the last 24 hours, making up about 5.5% of Kraken's total trade volume.

This means people are willing to take a significant loss to trade their Tether for real money.

Elsewhere, you have scenes like this:

This is from Bittrex, where people are selling bitcoin at a very different price depending on whether the buyer is paying with USD or USDT. Basically, if you want to pay with Tether, you'll now have to pay extra for the risk involved. Plus, as a sign of shifting supply and demand, it indicates that people are rushing to trade out their USDT right now, and that people are willing to get less bitcoin for their buck if it means they can get real USD instead of USDT.

And then you have TrueUSD (another more transparently backed stablecoin) to Tether pairs. People have now started trading their USDT for TUSD at a 4-5% loss.

By extrapolating today's Tether market movements to an Augur-style predictions market takeaway, it looks like the cryptocurrency markets are collectively estimating that there's a 3-4% chance that Tether could collapse at any moment.

Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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