Why Crypto Traders Are So Worried About Tether
(Bloomberg) -- It’s one of the most hotly debated questions in the world of virtual currencies: Is Tether telling the truth when it says that each of its digital coins is backed by one U.S. dollar? The answer could have big ramifications, given that Tether’s coin (also called Tether or USDT) is among the most actively traded cryptocurrencies -- treated by many as a substitute for the greenback on crypto markets around the world. In October, USDT broke out of its historically tight trading range around $1, briefly falling as low as $0.94, fueling fresh speculation that investors may be losing faith in the coin. The following month, it emerged that the U.S Justice Department was investigating whether 2017’s epic Bitcoin rally was fueled in part by manipulation, with traders driving prices up with Tether.
1. What is Tether?
It’s an issuer of a cryptocurrency with a twist. Unlike Bitcoin, whose value fluctuates wildly from day to day, Tether’s tokens are designed for stability. Prices for the coins have historically stayed near $1 because Tether says each one is backed by a dollar in its bank accounts.
2. Why are the coins popular?
Many traders use them as a substitute for dollars. Tether’s coins are more easily transferable between cryptocurrency exchanges and other online platforms because they don’t have to travel through the banking system. Stable prices have made the coins handy instruments for betting on the direction of other cryptocurrencies.
3. Why are there skeptics?
While Tether has repeatedly said that its coins are fully backed by dollars, the company has yet to provide conclusive evidence of its holdings to the public. There are also questions about Tether’s relationship with Bitfinex, one of the world’s biggest cryptocurrency exchanges. Both have the same CEO. Some market watchers have alleged that trading in Tether’s coins on Bitfinex has helped prop up Bitcoin’s price. There are also questions about its viability. In an online post in October, Bitfinex dismissed allegations it was insolvent and said withdrawals were functioning as normal, acknowledging though that “complications continue to exist for us in the domain of fiat transactions.” To be sure, bank statements from late 2017 to early 2018 seen by Bloomberg News appeared to confirm some of Tether’s public comments, showing that it was backed 1:1 by U.S. dollars.
4. What are U.S. regulators doing?
The U.S. Commodity Futures Trading Commission sent subpoenas to Bitfinex and Tether in late 2017, according to a person familiar with the matter. “We routinely receive legal process from law enforcement agents and regulators conducting investigations,” Bitfinex and Tether said in January 2018. “It is our policy not to comment on any such requests.” The aforementioned DOJ probe is looking at how new Tether coins are created and why they enter the market predominantly through Bitfinex.
5. Why is Tether so important for cryptocurrency investors?
Despite their modest total market value of about $2 billion, Tether’s coins play an outsized role on cryptocurrency exchanges. They were the second-most traded among all digital currencies after Bitcoin as of Oct. 15, according to data compiled by CoinMarketCap.com. While there are many other so-called stablecoins, none have come close to challenging USDT’s popularity.
6. What’s next?
If authorities were to find any evidence of wrongdoing at Tether, or if traders lost faith in the company’s ability to redeem its coins for $1, USDT could quickly lose value. But only time will tell if the coin’s recent challenges represented a blip or the start of something bigger. “Tether’s stablecoin dominance will only persist if they can settle community criticisms about their lack of transparency once and for all,” said Jehan Chu, managing partner at blockchain investment and advisory company Kenetic Capital.
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