Is Tether, the Most Popular Stablecoin, the End of Crypto Markets?

The most popular stablecoin, Tether, has always had a certain level of uncertainty and suspicion in the cryptocurrency community due to its lack of transparency. If the rumors are true, USDT tokens are not collateralized, which could cause a massive crash in the cryptocurrency market and create a domino effect far greater than USDT's $60 billion market cap.

Stablecoins have played a major role in the surge in DeFi and cryptocurrency trading. Instead of having to go through a bank every time they want to exchange their crypto for USD, users can use a stablecoin, a token pegged 1:1 to the USD, and effectively hold USD in their trading account without the hassles of US bank account regulation. Without stablecoins, cryptocurrency trading would be much more complicated for the average user, and it would be impossible to hold a stable asset while waiting for the right time to buy.

One of the best examples is USDC, created by Circle. They are very transparent, conduct monthly audits, and publish the results to the public. This transparency is essential in creating stablecoins because it assures holders that they are not simply printed out of thin air and that there is solid backing. This is why USDC has become one of the fastest growing stablecoins and is widely accepted by almost all major exchanges.

Tether was created by the Bitfinex exchange in 2014. Due to its first-mover advantage in the stablecoin space, it is accepted by almost every exchange and has been the most traded of all cryptocurrencies, with an average daily trading volume of $50 billion.

While it may seem that all stablecoins are created equal, this is far from the truth. Tether is extremely controversial in the cryptocurrency community due to their lack of transparency and accusations of propping up the market by minting USDT without the backing of U.S. dollars, printing money out of thin air to buy Bitcoin and other cryptocurrencies.

Throughout Tether’s 7-year history, they have been asked to prove that they hold appropriate collateral, but they have either refused to be audited or promised to be audited soon. Tether had never been audited before the New York Attorney General filed a lawsuit against iFinex, the company behind Bitfinex. In the audit conducted more than a year after iFinex stagnated, it was revealed that Tether had no bank accounts anywhere in the world before 2017, which meant that Tether’s billions of dollars were not backed by any tangible assets.

This view was further supported by a 2018 paper by John Griffin and Amin Shams, which claimed that the 2017 cryptocurrency bull run was driven by USDT.

Furthermore, the audit revealed that Tether now holds only about 74% of the required collateral, meaning that based on its reserves, each Tether should be worth $0.74 instead of $1. Another key issue is that these reserves are not even cash, but a variety of different financial assets that are not detailed in the report and may be composed of many junk assets.

Another piece of evidence against Tether comes from CNBC’s “Mad Money” host Jim Cramer and his skepticism of Tether. On his show, he pointed out that 65% of Tether’s holdings are commercial paper, and that they have been unable to disclose their holdings and are not recognized or known by other large buyers of commercial paper.

All of these issues could lead to a massive sell-off of Tether in the future, when holders realize that the asset is not what it seems.

If this happens, the consequences of the crash will far exceed its $60 billion market cap. At first glance, the main impact would appear to be wiping $60 billion from the total cryptocurrency market cap, which would not have a significant impact on a $1 trillion market. However, the more likely scenario is much worse: all Tether holders will start selling it, creating a $60 billion sell order on exchanges. Even the world's largest exchanges would not be able to withstand such demand, and the price of Bitcoin and other assets would likely plummet as the monetary instruments that support their prices begin to lose value.

While this may look like the beginning of the end for the cryptocurrency market, it is far from the truth. Getting rid of Tether while the crypto market is still relatively immature would be the best case scenario, as it ensures that any future growth in Bitcoin is purely due to honest investments, rather than price props. Ideally, Tether will slowly lose market dominance as people move to other, better stablecoins, and we will never see the asset crash. If it does crash, cryptocurrencies will certainly experience short-term volatility, but will be able to rebound stronger than before.