The last fortnight has been a nightmare for Tether (USDT) and Bifinex exchange. The two sibling companies have been trending for all the wrong reasons after a report on Bloomberg stated that U.S Regulators subpoenaed Bitfinex, Tether early December last year. This has had little effect on the ‘stable coin’ as it continues to record a high number of daily trades.
The coin is currently placed second to Bitcoin, higher than Ethereum, and Ripple, on the daily volume rankings on Coinmarketcap. The coin trades an average daily volume of $ 2,555,980,000 USD at an average price of $1 on various exchanges, as at press time (February 19). However, these huge amounts have raised suspicion amongst many of its critics who have come out strongly to question whether all this USDT is backed by actual fiat currency as is stated in the whitepaper. But does the lack of enough reserves pose a problem to Tether and other cryptocurrencies?
“Every USDT is backed up by real currency in Tether reserves. Every Tether is always equivalent to 1 USD.” Statement in Tether’s whitepaper.
Remember when Tether (USDT) carried out an audit? No? Me neither. No word has been given out on the issue since the company released the Friedman’s engagement report. This has put the stakeholders of the coin in even more doubt after these recent rumors. However, even with the ‘stable coin’ market cap is only 0.5% of the total market capitalization, it still has control over a great proportion of the market and that is why every cryptocurrency holder should be very concerned about these recent developments on Tether
Tether Limited, started in the Virgin Islands, offered USDT first in 2014. The cryptocurrency offers a decentralized platform on the Bitcoin blockchain that converts cash into digital currency and ‘tether’ their value to fiat currencies such as the US dollar, Japanese Yen and the Euro. Tether pegs to the US dollar at a 1:1 value, whereby owning 1 USDT is equal to 1 USD, at all times. With a current circulating supply of 2,217,140,814 USDT, Tether reserves claim to be holding an amount of over $2.2 billion which most do not agree to.
Assuming a 100% reserve of US dollars (applies to Euro and Japanese Yen), totaling to about $2.2 billion and a hypothetical case where all USDT holders wanted to redeem their coins at the same time, all will work well since there would be enough US dollars to offset the demand. However, if Tether had only 50% USD in reserves and all the holders wanted to convert to USD, then half of the holders would get the dollars and the others would remain with USDT that are backed by nothing rendering them worthless. A true showing that it is the fiat currencies reserves placed in Tether and the demand of USD is what will affect the long term growth of USDT.
“The very use of Tether is to allow conversion of digital currencies to fiat currency in an effort to provide stability in the field.”
Any case of Tether Limited holding a lower amount in reserves than the actual number of USDT circulating, will cause liquidity strains in the market of other cryptocurrencies. Imagine an instance where Tether announces it only has 35% reserves, how can this push the current prices of a coin like Bitcoin?
First of all, the very use of Tether (USDT) is to allow conversion of digital currencies to fiat currency in an effort to provide stability in the field. This revelation of a lower percentage of reserves can cause a sell rush in the market where most people will try to exchange their various cryptocurrencies to USD. Since only 35% of them can access the fiat currency, the rest of the USDT holders can only choose to trade for other cryptocurrencies on the exchanges that accept USDT for another cryptocurrency then obtain USD.
As more USDT holders wish to convert their USDT to USD, the lack of reserves will lead them to exchange the coin with another altcoin then further to USD. This increases the prices of these altcoins on cryptocurrency exchanges dealing heavy in USDT. Given that Tether plays a huge role on most cryptocurrency exchanges, including Bitfinex and Binance, the latter transacting close to $600 million worth of Tether daily, makes the impact of Tether on the crypto arena more fearful if the coin does not have the reserves needed.
As Tether (USDT) looks ready to do anything logical to maintain its place. It has even hired a PR firm to combat negative publicity that faces Tether (USDT) and throw in some positive vibes. For now though keep yourselves steady.