Tether's Mysterious Crash: Is The Money Really There?

Tether is a crypto, supposedly pegged to the dollar. On Oct 14, it fell to $0.86. Long-standing concerns surfaced again.

I will get to the new concerns in a moment, but first let's review how Tether works as well as the long-standing suspicions.

Please consider the Wall Street Journal April 12, 2018 article on the Mystery Behind Tether, the Crypto World’s Digital Dollar.

A fast-growing digital currency that claims to be backed by U.S. dollars has become a cornerstone of the volatile cryptocurrency market. The problem: There isn’t hard evidence the cash supporting it exists.

Unlike other cryptocurrencies that fluctuate wildly in value, one tether generally equals one dollar. This makes it a sort of digital-dollar substitute.

But Tether has never produced an audit showing it has the purported reserves. The company that controls tether maintains it has the reserves, yet it has never named the banks it uses to hold these funds, nor said where they are based and regulated.

Tether Ltd. marketed its cryptocurrency as a way to mediate the sector’s volatility—offering the safety of the dollar along with the speed and anonymity of a digital currency. The pitch worked. Tether’s market value has risen steadily over the past 18 months, to $2.4 billion from about $10 million at the beginning of 2017. That has made it a crucial link in the wider cryptocurrency market.

As a result, tether has become a key source of liquidity. At times this summer, tether has represented as much as 80% of bitcoin trading volume, according to research site CryptoCompare. When the year began, it accounted for about 10% of bitcoin trading volume.

Nearly half of tether’s trading volume is among just a handful of tether-accepting exchanges, including some of the market’s largest.

Red Flags

Since the inception of Tether, there have been a huge number of red flags. The WSJ mentions a few of them.

  • “There are a couple of forces in this market that if they failed, it would be catastrophic,” said Ding’An Fei, a managing partner at Ledger Capital, a digital asset investment firm in Beijing. “Tether is one of them.”
  • Chainalysis also found tether trading is increasingly concentrated among smaller, more speculative digital currencies, a sign it is being used as a tool of “pump-and-dump” schemes, in which traders hype an asset, causing its price to rise, before dumping it for a profit.
  • Tether trading in newer tokens such as EOS and NEO has risen to about 20% of overall tether volume, according to the report.
  • The Securities and Exchange Commission recently singled out tether in its rejection of a proposed bitcoin-based ETF, citing studies that raised the possibility that the digital currency is being used to manipulate the bitcoin market.
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