This is true for every pile of toxic crap that's ever been financially engineered.
The problem is the entangled financial health of the backer (in this case, Bitfinex and other crypto exchanges) with the backee (Tether). If creditors to the system (in this case, lenders to and customers of the exchanges together with holders of Tether) don't have transparency into the health of the nodes, a small crisis of confidence can prompt a run. (How do you know the parties are "well capitalized"?)
Critically, this can occur even if the original impetus was survivable. The opacity causes people to doubt the system's survivability, which avalanches into a run that no system can survive. Perversely, everyone knows this pattern, which increases the chances of small perturbations careening out of control. Add in that a crisis in any part of this system creates a systemic risk and the outcome becomes, as it's been across history, inevitable.
Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.
LOL yes I am assuming some sarcasm here. Sticking ones finger up to the man by.. holding cash equivalents in forms not eligible for FDIC insurance, yes!!
But tether only works if backed by well-capitalised entities, i.e. the Man, so you are sticking what?
Buy Iranian government bonds, Venezuelan government bonds, Bolivian government bonds, etc
Will you get a return? Not all that likely (not unlikely either) , but you would indeed be sticking it to "the man"
Buying tether? Ha heck no
I have a radical idea that I'm fairly sure would get me killed if I ever stood a chance of implementing it: A complete ban on all non-productive financial schemes. We have an entire parasite class that grown unfathomably wealthy while providing no real value to the rest of society.
The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this.
They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
That's been my personal conclusion as well but it led me to the next question of what # is the breaking point for these well-capitalized parties?
I tried looking at the size of other well-known collapses like Enron, LTCM, Lehman Bros, etc. LB reportedly had $700B in assets and liabilities before the underlying asset devaluation precipitated their cave in. Tether survived the recent de-peg due to trading shops like Alameda absorbing the free 1-5% with their cash flow, which I believe is also responsible for the recent 11% drawdown in Market Cap (I assume due to redemptions). That said I'm not really experienced enough to know how these backroom overnight liquidity issues get resolved.
My hunch is given the true global reach of the crypto market Tether could easily get to $nnnB or $nT before we experience a black swan event that results in a liquidity crisis. Assuming they survive these short-term recessionary pressures, my long-term prediction is we're just setting ourselves up for another roaring '20s again, with crypto eventually learning all the same fundamental financial lessons we did back then.
https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Opera...
Roughly half of USDT is circulating on Tron, which is a dead chain. This TRC20 Tether is almost exclusively used for inter-exchange transfers (since fee is capped at $1/transaction)
On Ethereum, USDC is now bigger than Tether. Over a month, Tether on-chain supply has dropped nearly 12% [0]
There's a nuance here.
If Tether IS full collateralized, then it does not matter since a run on Tether is by definition impossible.
If Tether IS NOT fully collateralized then it may or may not matter depending on the size of the run and the ability of Bitfinex etc. to contribute capital.
This is a ticking bomb.
Oh wait, I'm just getting word that Tether isn't a bank. I wonder what ratio you can have if you aren't a bank?
Weird to think about because I thought that it was very illegal to have an unregulated bank. Oh well, I'm sure nothing bad ever happened before bank regulation.
Crypto risks are highly correlated. The ability to bail out Tether is not a given.
This reads like the honest description of a Ponzi scheme.
As long as the originating parties, or newbie rubes, continue to prop up this sham it will not collapse.
More examples: Metamask, Moralis, Blockchain.com, Kraken, Binance
Doesn't that make Tether a fiat currency?
https://www.investopedia.com/ask/answers/08/george-soros-ban...
Nothing lasts forever, especially in cryptoland.
This is misleading. Tether has consistently traded between $0.998 and $0.999 between May 13th and May 20th. See https://coinmarketcap.com/currencies/tether/
Is it trading at 0.1% lower than it was before the Terra USD collapse? Yes. Has it "lost its peg"? No.
Completely. For context, "the Reserve Primary Fund broke the buck when its net asset value (NAV) fell to $0.97 cents per share" [1].
[1] https://www.investopedia.com/articles/economics/09/money-mar...
I am no fan of tether, but small fluctuations like this have always been normal for "stable coins".
A peg is a peg, it's supposed to be more or less certain.
the 'fee per fiat withdrawal' is 'The greater of $1,000 or 0.1%'
so it would theoretically make sense for the peg to be 0.1% off as there is no more profit from redemptions at that level.
This non-linear relationship is literally programmatically hard coded in the case of money markets such as curve.fi
Currently the largest money market pool (https://curve.fi/3pool) it has a 5:1 USDT:USDC imbalance. In dollar amounts, the pool contains $1b USDT and $0.2b USDC.
This 5:1 imbalance only gives way to a 0.1% de-pegg.
In the past the balance used to be perfectly 1:1 USDT:USDC. The fact that a multi-million dollar arbitrage opportunity still exist is worrisome.
Sidestepping the definitional issue, I certainly worry when a pegged asset trades at a persistent discount, even a small one, when it didn't before. A stablecoin should generally trade at a premium just as often as it trades at a discount. When one goes long periods without ever being above, that is a strong signal. And when everyone panics, that's exactly when it's too late to get out. You have to beat the rush.
Remember, even up until the morning of May 9th, the day of the real TerraUSD depeg, people made that exact objection. "Oh come, on being 0.1% off is normal for stablecoin." Indeed it is -- but not in a persistent fashion!
Disclaimer: I closed out my Tether longs last week.
That makes the peg loss seem significant
The $0.99 Only Store could do stable coin. You could even redeem your coins for items in the store!
There is more money to be made on the gravy train of providing liquidity for trades, yield farming, etc. than in trying to short Tether and potentially bleeding out before it goes bust.
Dai is an ERC20 token on top of Ethereum. It might be more accurate to say Dai is a stablecoin coupled to MKR (MakerDAO), a governance token. Dai is over-collaterlized.
https://makerdao.com/en/ https://developer.makerdao.com/dai/1/
Terra is a coin with ticker LUNA, and is coupled to a stablecoin UST. As I understand, LUNA/UST was under-collateralized and could not handle what was essentially a virtual bank run.
Tether is a centralized stablecoin that is also reported to be under-collateralized, but it has bridges and industry connections to the wider crypto market which has kept it from crashing and burning so far.
More importantly, DAI is overcollateralized using ETH and other coins. UST was algorithmically pegged to the USD with an implicit backing by Luna. DAI still technically has a depeg risk (e.g. if ETH has a flash crash of > 50% that it doesn't recover from) but the risks are much lower. It's _probably_ safe in the long term although my stablecoin of choice is USDC.
Its trading at $0.99974 and has gone over $1 several times just today and over the last week. Which definition of peg matters here? Its not causing mass liquidations in Defi platforms because it trades so close to peg, it is still redeemable for $1.00 if you are non-US and have over 100,000 units.
This article has percentages for everything except when they don't reinforce the universally negative view of tether.
Is there another source that is less invested to corroborate everything more accurately?
Its kind of stupid to observe something different and be seen as “pro tether”, but lets just stick to accuracy.
If there was no leverage, then yes, a 1:1 backed stablecoin would hold it's value.
EDIT: I mean the story here is far from clear, you also need to consider arbitrage bots that act between exchanges, etc. etc.
Let’s imagine that I have 1000 cans of beer in my warehouse and I give out 1000 tickets to exchange for a beer.
Let’s further imagine you have infinity dollars to “break the peg”. So you buy tickets, trade tickets, give them away for free after re-buying them… doesn’t matter. As many times as you want.
Everyone who has a ticket at the end can still visit my warehouse to claim a beer — no matter the financial manipulations you engaged in.
0: The tweet: https://twitter.com/patio11/status/1241551327743770624
The, ah, assertion: https://twitter.com/patio11/status/1241553311024603140
> I am materially wrong about the most consequential thing I've had to have a view on in 15 years. You should probably degrade your estimate of my ability to think through complex problems.
The prediction: https://twitter.com/patio11/status/1252584289486565377
which is a link to https://www.kalzumeus.com/2020/04/21/japan-coronavirus/ , which states, on April 4 2020:
> Japan will face a national health crisis within a month.
Of course, he then edited it with a framing in which he claims:
> The core result was correct.
> ...
> This prediction was correct.
So not only was he wrong, he refuses to acknowledge or understand how and why he was wrong. And continues to tweet hashes as though we should give anything he says any merit whatsoever.
Further, it's apparently a very common thing in cybersecurity circles (though I've worked in cybersecurity for a decade and don't recognize the idiom, but my experience is more in software dev than research), so I don't really get why he'd stop even if he got a prediction wrong.
There's a lot of doomsaying around it, but after seeing the crypto market shrug off the loss of Terra Luna without contagion or bailout ala GFC crisis, the fear may be overblown. Terra was backed entirely by hot air, whereas Tether is mostly backed. Wouldn't the net loss be similar or even less?
1. Anyone holding Tether tries to cash out. Whales and important customers are allowed to redeem USDT for USD at a 1:1 ratio. Tether sells its crypto and other assets to cover redemptions, driving down the price of those assets.
2. Eventually Tether limits the withdrawals.
3. You're stuck with Tether you can't withdraw. What do you do? Try to exchange it for BTC or ETH ("blue-chip" crypto), which you can then hold or cash out on an exchange that is USD- or USDC-denominated.
4. Any exchange with Tether-denominated crypto prices are going to see those prices EXPLODE as there will be no sellers of the crypto. So you'll see some sort of weird market where BTC on Bitfinex costs $500k but BTC on Coinbase costs $10k.
5. If you're still stuck with Tether, you lose all your money or everything gets tied up in court a la Mt. Gox.
EDIT:
Fun potential #6 - if you're holding crypto on an exchange with Tether exposure, they may not allow withdrawals. The holder of the private keys may seize your assets to cover their debts.
Not sure how likely this scenario is, but even Coinbase (about as regulated as it gets in crypto) recently admitted that its bankruptcy could wipe out user funds: https://fortune.com/2022/05/11/coinbase-bankruptcy-crypto-as...
By moving to a pseudo-dollar like Tether, market makers can hang out while they wait for a suspect better buy-in price in the future. Should pseudo-dollars go way, they actual-Dollar transactions get a taxable haircut. Additionally, the friction of going from actual-Dollar to Bitcoin increases.
Tether is effectively behaving as a crypto-clearing house with their pseudo-dollar.
I've not seem credible proof that Tether has even 50% backing, especially 50% backing in uncorrelated assets (since if the holdings are in other crypto, those holdings will likely all take a dive when Tether does).
I don't pretend to know. I am asking if that might be the case.
That being said, from an outside observer, the crypto market does not look healthy right now, and Tether is part of that. The safe guess is that the crypto market hasn't reached its low point yet, and its impossible to say if it will ever get back to November 2021 levels again.
Well that would not be good for Bitcoin and the entire cryptocurrency market would it?
https://en.wikipedia.org/wiki/Harvey%27s_Resort_Hotel_bombin...
There's definitely outflow. Tether's reported market cap peaked at $83 billion in early May, and now it's down to $74 billion. So at least 10% of Tether has already been redeemed. There are other major stablecoins now, so nobody has to use Tether.
This is one of those things that will look fine, until it doesn't. As has now been demonstrated several times, stablecoins have only two stable points: 1 and 0.
>"It is well-understood in the cryptocurrency community that Tether’s reserves are a polite fiction. If pushed on this, clueful members of the community, such as their co-conspirators, will (quietly) admit that Tether depends on a de facto guarantee of support from members of its consolidated group, such as Bitfinex, which can inject more equity at will.?
Can someone say what is meant but "its consolidated group"? Is this a loose alliance or something more formal?
Of course, panic would happen, but still. I think people would move on, forget, and continue believing whatever they want to
just curious to read counterarguments
It’s plausible that there’s less than $80bn of USD in the crypto market and so tether could well represent every single dollar available. I don’t know if I’d argue that is the case, but it’s certainly plausible — and so it’s easy to see how a collapsing tether could take down the entire market, or at least, represent a far greater threat than the ~5% it represents in market cap numbers.
it feels odd to speak about this scenario like it's a foregone conclusion.
The workaround is to put everything on exchanges, but then you've lost the decentralized nature of Bitcoin and you are back to just a central database owned by a company, AKA a bank.
Besides, Coinbase/Circle is already miles ahead in this race for institutional credibility.
https://www.cnbc.com/2022/05/02/greenwich-mansion-for-sale-w...
Legally though, the transaction still has to be recorded and taxed in USD.
The only unconditional claim I saw was that Tether will lie again. Am I missing something?
This one is a bit more interesting:
> Tether originally promised to back the reserves with cash in a bank account. This was a lie. It was a well-chosen lie, because the value of cash does not routinely fluctuate. Backing a fixed liability with volatile assets and a wafer-thin equity cushion would have the predictable result of causing the liabilities to become unbacked in many stressful situations for any of the backing assets.
What's interesting is that I'm not sure many banks would want to hold the cash, regardless of the source.
When a bank receives cash deposits it has to do something with it. The money doesn't sit as bank notes in a vault.
The bank has a problem. The cash becomes its own liability. The depositor can withdraw the cash at any time and the bank needs to fulfill that obligation. And a lot of cash means a lot of obligation. So the bank desperately wants to turn the cash liability it faces with a deposit into an asset (i.e., somebody else's debt).
How do do that?
Banks are highly regulated on this point, especially post-GFC. There aren't a lot of options. What they'd like to do is issue loans to high-quality borrowers at profitable rates. But if the quality of borrow is going down the tubes (it is) and interest rates are at historic lows (they were), they would rather not do that.
Treasuries are an option. But the demand for short-term treasuries has been so intense that yields have been driven down to absurd levels relative to other instruments.
All of which is to say that the very idea of a US dollar-backed "stable" coin may not be possible for any entity other than the US Federal reserve or the Treasury.
And this defeats the entire purpose for Tether holders. They can already park cash at a bank. They hold tether to be out of the US banking system jurisdiction.
And yet, users out there are holding a total of $73 billion worth of Tether.
Who are those users holding Tether? Who wants to hold Tether? What's the motive of Tether holders? What market need is Tether addressing, and how can that need be addressed while avoiding Tether's issues?
Doesn't DAI work toward basically the same market need as Tether, but in a way that's actually decentralized and actually has checkable reserves? Why don't people desert Tether for DAI?
If we held the industry that Patrick works in to the standards that Patrick wants to hold the crypto world to we would call all of them "scams". Basically every international bank has a long history of money laundering. Every single large bank is doing much more complicated and riskier things with their balance sheet than Tether.
I don't think they are scams but I don't think Tether is either.
In many ways this is just the crypto world leveling down to the level of sketchiness that the average large bank exists at. Which is really not a defense, I dislike those banks and I dislike and distrust Tether.
But I don't think the risks of some kind crypto solvency contagion event are even as high as what's going on in the traditional banking world right now and that is given that traditional banks balance sheets at least on the surface are in the best shape they've been in in a decade.
Any way tldr: I think Patrick is technically correct but framing the large picture according to a big double standard.
Since most of the USDT is owned by big exchanges who need it to provide liquidity and have no interest in crashing the crypto market, I don’t think this is likely to happen.
These events ultimately lead to the creation of the Federal Reserve for banks to participate in a semi-cooperative system that didn't devolve into save-yourself during times of crises.
The story here is that "unless there is a massive run" is actually a fairly common event.
I'm not saying that Tether the company is not shady. They should definitely be more transparent about what assets they are holding and their collateralization, but I think the risks of total collapse are largely overblown.
Tether is NOT a bank. They are not regulated and have no guarantee that depositors will be paid back. They promise a 1-1 backing and instead of people holding them to their promise their supporters desperately try to compare it to moderns banks.
No. Tether is not a bank. It is not doing fractional reserve banking. It is committing fraud. It’s that simple.
Tether is not a bank. Not in the US, not in the Cayman Islands, not anywhere. Everyone holding or trading Tether could be using a test network, and the monetary value of the token should be the same.
There isn't any real visibility into the balance sheet, but I'd guess most of the "collateral" boils down to margin loans issued at the exchanges, and since the house has the edge on those platforms, their ship stays afloat.
I think that at this point, these risks are priced in by the market (Tether is selling at a discount from USDC). If you disagree with the market, it is your speculation, and also an opportunity to get rich if you are right. For example, the FTX exchange offers Tether put options as well as the ability of shorting Tether, and there are many other similar products.
A FRB is a bank where deposits exceed liquid liabilities (cash), but do not exceed liquid plus illiquid liabilities (cash + investments).
When deposits exceed liquid and illiquid liabilities you can't operate as an FRB. Because you are insolvent.
But this is all irrelevant, because Tether isn't a bank. Your bank promises that you can withdraw your deposit. Tether does no such thing - it provides withdrawals as a courtesy. If Tether doesn't feel like letting you withdraw, it's not going to let you withdraw.
If we take a step back and look at the key takeaway from the audit report is that amount of commercial paper was reduced and amount of T-bills (essentially cash) was increased by 5 bil. Good news if you think solvency is an issue, but of course they're all scoundrels eh?/s
Tether might have done shady things in the past as the article, but the scale to which Tether operates now (10s of bllns), in addition to scrutiny from SDNY, external audit, etc mean that Tether from before is much different from the Tether now, and it has pulled off the made it portion of "fake it till you make it".
As long as the US government itself doesn't try to destroy them again - in few years tether is going into hundreds of billions.
Actually, come to think of it, Tether does claim to publish asset and liability totals (if not breakdowns) in near real time, so let's see how it's doing. And, surprise, Tether somehow still has just $160 million in extra assets over liabilities. In fact, between the attestation date of March 31, 2022 and the latest update as of last night, this buffer has changed by just $186. That kind of performance is... well, not credible.
They gave nearly a billion dollars to someone without a contract. That's a higher level of stupidity than just "we used a shady banking partner because we had no alternative".
