Analysis: Tether Worth Trusting?

Tether long read analysis

The whole crypto market has been turbulent over the last weeks. Under these circumstances more people start taking a closer look at existing projects and giving an eye to their blind spots and downsides. Tether has made its mark in this respect as the debates on it becoming more heated. Let us get things straight, whether the charges sounded are reasonable or it is just another FUD case.

  • Why Tether?

Tether (USDT) is a digital currency of the namesake company designed to become a crypto equivalent for US dollar. As the creators claim, each USDT is backed by dollar from the company’s account. Thus, you can purchase USDT directly via official site and conduct transactions among accounts with small commission fee. In addition to this, Tether maintains stable price which is a perfect plan B in case of bear market. But that is only a theoretical perspective. It is far more complicated and ambiguous in real life.

The point is that USDT is issued in bulk, not successively. If you look at the issue dates they always go after Bitcoin price shrink while issuing itself causes price boom.

Considering that up to 750 mln USDT has been issued since the beginning of this year, there can only be two possible causes for this situation. One is that Tether is used for buying Bitcoin not to let its price fall still more.

Another one is that people try keeping funds in USDT in the times of crisis and in doing so push up currency demand. So the company has to issue new coins in volume for holding stable one-dollar-price. Both variants are no significant threat for the market. Yet there comes another hot topic if USDT is USD-backed at all.

  • Bitfinex links

Since Tether's first days the project designers made no bones about company affairs with Bitfinex, the largest crypto exchange. However, the company’s director Phil Potter made controversial statements about Bitfinex influencing Tether: one day saying they are completely independent, another day claiming Bitfinex to hold Tether share majority. After Paradise Papers disclosure (big information leak on tax-haven business) both companies turned out to have the same management.

  • Was there actually USD involved?

Taking account of Tether market cap it is quite hard to believe any bank giving out $100 mln a day to some company. This poses the questions whether USDT is really backed by dollar. The only explanation is that Tether takes on loans at several independent banks, trades this money and pays part of the profit back as interest.

It was in November when Bitfinex canceled all contracts with its house bank Wells Fargo and has been working independently since. Of course, the exchange claims to have found another servicing bank yet concealing all possible information on it for some reason.

To avoid bank services Bitfinex made up an exciting plan: ultimately it functions as trading site for those who wants invest or withdraw funds from exchange. This means that if you want to withdraw $1000 from Bitfinex the system searches for, say, one person ready to invest $200 and two persons putting in $400 each and thus the so-called funds interchange takes place. The exchange itself is engaged mediately into transaction.

This inventive idea however works effectively only in the case when crypto market itself is on the rise or in slow stagnation at least and people keep on putting in and out funds in equal proportions. If Bitcoin finally bursts, the exchange will not be able to meet all output requests which may produce a disastrous impact. The scenario is not to Bitfinex’s liking too, so they just may possibly issue on thin air coins manipulating Bitcoin price.

  • Summary

After all, it is always up to you whether to invest in Tether or not. But if some day haters prove to be right about Tether having no backing, the scheme will finally crash and pull a good half of the market lower. So like in any other business just be ready to lose all investments dealing with cryptocurrency.