Tether Falls, What Is Next?

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The sky is falling in Crypto today because its biggest stable coin has lost its peg to the dollar. Tether USDT, long claimed to be backed up by millions in fiat reserves, is no longer trading at a dollar, currently sitting at $0.966.

A mere three and a half cents off of its normal price might not seem like a big deal to outsiders, but it is. Tether is supposed to be pegged to one USD. Without that stability, it loses its main selling point and could quickly lose the confidence of investors.

While every situation is unique, losing investor confidence has sounded the death knell for previous attempts at a stable coin.

NuBits is hardly talked about these days but it was the crypto world’s first “successful” stable coin. From September 2014 until June 2016 NuBits stayed around one US dollar, give or take a cent. On June 7th it fell to $0.96, which wasn’t that far from its normal variance but was enough to erode investor confidence. June 8th it fell to $0.90 and then by June 9th it had entered free fall, hitting $0.63. by the 18th, it had hit lows of around $0.21.

Somehow, NuBits managed to recover. In September of 2016 it clawed its way back to around the $1 mark. But it was a short lived victory. In late 2017 as rumors of a Bitcoin Christmas crash circulated, investors started jumping back into Stablecoins, including NuBits. Its marketcap jump dramatically and it started seeing short lived spikes in price, up to $1.43. While most coins would welcome an increase in price, for a stable coin it is almost as concerning as a downtick. It is not clear if that is what caused the lack of confidence but in March of this year, interest In NuBits dropped and so did investor confidence. The price quickly followed. Whatever the cause, people started leaving NuBits and it’s blockchain voodoo algorithm was unable to keep up. Its price tanked to around $0.25 and has yet to recover.

Now you might be thinking that NuBits recovered from breaking its peg once, perhaps Tether can as well. And you wouldn’t be wrong in thinking that but there is one problem: This is Tether’s second break. In April 2017, Tether USD fell to $0.92 before eventually recovering.

There are differences, of course. Tether’s first price drop was short lived, lasting from late April to late May. By contrast, the first NuBits break lasted from late May to late September 2016, four months. The rest of the industry is also tied up in Tether. While the collapse of NuBits was felt, most obviously among the traders who used it as a hedge. But Tether is the creation of BitFinex’s top executives and they have  a lot of their wealth tied into it. Biannce and Kraken also both have hundreds of millions of dollars tied up in Tether. If Tether were to collapse, it could bring down three of the industry’s largest exchanges. Even if these exchanges manage to survive, any drop in Tether’s price it would undoubtedly reverberate throughout the industry.

That works both as an advantage and a disadvantage for Tether. It will have some powerful forces working to prop it up. But its potential impact is likely to make investors more nervous and as we saw in the case of NuBits, a lack of investor confidence can bring the whole thing down.

A key point will be when Tether Inc. supposed reserves are tested. Tether has long claimed that each unit is backed up by a real dollar. But the company has never been officially audited and Bitfinex allegedly had issues with its banking partner Nobel Bank before switching to HSBC. It is not known if the reserves were held at Nobel Bank or not. They shouldn’t be because Tether and BitFinex are technically different companies (despite sharing key leadership) but one can never be sure of anything in the crypto world. If Tether/BitFinex can’t reach its reserves or if the reserves were exaggerated, that could be a huge problem. There is undoubtedly going to be a bank run on Tether. How long it lasts and how significant it is largely depends on how long the price remains below a dollar.  If it becomes too much for Tether to handle and it collapses, its consequences are going to be felt in the industry for years. BitFinex is already showing shades of Mt. Gox with customer complaints on withdraws times and complaint tickets not being answered (though our own experiences have been fine). A Tether collapse would certainly exacerbate their problem to the point where recovery is hard to imagine.

In a related note, competitor TrueUSD has also broken its peg, in the other direction for about the same amount. It is currently trading at around $1.05. While that may seem like good news, it showcases that their control price levers may be unable to keep up with the increase in demand due to Tether’s fall. If that is the case it may indicate they wouldn’t be able to handle a similar downward trend in demand. The same can be said for USD Coin, the Circle created and Goldman Sachs funded stable coin is currently trading at $1.10. Circle has told me in an email that they have seen a 2,000% increase in use this weekend alone.

We will have more as it develops.