That same thing will happen if crypto has a major run. The exchanges already conveniently "go down" when Bitcoin dumps even now. Every single time, it's become a running joke. If we had a serious Tether blow-up or BTC move that would rock the boat, everything would get locked down and you'd have no way to buy back your Tether short for pennies on the dollar. When tril/billions are on the line, ain't no way you're getting your millions, especially in this unregulated wild west.
I doubt a run on tether would even cause a 50% drop in BTC price. Hope your account doesn't blow up when Bitcoin inevitably reaches 1 million per coin ;)
Sure, in the short term, unregulated markets can be manipulated.
But Tether's been around more than seven years, more than enough time for the "smart money" to profit by obliterating them.
You can sell Tether on Coinbase for U.S. Dollar deposits to your bank account.
The fact that Tether maintains its 1:1 peg to the dollar is a signal that maybe all the smart guys who have been confidently predicting its imminent and inevitable failure for the last seven years might be missing something.
> The fact that Tether maintains its 1:1 peg to the dollar is a signal that maybe all the smart guys who have been confidently predicting its imminent and inevitable failure for the last seven years might be missing something.
Bernie Madoff claimed that his scam started in 1991, though in reality it was probably much earlier. It didn't collapse until 2008.
Even in the cryptocurrency space, Mt. Gox took five years to collapse.
There wasn't a well publicized US federal indictment and investigation of Madoff and Gox, settled with a fine and no injunction.
I'm not saying Tether is clean or 100% funded, I don't know. But unlike Madoff and Gox, accusations have been very loud and very public for a very long time, and the market still accepts USDT at parity with USD.
If Tether's treasury is empty, and if people can freely trade USDT for USD, it wouldn't hold 1:1.
Check this guy: https://en.m.wikipedia.org/wiki/Harry_Markopolos
The question of a collapse is when not if.
How would the smart money profit from obliterating them? If you’re referring to a Soros/GBP style trade, how would one borrow enough USDT to pull it off?
Presumably, people who hold hundreds of millions of the stuff are well aware of every accusation made against Tether.
If they wanted to, they could trade their USDT for actual US fiat on a 1:1 basis if they thought USD was worth more than USDT.
The really smart money with large crypto stashes could borrow USDT with crypto as collateral, and trade the USDT for greenbacks.
Have you looked into the mechanics of this trade? The crypto loans I'm aware of are all significantly overcollateralized. You would have to pledge say 1m BTC to get 0.8m BTC worth of USDT which you could then sell for dollars. If you succeeded USDT tanks, everyone who holds USDT would be rushing for the exit, wiping out the crypto you pledged as collateral also. So you succeed in losing 20% of your money on the initial USDT trade and almost all of the value of the crypto assets you pledged for the loan as well.
These markets are nowhere near as flexible and liquid as regular fx - I would be amazed if you ended up making money overall on this kind of strategy and the execution risk is significant.
Presumably the value of Tether would drop much farther than the value of other crypto.
If USDT drops 90% and BTC drops 50% in USD terms, the BTC would gain value in USDT terms and your loan would be even more overcollateralized.
Then you could pay back your loan with USDT at ten cents on the dollar and make an absolute killing.
Love to hear this.
1)In normal FX markets the amount transacted goes to trillions of USD per day, and liquidity at the touch is very high. So if you need to unwind a position there will be people who will take the other side and the market won't move much even if you're trying to unload a lot of a single cross.
2)In equity markets (which I'm a little more familiar with from a microstructure point of view) a single large market participant like a big broker/dealer will do more than a billion client orders on a busy day (when you add up the orders they do internally and all the child orders from executing trades in pieces). If you wanted to do a billion transactions on the ethereum blockchain at the current throughput it would take you almost 2 years, and no-one else would be able to do anything. So making a lot of trades fast isn't really possible.
Obviously chains like solana would help this a lot, but the point remains that in the current defi ecosystem markets aren't very resilient because they can't react as fast and they don't have the kind of depth of liquidity that conventional markets have.
So I suspect there’s not much overlap between people who believe they could break tether and people sitting on a large crypto stash to use as collateral.
- borrow a ton of USDT
- trade it for USD on exchanges, eating away at organic demand as well as the reserves used to keep the peg
- eventually (presumably) the peg will break and the price will collapse, and you can buy back the USDT for cheap to repay the loan
The trouble is getting that USDT-denominated loan, though.
Personally I'm really really confused about who holds all that Tether. Just who is it? I can't come up with any good idea. Is it the exchanges? But if so then why would they?
I did create a synthetic tracking portfolio to keep myself accountable to the bet over time, though: https://twitter.com/paulgb/status/1453111218374389763
If the Fed prints another trillion dollars tomorrow, their stock price could double, wiping out your short...
That, of course, would not happen. Even if there were such an event you'd still see people trying to beat the clock and mass liquidate the old BTC while there's still demand, or people immediately liquidating their positions in "new BTC" because they think it's not going to eclipse "old BTC".
We have a good real world example of these very things happening with things like BCH and Ethereum Classic still trading quite regularly. Both were the result of some users deciding to move to a fork and some deciding to stay. In traditional markets you could make some parallels with a stock split or demerger.
The big risk in your play is that the crowd in a panic will select another stable coin for going on the sideline IF AND ONLY IF such a coin is available. If not they will buy the most stable non-stablecoin which is ... drumroll ... bitcoin.
Of course, long-term effects might be different.
To this point specifically: is there any proof this is malicious? Amazon, Facebook, Google have all had outages before; shouldn't we apply Hanlon's Razor when a cryptocurrency exchange fails to serve requests during a massive traffic spike?
Further, an honest exchange makes money on people’s trades. Going down when volume is high means giving up peak profits. Equivalent of amazon reliably going down on black friday.
First and most importantly, the crypto market can drop 15-20%+ in a 24 hour period; similar rises take multiple days on high-volume, large-cap coins. This is actually not specific to cryptocurrencies, there's a well known phrase in the equity markets "bulls take the stairs, bears take the elevator (or 'the window')".
Similarly, with such volatile assets, when the price falls dramatically, many people are running for the exits. On the other hand, when the price is skyrocketing, many people have a "hodl" mentality, think the price will rise up further, etc. If the price falls off a cliff everyone is trying to sell, but when the price spikes many feel "I missed my chance, better wait for a dip" and aren't rushing to buy.
Making a robust exchange is hard and requires an amazon level of development. Huge movements in price correlate with massive increases in volume. The simplest explanation remains firmly in the realm of poor platform, in my mind, rather than nefarious and illegal manipulation.
Just look at Robinhood. They offer a sleek looking product, but their crypto offering falls down under load (positive and negative) regularly.
[1] http://rekt.news
Like, this happens with currencies that are pegged to the dollar. The government that's supposed to be maintaining the peg starts to run out of dollars and starts limiting dollar redemptions. People turn to the black market to obtain dollars. The price of a dollar (in that currency) goes up. The value of the currency (again in dollars) drops. Now the peg is broken.
Tether the company could walk into the sunset with whatever they're holding- they can just honor "friends and family" withdrawals, but that doesn't prevent the coin going to zero for everyone else. It actually makes it even worse for the currency: suppose it's collateralized at 50%. Tether could honor withdrawals at 50 cents on the dollar, force every holder to take a 50% haircut. The price might settle to something less than $1 but more than $0 and continue on.
But if they abscond with the money instead, the currency will have even more reason to drop to nil.
Individuals will be told they're not customers by Tether (this happened on Twitter a while back, someone set out to prove you could and Tether stonewalled them, so he deleted his account). They're offered a piddly USDT:USD market pair on a few exchanges, like Coinbase and Kraken, as a distraction. There, they can sell their USDT to folks trying to buy it (for instance, to fund a DeFi position) or the exchange obo Tether, Inc. to keep the charade going.
Only institutional parties like exchanges, Alameda and Cumberland are "deemed customers" and they'll never redeem because they know they can't.
Everyone's in on this. I think only a court-ordered exchange liquidation could possibly end the game, like a Binance collapse for instance.
I just don't see how Tether refusing to honor redemptions makes it more resilient to a run in progress, rather than less. If nobody wants to buy 1 USDT for a dollar, the peg will break all the same. If Tether stepped in as a buyer of last resort, that would make it more resilient- but if it doesn't, that worse for the peg, not better.
It's better for anyone with physical custody of the Tether assets I guess (they have a pile of gold to Scrooge McDuck dive into) but the currency is even more boned than if they'd propped the market up by buying Tethers back.
A 100% collateralized stablecoin that just hands everyone back their dollars if they ask can survive anything, a 50% collateralized one can spend a lot of it back into the market to prop the price up, at least for a while. But if Tether can't or won't, that's going to make maintaining the peg a whole lot harder!
I feel stupid, but I still actually don't. If considerably more people will want to sell it than there is a demand for it, the price will have to go down, no matter what, as long as "price" is anything more than a decorative label on the exchange's website and you actually can swap it for any currency at all. So, either the exchange should cover all that demand, which doesn't sound reasonable (I'm not sure it's realistic, and even if it was — why would they do that? if this happens, Tether is dead, they can either abandon it or go down with it), or there actually must be some demand. So, I assume it's the latter.
But why would there be any demand for it, if everybody (basically) knows that USDT is a scam? It isn't the same thing as "SHIBA is a scam" or whatever, because even if everyone agrees SHIBA is essentially worthless, people are buying it to speculate, so it can hold onto a belief that others believe it will grow. You cannot speculate on USDT, since USDT cannot grow by definition, it's a stablecoin (and not the only one — there are others with better reputation). It can only crash.
So why doesn't it?
There are two ways this can be done. The first is to be a large holder of USDT already, one whose nominal position is greater than the entire reserve pile, and attempt to liquidate it in favor of USD (this is basically a bank run). Or you can artificially induce this by borrowing enough USDT and selling it to either soak up the entire reserves or induce others to do so as well. But Tether's reserves are probably substantial enough to make this latter option infeasible except for the very largest financial institutions.
Now the largest holders of USDT are those exchanges that immediately convert any USD you put into them into USDT. And so long as you don't try to withdraw that USDT for real USD, they're unlikely to sell any stocks of USDT they hold (in your name or in their own name). Effectively, this means that so long as there is a net inflow of hard currency into the cryptocurrency ecosystem, no Tether crisis is likely to happen. However, should there be a sustained net outflow... well, we'll discover who the equivalent of Lehman Brothers in the cryptocurrency world is.
But a longer term crypto recession would have a run on the exchanges, many would want to cash out, and the price isn't going to be stable
Even retail investors? Why do they hold a stablecoin that has any risk at all, with no upside? What is the retail investor’s end game here?
In each case no one believes it will collapse while they hold.
This is a highly risky activity pitched as not risky.
With centralized lenders (Nexo, Celsius, Blockfi) you sign over ownership of your crypto to them and hope they will meet their promises.
In Defi it’s programmatic. I am less familiar with the mechanics there. I figure there is massive risk when I see 20+% yields but do not understand the system.
Beyond that, you are correct of course!
But if "folks desperately try and exchange their USDT for something they can sell at a fiat-backed exchange" then surely the most desperate will be willing to take a haircut on their Tether to get out of it first, and then the Tether price collapses anyway, through some combination of the exchanges shutting down trading, drawing down their own collateral to maintain the peg (and then running out), and/or the exchange reluctantly allowing the price to float?
Like, the too-big-to-failness is definitely part of why it's still a thing, but that just means that the real buyer of last resort is other large crypto holders who don't want the ecosystem to collapse. That's great for Tether-the-company, and maybe good for Tether the coin, but it seems to me sort of distantly related to Tether allowing direct withdrawals.
There's an obvious mechanism for maintaining the peg if Tether allows large holders to redeem Tether: those holders buy any slightly discounted Tether, then hand it back to Tether and redeem it and keep the tiny profit. This will work but it's just Tether propping up the price with its capital with extra steps...
Being unable to redeem your USDT for dollars - regardless of reason (because Tether is out of money or Tether is refusing) - is what causes the run and the crash.
An entity that is holding a bunch of cash but refusing to honor IOUs it has issued will find that the value of those IOUs will rapidly approach zero. Permanently. Even if it laters starts honoring those IOUs, the IOUs have lost their utility forever and the price will remain at/near zero.
History has shown that this does not happen in crypto. Even for coins like Bitconnect and Confido that plainly turned out to be scams, there were still buyers long after the news was revealed. People like to bet on dead cat bounces, or some kind of news after the fact that redeems the coin.
I think what you mean is the Crypto-USDT pairs will go no offer (i.e. no USDT bid) as people turn to dump crypto against a fiat leg.
When you start using something like BTC as your unit of account and stop measuring your net worth with a shrinking fiat yardstick you'll realise this.
Fiat onramps will become less and less necessary. We'll hold everything in crypto and buy a bit of fiat from time to time when some backward merchant or hyperinflated backwater country requires it...
Luckily for Paolo & friends, their terms of service clearly state that they do not ever have to offer redemptions of USDT for dollars. Or even whatever IOUs and bits of string they may or may not have in reserve.
Out of all the stable coins its the most likely to withstand a "run" because they do not have to pay you if you ask. In fact if you're a US person, you're not eligible at all. If you're not a US person, it's at their discretion to deem you a "customer." Even if they do that, they can delay your withdrawal arbitrarily. Even if they don't do that, they can pay you out with whatever is actually in their backing. [1]
What would get destroyed in a run is every other crypto, as folks desperately try and exchange their USDT for something they can sell at a fiat-backed exchange. The Crypto-USDT pairs will quickly go no-bid, and as people rush for the narrow exits at fiat exchanges, prices will plummet.
[1] tether.to/legal