So assume Tether loses its peg. Worst-case:

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...

You say the price will explode. But is that explosion just the relative price of bitcoin and tether? Tether is dropping to 0 and so bitcoin price "explodes" because you are still comparing it to tether.

Correct. Price of BTC denominated in Tether goes up, price of BTC denominated in USD likely goes down, as a) Tether liquidates crypto assets to cover redemptions and b) people sell off their crypto assets due to uncertainty/fear in the market.

It is one step closer to shutting the doors on Bitcoin as an isolated financial ecosystem. Bitcoin-to-actual-USD is a trackable / taxable event. Whales avoid it like the plague.

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.

Aren't sales of Bitcoin for Tether taxable anyway?

> Aren't sales of Bitcoin for Tether taxable anyway?

Maybe in US, but not everywhere. For example in Poland where I live crypto to crypto transactions are not taxable.

In Germany selling crypto for fiat after year should be tax free. https://www.coindesk.com/policy/2022/05/11/germany-publishes...

Decentralized exchanges probably don’t give you the reports you need to do taxes even if you wanted to do them.

Can't speak for other countries but for Australians, yes, it's a taxable capital gains event.

You are assuming traders are being makpid about IRS compliance and reporting.

>whereas Tether is mostly backed

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).

In real engineering, you try to figure out what might happen if your system fails. In ‘financial engineering’ you assume failure won’t happen, and get caught with your pants down when it does.

" A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him." John Maynard Keynes

Nobody ever got fired for buying IBM / AWS / Microsoft

Isn't tether a way to redeem crypto that evades KYC (know your customer)? So if I am shady person getting paid in bitcoin, I can essentially bank in crypto and avoid the volatility of crypto assets without the institution I work with needing to check me out. It tether goes away (and presumably all other stable coins with them) wouldn't the utility of crypto be reduced for anyone avoiding the traditional banking system?

I don't pretend to know. I am asking if that might be the case.

It's almost impossible to say for sure. It could be anything from "the crypto market is shaken a bit, but quickly recovers" to "it leads to the downfall of the entire crypto ecosystem". Any more specific estimations are ultimately just a guess.

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.

When a market panics and people “sell” their crypto on most exchanges, what they are actually doing is trading them for tethers. If the tether then collapses they are entirely wiped out.

Tether is the de facto dollar. Hopefully most exchanges move off of it or at least have alternatives. I’m also wondering if it wouldn’t be the kind of catastrophe people were saying before

> What happens if Tether fails, realistically?

Well that would not be good for Bitcoin and the entire cryptocurrency market would it?