Prologue: I am confident that Bitcoin and other cryptocurrencies will survive the upcoming strong correction. I don't believe people who claim Bitcoin is a pyramid scheme or that there's no tech behind crypto. There is real value to many cryptocurrencies, but the more than 900 coins currently available that can survive the correction is probably few and far between.
Let’s start this by fully understanding what Tether claims to offer with it’s token – directly from it’s website:
- Tether converts cash into digital currency, to anchor or tether the value to the price of national currencies like the US dollar, the Euro, and the Yen.
- 100% Backed
- Every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USD₮ is always equivalent to 1 USD.
Though this may sound reasonable at first, and on a smaller scale may be possible, it implies that Tether has reserves somewhere, lined with $1.5 billion in cash. Even banks don’t promise a 1-1 backing of your US dollar – and Tether Ltd., located in the Cayman Islands, operated by the same folks that brought the world Bitfinex, without a single audit under their belt certainly will have trouble proving such an incredible claim. If it sounds too good to be true, it probably is.
As you continue to read through the website, more astounding assertions are laid forth:
- Seamlessly move currency between exchanges and wallets
- Offer your services in a variety of digital currencies
- Be the custodian of your own funds and eliminate exchange custodial risk
- Price goods and services in a currency your customers are familiar with
Unfortunately, the promises they make is where the good news comes to a crashing halt. Here’s where it all gets weird.
How’s Tether Work?
If everything is as Tether says, they’ve bought up over a billion US dollars and are letting it sit in reserves, or banks, accruing interest. That’s a beautiful sentiment, but it doesn’t hold water.
The legal section of the website is admirably brief. Why is it so succinct? Because it absolves them of any responsibility, very quickly. Here’s what the legal section lays out:
- Tether Tokens may be used, kept, or exchanged online… Tether Tokens are fully backed by the currency or property used to purchase them at issuance.
- Tether will not issue Tether Tokens for consideration that is other Digital Tokens and will not redeem Tether Tokens for other Digital Tokens; only money will be accepted upon issuance, and only money will be provided upon redemption.
- The right to have Tethers redeemed or issued is a contractual right personal to you. Tether must and does at all times reserve the right to refuse to issue or redeem Tether Tokens, without limiting the generality of the foregoing…
- Tether makes no representations, warranties, or guarantees to you of any kind. The Site and the Services are offered strictly on an as-is, where-is basis and, without limiting the generality of the foregoing, are offered without any representation as to merchantability or fitness for any particular purpose.
- Furthermore, residents of certain U.S. states are not permitted to be customers of Tether; are not permitted to cause Tethers to be issued or redeemed; and, are not permitted to hold Tether Tokens. Beginning on January 1, 2018, Tether Tokens will no longer be issued to U.S. Persons.
They even manage to make sure they’re not held liable for lying to you:
- Tether assumes no liability or responsibility for… any claim, application, loss, injury, delay, accident, cost, business interruption costs, or any other expenses… related to… any inaccurate, misleading, or incomplete statement by Tether or on the Site regarding your account, whether caused by Tether’s negligence or otherwise
Furthermore, Tether has never had a proper audit done – though they’re happy to state that a Taiwanese Accounting Firm published an audit on them in Mandarin. Cool story, but no one seems to be able to get their hands on this so-called audit, and there’s no unverified audit that Tether has claimed for years. Question: Where’s the $1.5 billion? Answer: No one knows.
Problems and Legal Loopholes
As Tether addresses in its legal section, US citizens are not allowed to purchase or use Tether. Fascinating to think that Tether is somehow getting their hands on billions of USD every time the crypto markets take a dip then, isn't it? In an extraordinary feat of taking advantage and manipulating the hell out of a market, Bitfinex (a crypto exchange owned by many of the same individuals who brought the world Tether) & Kraken are the only crypto exchanges that allow individuals to exchange Tether into USD. They also don't allow US citizens to use their exchanges any longer. Since November people have been reporting accounts of Wash Trading taking place via use of Tether.
On top of this, Tether offers no value in the sense of blockchain technology or use. No citizens of the US (where the US dollar is used) can utilize Tether, the network is entirely centralized, and Tether can print more Tether whenever they feel so inclined (almost always during dips). They've printed over 700 million Tether in January of 2018 alone. Worried? Troubled? Scared? You should be.
Are There Arguments For Tether?
Yeah - and they're the same arguments for why the Federal Reserve exists, why banks and financial institutions somehow make money, and why we value the dollar the way we do: consumer confidence.
Despite the fact that this argument goes against everything that made cryptocurrencies valuable in the first place, we can pretend it's valid. Consumer confidence still requires real assurances. The problems with Tether become more apparent with lack of disclosure - nothing can be verified, and nothing is promised. So where should the confidence lie? People may hate banks, but regulations require reserves, audits, and insurance. What does Tether need to back it's 1-1 USD peg? Absolutely nothing. Reddit user SeveriorumPatrem put it best:
I wish I could create and print a new crypto without circulation limits, self-state what its value is, and then start trading it for other coins. I would summarily not care what happened to the value of my self-printed crypto after I bought 2 billion USD worth of other stuff, because hey, I'm not holding those bags any more.
Am I oversimplifying this?
Spoiler Alert: He isn't oversimplifying it.
What Happens Next?
Crypto markets seem to be anybody's guess these days - right? To a certain degree, that's true, but with the democratization and decentralization of marketplaces, comes faster revelations regarding scams, schemes, and lies. It took Bernie Madoff decades to be discovered, HerbaLife is somehow still in existence - but the latest Ponzi Scheme in the cryptosphere, BitConnect, took all of a year to disintegrate. The survival period for clear, blatant scams in the world of crypto is short. People have been calling out Tether for months, and it's only a matter of time before this tumor on crypto gets surgically removed.
Tether will soon be the most utilized currency in the marketplace, and you better believe questions will quickly arise. And once the flood of questioning begins, the game is over. Tether will either suspend trading, no longer back the 1-1 ratio, or vanish altogether (with the guise of a "multi-exchange hack"). Confidence in crypto will vanish, and people who have been calling for Bitcoin to revert to $6,000-$8,000 will stop looking crazy.
What Do I Do?
I'm not a financial advisor and never claim to give financial advice. I will tell you that regardless of whether the Tether situation plays out tomorrow or in months, when that house of cards comes crashing down, it will be horrible - and the longer the cryptosphere waits to address it and props the market up with fake injected wealth, the worse it will be. I strongly believe in doing your own research. Personally, I've moved my capital out of most cryptocurrency and AS FAR AWAY AS POSSIBLE FROM TETHER.
Think that the nearly "$2 billion" in Tether isn't a big deal because the Market Cap for crypto is 500+ billion? You're wrong wrong wrong.
I am bearish for the foreseeable future in all cryptocurrencies.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.