Recently, Bitcoin has found itself in an unusual market situation due to concerns over cryptocurrency’s largest stablecoin, Tether (USDT). There has been a mass exodus from its more than $2 billion market capitalization into Bitcoin and other altcoins. The panic yesterday caused Bitcoin to explode in price, jumping $600 or so on all exchanges with a premium on Bitfinex, where it jumped to as high as $7500 from $6200 in a very short amount of time.
What’s the reason for the current market panic over USDT? Although we have been here before with public concerns over the stablecoin, the USDT panic yesterday was significant enough to cause the stablecoin to drop far under $1, reaching as low as $0.89.
The fear is that USDT might not be what it claims it is. Tether claims that each USDT is backed by an actual dollar in a bank account. The stablecoin also has a special relationship with Bitfinex, which trades almost all its cryptocurrencies with the USDT. However, both Bitfinex and Tether have not been properly audited for their claims.
Bitfinex released a response on Oct 7th to the so-called “online rumors” circling around about the exchange’s insolvency. The recap of the article was that:
- Bitfinex claims it is not insolvent despite the stream of media articles claiming so. Operating since 2013, the exchange posted their cold wallets to demonstrate proof.
- The exchange claims that fiat and cryptocurrency withdrawals are functioning as expected.
- Any allegations regarding Noble Bank, the Puerto Rican bank that stopped working with the exchange recently, are not related to concerns over Bitfinex’s insolvency.
Due to the fallout over cutting ties with Noble Bank, Bitfinex had a temporarily suspend deposits which caused some panic in the markets. Today, Bitfinex released an update on its fiat deposit pause which had been going on for days and is still unopened. It seems that the suspension coincided with a Bitcoin premium on the exchange which found its peak last night.
The premium on Bitfinex indicates that Tether holders may be heading for the exit. Momentarily, the price of Tether crashed to sub-90 cents with the entire market rising as USDT was being emptied and money was pouring back into the rest of the market.
Interestingly enough, there has been some speculation that the collapse of Tether would bring about a short-term bull market due to all the funds in USDT likely moving to BTC. However, what would follow this short-term market increase would likely be extreme uncertainty which would be unhealthy for the market overall. If any problems with USDT spill over onto Bitfinex and their operations, then we could see this bearish market rout continue to deepen.
The only issue Bitfinex has publicly admitted to is in regards to its fiat deposits. In a statement on Oct 8th, the exchange said that “complications continue to exist” when it comes to fiat withdrawals and deposits, however this is an issue that is prevalent among “most” crypto-related organizations, they said.
Time for New Stablecoins?
The current panic over Tether should remind us that nobody is forcing us to use USDT, despite having a market valuation of over $2 billion. We have seen this year a flood of new stablecoins which should ease our worries.
Some exchanges have taken this uncertainty as an altogether reason to add plenty of new stablecoins, in competition with USDT. OKex exchange, for example, added TUSD, USDC, GUDX just today as panic over USDT rose. The USDT rout has also caused Binance’s other stabecoin, TUSD, to rise well-above its pegged $1, reaching a high of $1.24 at one point.
It is still possible, however, that Bitfinex releases a full audit soon and this panic subsides. The closest Tether ever came to an audit was a three-page memorandum they released in June. The report, produced by the law firm Freeh Sporkin & Sullivan, LLP (FSS), was not an audit but rather a legal testament to Tether’s claims as valid. Tether claims that a full-scale, traditional audit is not possible due to the unique problems within the cryptocurrency industry such as a steep learning curve, different accounting standards, and uncertainty over rules. In effect, Tether claims they went and got the next best thing — a legal memorandum.
Although the memorandum was produced by a major Washington D.C. law firm, it does not absolve Tether of any of the circulating rumors. Frankly, with so many already legally-valid and proven stablecoins on the market — such as the Gemini Dollar, regulated by the New York State Department of FInancial Services — ask yourselves, do we really need to trust Tether when other, more compliant options exist?
Given that there is no short supply of stablecoins, the cryptocurrency space should consider a possible replacement for USDT. However, this all starts with exchanges taking the initiative and providing more options for traders.