Bitcoin is crashing, but you probably already knew that. However, if you haven’t spent the past few weeks desperately refreshing CoinMarketCap (or one of the other sites that tracks the value of cryptocurrencies) you may have missed a shocking drop that’s erased much of the value built up over 2017.
Tether
It’s still unclear exactly what’s causing the price of Bitcoin to drop so rapidly (currently hovering at around $8000, down from $21,500 a month ago). Of course, it’s no secret that the value of cryptocurrencies can be volatile, but recent reports suggest that one particular currency could be responsible for artificially driving up the price of Bitcoin, leading up to this plunge.
Tether was designed to create stability in the cryptocurrency market, but it could bring it crashing down instead. Here’s what you need to know about the theoretically stable cryptocurrency that may not be stable at all.
What Is Tether?
Tether belongs to a family of digital currencies called “stablecoins”, the idea being that they’re pegged to something with real-world value. This helps keep the price stable compared to currencies like Bitcoin. In Tether’s case, each token is worth exactly one one US dollar, and the company behind it (also called Tether) claims to have $US1 in the bank for every token in existence.
Tether was founded in 2015. The company also has close ties to Bitfinex, a popular digital currency exchange based in the British Virgin Islands that’s been fined by US regulators in the past. Tether previously denied a direct connection to Bitfinex, but a New York Times report last November revealed a clear line between the two companies.
If you think all this is starting to sound a little fishy you aren’t wrong, but it’s about to get way worse.
Why People Think Tether Might Be a Scam
Questions about Tether’s actual value have been floating around for months, but the issue came to a head last month thanks to anonymous report titled “Quantifying the Effect of Tether“. The author argues pretty convincingly that Tether was used to prop up the value of Bitcoin. Basically, whenever Bitcoin’s price started to drop, a bunch of Tether tokens were spent on Bitcoin to push it back up.
[referenced url=”https://staging.lifehacker.com.au/2018/01/why-bitcoins-price-is-so-volatile/” thumb=”https://staging.lifehacker.com.au/wp-content/uploads/sites/4/2018/01/Charts-410×231.jpg” title=”Why Is Bitcoin’s Price Is So Volatile?” excerpt=”In 2017, Bitcoin’s value soared from $1200 to around $25,000 before dropping down to around $16,000 at the end of the year. Since then, it’s value has risen and dropped sporadically from day to day, dragging smaller cryptocurrencies such as Ether and Ripple along with it.”]
That wouldn’t be an issue if each Tether token was actually backed by a dollar, but what if it’s backed by nothing? Another report from cybersecurity expert Tony Arcieri suggests that Tether (the company) could be creating tokens out of thin air with nothing to support their value.
Meanwhile, Tether hasn’t exactly done a great job of proving it has the money to back up its tokens. The company claims to have over $US2 billion ($2.5 billion) in assets, but plans for an official audit with an independent audit firm recently fell through.
Until Tether can prove it actually has that money in the bank, concerns over the currency’s value (and its effect on the larger cryptocurrency market) will only get worse. That uncertainty could push Bitcoin’s price even lower, but the truth might be even worse.
What This Could Mean for the Price of Bitcoin
If these reports are correct and Tether isn’t actually worth what the company claims, we could see the price of Bitcoin drop even faster than it already has. According to that anonymous Tether analysis, Bitcoin’s value would plummet by anywhere from 30-80 per cent, falling as low as $2500 per Bitcoin.
For now, this is just speculation, and Tether still maintains that it really does have one dollar in the bank to back up each token that exists. According to the company’s website, “Tether Platform currencies are 100% backed by actual fiat currency assets in our reserve account.”
But if that isn’t true it could bring down Bitcoin – and the rest of the cryptocurrency market with it.
Comments
One response to “Tether: How A Cryptocurrency You’ve Never Heard Of Could Tank The Price Of Bitcoin”
This tether story has been around for months – and this article brings nothing new to the table and does not even attempt to explain how the tether mechanism works.
Every rubbish article on this topic always:
* Has an alarmist tone
* does not take the time to acknowledge that tether is created when USD is deposited onto an exchange and burned when withdrawn
* Only focuses on the idea that Bitcoin is the only cryptocurrency that benefits from Tether. The idea that tether could be used to buy Ethereum, Bitcoin cash, ripple etc is apparently unthinkable
* Ignores studies that show that the link between bitcoin prices and tether aren’t directly correlated and overlooks the fact that in a bull market, if the price pulls back of any asset – including shares, “new” money will try and enter the market to purchase the asset at a lower price on the expectation that prices will bounce back. In this scenario, of course more tether would be created as new funds enter the market and are exchanged for tether.
*Completely ignores that fact that the cash in your bank account or wallet right now is backed by nothing, just a government promise that it will pay you the face value if you ever present to the mint and ask for the funds.
* Does not dare mention that during the recent bear market where bitcoin’s price has been decreasing that Tether has not been created out of thin air to increase the price, as funds are actively leaving the space -but this doesn’t fit the narrative.
This article has very little actual research, and simply attempts to recycle alarmist click baity youtube videos or rubbish you will find on Reddit.
If you are worried about tether and its affect on your investments value, please do your own research, from both sides of the discussion. Don’t just listen to the first youtube video or half done article that you find and decide that the sky is falling. And if you feel that the sky is still going to fall, withdraw your funds now – don’t lose an hours sleep over this.
It’s going to be interesting,
I think crypto-currencies win either way, If it’s legit it adds confidence, if not we remove a bad actor from the market.
Will be a rocky road to get there though.