The tether scares the experts: it may be the real ‘black swan’ of cryptocurrencies

tether scares the experts

Within the volatile world of cryptocurrencies, almost all references are to bitcoin or famous pairs such as ethereum or the friendly dogecoin. But little is said about tether, the third-largest cryptocurrency by market capitalization (62,000 million dollars), the first by volume of daily operations (52,000 million dollars a day, almost double that of bitcoin) and a great fear right now for the analysts scrutinizing the universe of digital currencies.

Since it is not so media, the first thing is to introduce the tether. It is stablecoin or digital asset linked to a real world asset, in this case the dollar. Unlike the most famous cryptocurrencies with their crazy price swings, these stablecoins have the characteristic of having a relatively fixed exchange value, although sometimes it fluctuates giving investors a headache. A tether token is equivalent, always on paper, to one dollar.

How did this stablecoin emerge? It is no secret in the world of cryptocurrencies that tether was launched between 2014 and 2015 by the exchange house Bitfinex through a signature of the same name to the token to irrigate the always delicate cryptocurrency market with liquidity. With the lack of dollars for the exchange, due in part to restrictions and the lack of regulations in this regard, these tokens, equivalent to one dollar, would act as casino chips to be able to get other cryptos, especially bitcoin. Recent data indicates that 70% of operations in this market are made with tether and only 10% with dollars.

When did the main problem arise? The always pristine theory dictated that Tether would back all these ‘tokens’ with dollar reserves. The reality was somewhat different: in repeated data publications it has been seen that its availability of cash or assets such as US Treasury bonds was well below the number of tether in circulation. In May the company revealed that only a fraction of its reserves – 2.9%, to be exact – were in cash, while the vast majority were in commercial paper, a form of short-term unsecured debt.

To make matters worse, if initially the company guaranteed the exchange of dollars for tether but also the other way around, shortly afterwards it began to put up obstacles so as not to ensure the delivery of dollars in exchange for tether. When it was seen that dollars were entering the firm but did not come out with the same fluidity, suspicions were heightened. In practice, users receiving tether could only really use it to buy other cryptocurrencies.

A review of the newspaper library makes it clear that when there have been strong increases in bitcoin, previously there has been a large issuance of tether. That is why this cryptocurrency has been identified as the ‘Central Bank’ of the others under repeated accusations of having served to manipulate the bitcoin market, the true king of digital currencies.

The suspicions, of course, have ended in court. In April 2019, New York Attorney General Letitia James filed a lawsuit accusing Bitfinex of using Tether reserves to cover a loss of $ 850 million. In February of this year, he stated that Tether had lied about its reserves to cover losses.

Concern among analysts

All this context, summarized in the worrying possibility of creating false liquidity, has alerted some experts who no longer hesitate to point to tether as the true ‘black swan’ of this market and even of others. J.P Morgan analysts have warned that a sudden loss of confidence in tether could end in a “severe liquidity shock for the broader cryptocurrency market.” They also affect the risk that a sudden spike in tether withdrawals could lead to potential market contagion, affecting assets other than cryptocurrencies.

In June, the president of the Federal Reserve Bank of BostonEric Rosengren, sounded the alarm about the tether, calling potential risk to financial stability. “These stablecoins are becoming more and more popular. A future crisis could easily be triggered as they become a more important sector of the financial market, unless we start regulating them and making sure that there really is much greater stability in what is being traded. to the general public as a stablecoin, “he said during a presentation.

Last week, rating agency Fitch warned that a sudden mass write-off of tether tokens could destabilize short-term credit markets. “Stablecoins that use fractional reserves or adopt a higher risk asset allocation may face a higher risk of execution,” they warned from the US agency, reports CNBC.