If not for stablecoin tether, this would have a been a pretty predictable week. On Monday morning bitcoin was finally about to drop below support. A big fat short loomed on the horizon.
But not for long. Just as I was brewing my morning coffee the price of bitcoin exploded. In about two hours it rose from cca $6,300 all the way to $7,800. After that, it plunged again, leaving wreckage all across the board. Many didn’t know what was happening. Panic, euphoria, fear and misinformation were the name of the game.
So, what happened?
Stablecoin tether untethered
After about two weeks of uncertainty, on Monday the price of a cryptocurrency called tether (USDT) started plunging. Instead of holding its 1-1 peg to the dollar, the so-called stablecoin tether fell to approximately $0.85. On one of the exchanges it even reached 50 cents.
This had repercussions across the market. The thing is, tether is supposedly used for at least a quarter of all Bitcoin trading. Some research puts this figure at three quarters but that has been more or less disapproved. Furthermore, one of the biggest bitcoin exchanges, Bitfinex, is closely intertwined with the company that issues tether dollars. Let’s look at this a bit more closely.
How does stablecoin tether work?
Tether Limited launched tether in 2014 by . Technology-wise, it exists by way of the OmniLayer, a software platform built on top of the Bitcoin (and partly Ethereum) blockchain. As per its whitepaper, tethers are created exclusively when fiat money is deposited to Tether’s bank. Each of the circulating USDT is supposedly backed by the deposited USD. In theory, one can convert them at will.
At the moment, there is only one company depositing fiat to Tether Limited’s bank vaults. It’s name is Bitfinex, one of the most important exchanges in the crypto industry. It is important to note that this exchange doesn’t really trade tethers. You can only get them if you want to move your fiat holdings elsewhere. In that case Bitfinex transforms your fiat into tether and sends it to other exchanges like Binance, Okex, Kraken and so on.
If you are not sure how to decide which exchange is right for you, don’t worry. We got you covered. Here are the important things you need to look out for when deciding on which exchange you’ll be doing your cryptocurrency trading.
The tether controversy
The level of integration between Bitfinex and Tether Limited was for many years only a speculation. Proper conformation of this came in November 2017, when the Panama Papers disclosed that both of the companies are led by the same people. Considering that Bitfinex is Tether’s only partner, they are de facto a unitary business enterprise.
However, such lack of transparency was not encouraging – especially given some of the questionable moves Bitfinex did in the past.
In the coming months, things only got shadier. A promised audit of Tethers accounts by a third-party still didn’t take place by the end of 2017. Also, in December 2017 both Bitfinex and Tether received subpoenas from the Commodity Futures Trading Commission. Furthermore, in February 2018 Tether terminated its relation with the auditing firm Friedman LLP. They claimed the auditing process was taking too long.
In light of all this, many started to doubt whether tether dollars are 100% backed by fiat dollars. Claims of printing tether out of thin air became a fixture in the crypto space. Consequently, the price of stablecoin tether was in fact rather unstable throughout the winter of 2017/2018. However, things calmed down with the coming of spring.
Why the peg – again – failed?
Bitfinex and tether already have a history of troubled banking relations. So, when in September news emerged that the bank they were using was in trouble. This was followed by reports in early October that that Bitfinex was having difficulties with customer withdrawals. On October 11th Bitfinex also paused all USD deposits. Crypto investors went into full alert mode.
These delays were probably due to the fact that Bitfinex was switching to another bank. However, the company was very secretive about all of this. Insolvency rumors were again on the menu. Trust in tether was diminishing fast. Consequently, the tether price of Bitcoin started to get significantly higher than its price in fiat. Even more, the price of Bitcoin on Bitfinex – where you can only trade BTC in a fiat pair – also went higher. Traders and investors were fast losing confidence in both the currency as well as the exchange.
The “stablecoin” tether drama
On Monday, the whole situation exploded. Suddenly, everyone was talking about it. A photo-shopped picture started circulating that Binance will delist stablecoin tether.
Suddenly, many people didn’t want to hold tether anymore. Others wanted to move their money away from Bitfinex. Both groups of people started mass-buying Bitcoin and other cryptocurrencies. This unexpected run triggered a massive squeeze on short positions and price started to rise even more. With such wild price movements people started panicking even more. The price pumped to $7,800 on Bitfinex and to $7,400 on Binance.
The price rise also happened on fiat exchanges like Coinbase and Bitstamp, but much less. Nevertheless, arbitrage bots and FOMO buyers pumped it to $6,750. Here entered the sellers. They seized the moment of panic, closed their longs and mass-dumped. Their bet was that the whole thing is overblown and that markets will calm down.
The markets did calm down. Currently, Bitfinex once again allows fiat deposits and its banking situation looks to be moderately stable.
A lot of people made very decent money out of this. One speculation is that the whole thing was an orchestrated event to manufacture volatility. However, there is another group that profited from this. To calm down traders and investors, a number of exchanges fast adopted other stablecoins – TrueUSD (TUSD), Paxos Standard (PAX) and Gemini dollar (GUSD). In hindsight, it looks quite likely that a new cycle of tether FUD was in fact manipulated by tether’s competitors.
What can we learn from this?
There are two things that a trader should always keep in mind. One is that the crypto market is a very risky place. Your funds – even if held in so called stablecoins – can lose their value in the blink of an eye. The intermediary companies in crypto are not held to account the way traditional financial service providers are. If we consider that the latter still manage to indulge in very questionable business practices, this means that large scale frauds in crypto are probably taking place as we speak.
The second lesson is that of staying calm. People who panicked and dumped their tether dollars into Bitcoin at $7800 lost a lot of money. I was also very anxious while all of this was happening. However, I remained calm. Only as tether returned near its 1-1 peg did I move some of my funds elsewhere. Even more, this was a great opportunity for arbitrage trades. On Kraken you could still sell tether for $1 while it was worth a lot less on other exchanges.
It is hard to say if the FUD was manufactured or justified. This article only scratched the surface and it still remains to be seen if Bitfinex/Tether conglomerate is truly as stable as it wants to be seen. For now, it is a good idea to keep your exposure to tether and Bitfinex minimal, just in case. Better safe than sorry.
Anyway, you know what they say. It’s never a dull day in crypto!