The cryptocurrency world, with its volatility, is all about FUD, which means fear, uncertainty, and doubt.
Nothing is generating more FUD right now than an unusual currency which is called tether.
Unlike bitcoin, as well as its many siblings, the tether is what is called a stable coin, which is an entity to not fluctuate in value.
With most of the cryptocurrencies that are prone to wild swings, tether offers people who dabble in the market the option of buying currency which its supporters say is bound to the US dollar.
To sell or to by bitcoin for dollars at a bank can be cumbersome, as well as costly; in comparison, acquiring tether is simple, as well as cheap and fast.
But, recently, a chorus of doubters has questioned approximately everything about tether.
The source of the discussion is whether the company behind it, which is also called Tether, tells the truth when it claims that every unit in circulation is matched by a US dollar it holds in reverse.
If the organization has a dollar for every tether that means that in theory, any owner can sell tethers to the same company for the same amount of dollars at any time.
This theory keeps the value of a tether tightened to a dollar.
Critics on Twitter, Reddit, in blog posts, and at a recent bitcoin conference have been demanding that the company prove its reserves through external audits.
But, not only has Tether failed to do so, last week it confirmed rumors that it had served ties with Friedman LLP, the accounting firm on tap to perform those audits.
On Tuesday, Bloomberg reported that the US Commodity Futures Trading Commission had sent subpoenas to Tether.
A Tether spokesperson said, “We routinely receive legal process from law enforcement agents and regulations, directing investigations.
It is our plan not to comment on any such requests. “The spokesperson declined another comment.”
If tethers are not supported by an even number of dollars, then it can print an arbitrary amount of money.
Some other cryptocurrencies, by contrast, create some new tokens according to strictly prescribed, predictable rules.
Some other problems ensue, such as doubts that Tether is measuring the release of new tethers to correspond with drops in the price of bitcoin and then using those tethers to scoop up bitcoins.
Some of the observers fear that these purchases are artificially inflating the price of bitcoin.
“It is also possible that a nontrivial rise in the price of bitcoin, as well as other cryptocurrencies, has come from this asset being printed possibly out of thin air, and that is very concerning, “says Jill Carlson, who is a former Wall Street trader that now invests in and consults for cryptocurrency startups.
If traders lose faith in the tether, they could end up triggering the crypto version of a bank run.
Tether helps in stabilizing cryptocurrency exchanges in different ways, so its failure could also cause some exchanges to topple, cleaning out billions of dollars of investment overnight and potentially undoing much of the growing interest of the public in new technologies such as bitcoin.
The front lines are the more than 100 exchanges where blockchain-based currencies are traded – some places with names such as Coinbase, Bittrex, and Kraken.
In 2017, some exchanges lost their ties to traditional banking partners or were unable to find new ones, making it even harder for speculators to sell their cryptocurrency holdings for dollars or other fiat money.
Tether grew popular in this climate, as it offered traders a way to escape the volatility.
They could buy tethers with some confidence which the currency world not suddenly plummet in value.
Signs of trouble start to emerge last spring when two big banks which had been supporting tether transactions – Bank of Taiwan and Wells Fargo – said they would not do that anymore.
The banks also said they would not deal with Bitfinex anymore, which is a cryptocurrency exchange which has top personnel – its CEO, CFO, chief strategy officer, chief compliance officer and general counsel, hold the same positions at Tether. Still, the company continued releasing new tethers and put them into an account on Bitfinex.
Instead of an audit, Tether released a document in September, purporting to substantiate its reserves, but with those names of its banking partners backed out.
Since then, the number of tethers in circulation has risen roughly five-fold, to about 2.28 billion, from 450 million.
In January only, Tether released about 850 million of new tethers.
The speedy creation of new tethers has fueled questions about the motives of the company.
One anonymously published statistical analysis of tether releases started to circulate through the cryosphere.
The report also suggested that in 2017, the timing of new tether releases has closely aligned with notable dips in the price of bitcoin – just as critics had been alleging, but now with some numerical heft to back it up.
The report also looked at some random samples of tether transactions after a new release, and it concluded that they violated Benford’s Law – it is a statistical principle which in numerical data sets, more numbers tend to start with 1 and then any other number, with a diminishing percentage of entries starting with 2, 3 and so on down to the number 9.
However, tether transactions show some different distribution, suggesting that “something ‘artificial’ in the vein of market manipulation.”
The author, who is unnamed, is described in an accompanying slide presentation as a “former Googler, machine learning/statistic,” which was funded by 1000x Group, which is a new “private community that is dedicated to finding the highest quality information in the crypto markets.”
If Tether has enough dollar reserves, these observations do not necessarily predict big trouble.
This is why a lot of observers are clamoring to see an audit. But, recently, it has been noticed that Tether and Bitfinex no longer appeared on the website of Friedman LLP; a few days later, Tether confirmed in an article published by Coindesk that the relationship with its author had “dissolved.”
The resilience of Tether amid these troubles underscores the important roles that it plays within the cryptocurrency trading ecosystem.
Sometimes, crypto exchanges purchase tethers to trade among themselves – and switch with too much litecoin may like to trade with some other exchange for bitcoin, for instance. Using tethers as an intermediary shield the exchanges from those currencies’ volatility.
Traders were also using it to move their investments fluidly from one exchange to another, as well as to engage in margin trading.
Tether still trades close to $1. But, if they lose confidence in it, as well as if its worth starts dropping, “people will run for the door,” says Carlson, who is the former Wall Street trader.
If Tether cannot meet all the demands of its costumers for dollars, tether holders are going to try to snap up other cryptocurrencies instead, temporarily causing some prices for those currencies to soar.
With the role of the tether as an inter-exchange facilitator compromised, investors may lose faith in cryptocurrencies more generally.
Emin Gun Sirer, a Cornell professor and co-director of its Initiative for Cryptocurrencies and Smart Contracts, said:
“At the end of the day, people will lose large sums, and in the long term, this would be very bad for cryptocurrencies.”
There is also another concern, and it is that Bitfinex might simply shut down, pocketing the bitcoins which it has already been stockpiling.
Because people that trade on Bitfinex permit the exchange to hold their money while they speculate, these traders could somehow face some substantial losses.
Tony Arcieri, a former Square employee that turned entrepreneur trying to build a legally regulated exchange, said:
“The exchanges are just like unregulated banks, and it could run off with the money of everyone.”
Whatever the precise chain of events, Sirer says: “I believe that we are at a running point with Tether.”
To some people, the loss of faith in tether is long overdue. Jackson Palmer, who is the creator of dogecoin and vocal Tether critic, says:
“I honestly thought that it would have crumbled a lot earlier, as well as have been consistently shocked at how long the façade has been kept up.”
Some skeptics of blockchain-based money may shrug, which is nothing that the victims are financial mavericks, as well as sordid dark web actors.
But, with people now taking out mortgages to invest in bitcoin, the episode of tether comes at a time when cryptocurrencies have entered the mainstream-potentially leaving the mainstream to foot the bill.
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