Traders flee Tether as uncertainty mounts

As Tether started to show signs of weakness two weeks ago, the USDT-to-Bitcoin prices on Bitfinex, Binance and Kraken started to drift higher than fiat USD-to-Bitcoin prices on exchanges like Coinbase. This "Tether premium" continued to grow until early Monday morning (UTC), when the difference in BTC price between USDT/BTC and USD/BTC options, peaked at $900 USD as panicked traders swapped the ailing stablecoin for Bitcoin en masse.

The Tether time bomb

As the first popular crypto substitute for the greenback, Tether has an outsized influence on the crypto economy — trading $2.3 Billion in 24 hour volume, compared to only $9.4 million from its closest competitor TrueUSD.

Ongoing concerns over auditing, and recent problems with banking, have led to intensified speculation on the legitimacy of this stablecoin. The questioning has been led by commentator Bitfinex’ed, who published an article (since removed) on Medium two weeks ago accusing Tether’s partner firm Bitfinex of insolvency.

This was prompted by the disabling of withdrawals and deposits by the exchange after their relationship with Noble Bank broke down, and a potential partnership with HSBC began to look unlikely. Unsurprisingly, this situation didn’t sit well with investors, and Tether fell from its dollar peg to trade in a channel around $0.98, causing Tether-traded Bitcoin to print one to two percent higher prices on Tethered exchanges.

Bitfinex have since restored deposits and withdrawals, and Tether have attempted to quell the FUD by issuing a memo claiming that all coins in circulation are fully-backed:

"Tether is the leading provider of tokenized fiat currencies and is listed on many exchanges worldwide. We would like to reiterate that although markets have shown temporary fluctuations in price, all USDT in circulation are sufficiently backed by U.S. dollars (USD) and that assets have always exceeded liabilities. In June 2018, a report from Freeh Sporkin & Sullivan, LLP (FSS), based on a random date balance inspection and a full review of relevant documentation of bank accounts, confirmed that all Tethers in circulation as of that date were indeed fully backed by USD reserves."

Despite these assurances, the stablecoin has yet to fully recover, and is currently trading at around $0.95 on Bitfinex. The continued discrepancy between reality and its intended value is in clear contradiction of the Tether website, which states that "USD₮ is always equivalent to 1 USD."

The Untethering

October is known for high levels of volatility in traditional markets, and Tether also experienced high volatility around this time last year — dropping to $0.90 on the Kraken exchange before traders rushed in to buy. At the time, analysts attributed the short-lived decline to a rapid sell-off in favour of a bullish Bitcoin.

Issues of transparency have long threatened to topple Tether’s dominance, but the recent launches of fully-audited alternatives — like Gemini USD and Paxos — have made the stablecoin even more vulnerable.

As traders fled Tether on Monday morning, these new options provided safe harbour. Tether’s closest rival, TrueUSD, hit fresh highs as Tether fell, gaining 0.6 percent, a rise matched by rival dollar stablecoin PAX that was launched only last month. As of writing, both PAX and TrueUSD are still trading at a premium, while Tether is still struggling to push back up to the one dollar mark on Bitfinex.

Asked when Binance would be launching TUSD and PAX markets, CEO Changpeng Zhao said that the exchange was only waiting for more people to take advantage of the arbitrage opportunities available, which would boost the market-cap to a point where adding other stable coin trading pairs would be feasible.

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