• Sun. Sep 25th, 2022

Is Tether going to collapse?


Jul 31, 2022 ,

Why people are betting big on tether crash?

Tether (USDT), the world’s largest stablecoin by market capitalization, appeared to be breaking its dollar peg following the demise of Terra’s UST stablecoin and the Celsius Network lending platform.

Following both occurrences, the price stabilized, with its CTO informing investors that the currency will continue to enable payouts.

Tether, which promises to equate USDT to USD at a 1:1 ratio, hit a low of $0.9485 on May 12 when UST collapsed. Although it has since been trading around $1, this slight volatility has raised numerous eyebrows.

This possibility will be discussed in this article!

The UST Story:

Tether (USDT) and TerraUSD (UST) are both stablecoins, which are cryptocurrency coins that are tied to another asset or currency, such as the US dollar. They are intended to let investors store funds in digital form without being exposed to the fluctuation of cryptocurrencies like bitcoin (BTC) or ether (ETH).

Stablecoin holders may use them to borrow, lend, and earn interest through decentralized finance (DeFi) apps.

Prior to the catastrophe, UST had a market capitalization of $18.7 billion, while the USDT coin was worth $83.24 billion and the USDC coin was worth $53.53 billion.

Tether’s value has since fallen to $74.12 billion, with USDC remaining at $52.78 billion and UST falling to $1 billion.

How UST Was Different?

UST differs from USDT and USDC in that it is an algorithmic stablecoin (a non-collateralized stablecoin that uses algorithms to maintain a steady value), whereas USDT and USDC are collateralized.

Regardless of the price, the UST algorithm employed an on-chain swap mechanism that swapped 1 UST for $1 of LUNA. This was intended to encourage users to swap UST for LUNA if the stablecoin’s value went below $1 and to swap LUNA for UST if the stablecoin’s price rose above $1, therefore burning part of the LUNA and lowering its circulating supply to sustain the price. The remainder was transferred to the company treasury.

The Anchor protocol, which rewarded holders 20% interest rate on deposits, fueled UST’s success. Terra, on the other hand, was subsidizing the 20% interest with corporate treasury money. Without users minting more UST and ramping up LUNA price, Terra would be unable to make the payments.

On May 9, investors began selling UST in order to push it to depreciate against the US dollar. As UST sales produced even more LUNA, the LUNA price soon fell, leading to hyperinflation.

The value of UST fell to $0.7934 on 12 May and has since fallen further, to $0.07601 on 19 May, whereas the USDT/USD price has stabilized. The Luna Foundation Guard, which had purchased bitcoin in response to complaints that the dual-token scheme was not collateralized, was forced to dump its bitcoin holdings in an unsuccessful attempt to stabilize LUNA.

The USDT Story:

When the New York State Attorney General investigated the tether token in 2019, it was suspected that “the operators of the ‘Bitfinex’ trading platform, who also control the ‘tether’ digital currency, have committed a cover-up to hide the apparent loss of $850m of co-mingled client and corporate funds,” and that the coin was not backed by US dollar holdings from at least June until September 2017.

As a consequence, Tether and Bitfinex agreed to pay an $18.5 million fee to resolve a disagreement.

Anders Nystee and Mads Eberhardt, analysts at Dutch bank Saxo, stated in a report on May 12:

“The largest stablecoin, Tether, does reportedly have around 85% of its reserves in cash and cash equivalents and the rest in other assets such as corporate bonds and other digital tokens. However, Tether has earlier faced controversies when it comes to transparency around its dollar reserves, so the market has for years questioned what assets its reserve consists of and whether Tether in reality keeps full reserve to back its stablecoin.”

“These controversies are likely what is driving stablecoin investors away from USDT, as the event of UST has refreshed the market’s memory of Tether’s lack of transparency with respect to its reserve. The sell-off in USDT this morning occurred even after the CTO of Tether posted on Twitter that they were continuing to honor USDT redemptions at $1 and that the redemption of more than $300m has been carried out over the past 24 hours.”

It went on to say that these occurrences did not indicate a loss of the peg or reserve backing, but rather that selling interest on the exchanges outweighed their restricted liquidity on the coin, stating:

“Any given exchange will not have enough liquidity on its books to process the exchange of every USDT token for dollars. In instances where exchange liquidity is too low, investors come to Tether to request a redemption which is exactly what happened in May. On May 11th and 12th, the price of USDT deviated from its typical price of $1 on few exchanges. This caused investors to purchase USDT on those exchanges for a discount and then redeem those USDT tokens with Tether on a 1-to-1 basis.”

Tether Holdings filed its quarterly report on May 19, detailing its overall reserves. The statistics revealed a 17 percent decrease in commercial paper investments but a rise in the acquisition of US Treasury notes. Its combined total assets were worth at least $82.42 billion as of March 31, sustaining its market cap.

While the supply of Tether has significantly reduced in recent months, Eberhardt remarked that traders continue to choose the stablecoin over other similar cryptos because “trading pairs quoted in Tether are typically substantially more liquid compared to equivalent USDC trading pairs.”

Tether’s CTO Paolo Ardoino tweeted that the Tether portfolio was “stronger than ever.

Will Tether Collapse?

Hedge firms are wagering hundreds of millions of dollars that Tether will be devalued and would be a complete failure!

That might be because investors witnessed UST accomplish the same thing only a few months earlier. Many investors believe Tether will be the next in a long series of unsuccessful stablecoins.

There have been recurring suspicions regarding who controls the firm behind the currency, as well as whether the company genuinely possesses the holdings it claims to have. The assets that are meant to back up the currency.

With all of that, shorting Tether, or betting that it would collapse, may appear to be a solid option to some.

But the truth is Tether is a very different digital currency than the fallen UST, and it plays a vital role in the crypto ecosystem. Although predicting the future is impossible, comparing the functionality of Tether to UST is unfair given the fundamental models!

The content provided in this article is not sponsored and is correct upto the best of my knowledge. This article is not financial advice and we are not responsible for any action taken in response to this article!

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Is Tether going to collapse? was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.