The cryptocurrency market slumped hard on Friday and people are accusing Tether and the cryptocurrency exchange, Bitfinex to be involved in the matter somehow.
What is Tether?
Tether is a cryptocurrency that is claimed to be pegged to the U.S. dollar. The cryptocurrency was founded in 2015 and is much stable as compared to other cryptocurrencies which show sudden price swings.
A single coin is priced at $1.
Who created it?
The business entity behind Tether is called “Tether Limited”. According to its website, the company is governed by the laws of the British Virgin Islands.
A number of rumors are circulating around about Tether being closely related to the biggest cryptocurrency exchange Bitfinex. It has emerged that Jan Ludovicus van der Velde is the CEO of Bitfinex.
How is it used?
Tether, on Bitfinex and other exchanges, is used to buy other cryptocurrencies including Bitcoin. According to Tether Limited, this is a much convenient way to convert digital currencies into fiat as Tether can be traded in an out of exchanges much faster and cheaper. Most of the exchanges do not have good relationships with banks and it is the best solution at such times.
“Exchange users know how risky it can be to hold fiat currencies on an exchange. With the growing number of insolvency events, it can be quite dangerous. As mentioned previously, we believe that using tethers exposes exchange users to less counter-party risk than continually holding fiat on exchanges,” one of the whitepapers on the company’s website reads.
So, what are the concerns lately?
A lot of people are arguing that there is a close relationship between Tether and Bitfinex. Rumors say that it is being issued by the team behind Bitfinex. This has concerned critics who think that the cryptocurrency and the exchange should not such close connections.
The allegations do not stop here. For a month now, fears have been raised that the company behind it isn’t really capable of backing the Tether in circulation with U.S. dollars.
According to a recent Bloomberg report, the U.S. Commodity Futures Trading Futures sent subpoenas to Bitfinex on 6th December. The company is asked to provide evidence of its holdings and reserves.
Tether has been releasing more and more coins for the past few months and this move perfectly coincided with the sudden record high growth of the cryptocurrency market. Now, this has raised a lot of concerns as critics believe that it is involved in ‘price manipulation’ along with Bitfinex.
“Over the past couple of months, a huge amount of tether has been created, it has shifted to the Bitfinex exchange and presumably buys bitcoin and other cryptos. This, I believe, has been keeping the price up,” said Nicholas Weaver, a senior researcher at the International Computer Science Institute at Berkeley, California.
More and more people have started to believe that Tether is manipulating Bitcoin prices. An anonymous analysis posted online last week studied closely the relationship between BTC and USDT and concluded that it arrived at the time when Bitcoin was falling.
“Tether printing moves the market appreciably; 48.8 percent of BTC’s price rise in the period studied occurred in the two-hour periods following the arrival of 91 different tether grants to the Bitfinex wallet,” the analysis said.
What did ‘Tether Limited’ say?
Currently, Tether Limited is keeping its silence, but back in September, it released a document named ‘proof of funds’ that claimed that it held the required reserves. However, the document wasn’t clear enough and had all the bank accounts blacked out.
Moreover, Friedman LLP, the firm that worked on an audit of Tether(USDT), broke ties with it hence fueling up the suspicions. However, Coinbase reported last week that the relationship between both the companies has “dissolved”.
What will happen next?
It seems like the anonymous analysis claimed right because Bitcoin fell back to below $8000 on Friday for the first time since since November 24.
“If a tether debacle unfolds, it will likely cause quite a devastating ripple effect across many of the exchanges that see most of their volumes traded against the supposedly USD-backed cryptocurrency. In such a scenario, we may see cryptocurrency prices retreat quite dramatically in the next month or so,” said Thomas Glucksmann, head of APAC business development at cryptocurrency exchange Gatecoin.
Another predicted result is a bank run or in this case, a Tether run.
“You could see a spike in prices in tether-only bitcoin exchanges. So, on those exchanges only you will see a run-up in price compared to the bitcoin exchanges that actually work with actually money. So you would see a huge price diverge as people see that only way they can turn it into real money is to buy other cryptocurrency then move to another exchange. That is a bank run,” said Weaver.