Because it is 99% of liquidity of all crypto trades. If you want to cash out in crypto or have an easier way to deploy capital at a moments notice, holding a stable coin has its perks. Although after reading this, i agree, why would anyone want to hold these
I understand the use of stablecoins. My question was about the choice of which one to use. Unverifiably Treasury “backed” seems way worse than simple algorithmic backing.
As for the act of “holding” them, it’s too difficult to earn interest. True, you could hold cUSD, but that’s still a conversion process.
Thanks for the report - but nothing new here. And realistically speaking: it is both unlikely and operationally negative for the leading (or any) stablecoin to have real reserves.
Unlikely because Tether would have to be selling crypto to get cash to buy said reserves - which would be both noticeable and trackable; the amount of net cash spent to buy tether or any other stablecoin is probably very tiny compared to crypto.
Operationally negative because, for example, ETFs get front run all the time - it is inconceivable that Tether would not also get front run were it to really tightly couple reserves vs. activity.
So Tether is a faith-based fraud upon which FTX probably drew at least some inspiration. But ultimately, I have a hard time seeing this as being that much of an issue.
People don't buy Tether to make money; they buy tether to enter/exit other crypto. This function generates profit for Tether but ultimately its stablecoin is a function that would occur either way - and Tether's method sadly is probably more cost efficient than actually having the backing.
Or in other words, their shoddy and criminogenic accounting practice isn't going to implode or cause much systemic harm short of imploding, unless they do something particularly stupid like get caught red-handed stealing/misusing funds. Given the numbers of investigations to date that have come up empty, it seems that they're being smart about it.
Excellent article, thank you for all the work you do.
Now I have a question. Supposedly there’s a hedge fund (or funds) shorting Tether, which would seem to be a phenomenal trade from a risk/reward standpoint. How would one do this without entrusting capital to a centralized crypto exchange that can go up in smoke overnight?
To short Tether, you can take out a Tether denominated loan. Those exists, but those offered to retailers carry a 4BPS per day interest rate. That's more than 15% per year. No way that trade is profitable unless you think Tether will collapse in a short amount of time.
First of all - where would the hedge fund borrow all the tether to short?
Secondly - what is the mechanism to borrow, even if it were possible? You can short bitcoin by shorting GBTC - which is a type of investment geared specifically for institutional trading. Is there such a thing for tether? I think not precisely because Tether is not supposed to change in value. The only way I could see this happening is borrowing money from Tether and then trying to make them implode by causing a "run on the tether bank". But again, unless Tether has been particularly stupid about the funds it has taken in - this isn't going to work. In particular, I'd guess that Tether would have to be in the 20% or lower capitalization in order for an FTX style implosion to occur.
Put in other words: if tether was "merely" scamming 50% - an FTX style rout wouldn't cause the whole house of cards to collapse.
the largest tether holder is Bitfinex with overall exchange holdings of Tether at 60% of supply. That seems like a lot but really isn't; this isn't a Binance style FTT route where Binance was basically holding half (?) of the actual FTT, non-FTX liquidity (I'm guessing but fairly sure it was a huge percentage). Bitfinex dumping its Tether would be say, 37% of Tether float - unless Tether is sub-60% capitalized, they couldn't pop the bubble themselves.
You can game out various scenarios from there.
Long story short: $137M short of Tether is a pimple on that elephant's butt.
Let’s evaluate a simple scenario. Tether takes in $100 from Customer and issues 100 USDT to Customer. Tether takes that $100 and buys $50 in US T-bills, $49 it puts in a bank and $1 is invested in the equity of (related) Crypto Exchange. In subsequent weeks crypto markets are unstable with a few exchanges going bankrupt. Customer is concerned about (related) Crypto Exchange and decides to redeem their 100 USDT for $100. Tether says “we can give $99 back but you’ll have to hold on to that last 1 USDT until we can figure something out.” “Figuring out” means getting (related) Crypto Exchange to redeem Tether’s equity for $1. At this point in time, to the Customer, what is that last remaining 1 USDT worth? Is it really $1? Hopefully the point is clear, the value of USDT is about whatever that last marginal USDT is worth, not that the bulk of it is “fine” and “fully backed.”
Your scenario is unrealistic and unrepresentative as follows:
1) Pretty much nobody buys Tether in cash. They buy Tether primarily as a vehicle to park crypto in between trades.
2) A single customer redeeming $100 in Tether for cash won't make any difference whatsoever. And unless a large percentage of Tether float arose from cash (see #1 above), it doesn't really matter if even a large absolute number of customers with a large absolute amount of notional fiat value wants to redeem so long as Tether has the liquid reserves to meet their obligations.
Using your example: Customers want to redeem $1 billion of tether for cash. That would be maybe 2% of Tether float - no problem to redeem even if this $1B were fully coordinated.
3) You don't seem to have a very strong idea of how exchanges work. Again, you need to understand better just how much Tether purchasing/selling is cash vs. crypto. It is a very big difference if an exchange is buying Tether for crypto or cash; an exchange customer who is converting tether to cash is hitting the exchange's cash - not Tether's. It would only affect Tether's fiat cash if the exchange purchased said tether for cash to start with - which I would bet large sums is not what happens in general - and mass customer redemptions forced the exchange to try and get cash back from Tether which said exchange had bought tether with to start with. If, in fact, the exchange bought tether with crypto - then that's what the exchange would more than likely get back.
The essence of FTX's scam token transactions was to exchange a worthless token for actual value - whether bitcoin or cash. That's what they did with Binance, that's what FTX did with BlockFi, etc etc - and so Binance's selling of the worthless token in order to get its bitcoin, cash or whatever hard asset back exposed FTX's worthless token's real value. Note that FTX's tokens had zero real value because they were representing fake capitalization to start with, whereas Tether's fake market value won't be exposed unless redemptions exceed the percentage capitalization. FTX's capitalization was pretty near $0, Tether's is clearly nowhere near that since they have been hit multiple times and haven't collapsed even if it may not be the 100% it is supposed to be.
Thus Binance or Bitfinex could try to crash Tether, but that would ultimately hurt themselves first because they owe their customers holding tether, the notional value of said Tether and so it is a very different type of outcome than Binance taking down FTX (a competitor at the end of the day).
Let's say that Tether's mkt cap is 68B, of which 65 is backed by hard assets (cash, or short term treasuries), but 3B are lost in space due to some shady investment or whatever. Suppose now that 60B is redeemed. It doesn't have to be that these redemptions happen because of a run on Tether per see. It could be that over time, Tether loses market share relative to other stable coins for whatever reason. Or perhaps because mkt participants view the other stable coins as more secure and transfer their holdings to those (call that a soft run if you want). Point is, the remaining Tether float is now only 8B, of which only 5B are secured and 3B are not. If investors in Tether wake up one morning thinking that they could lose 37.5% of their stash, or all if they do not withdraw immediately, there will be a run on Tether.
So you're trying to say that a 4.4% Tether underfunding could collapse if it loses 88% of its present market share? Let's say that is true - I don't actually automatically agree with this scenario because you're ignoring the ongoing float consisting of transactions still in the process of switching in/out of tether.
What would be the driver(s) for tether users to switch out?
There have already been lawsuits, fines, etc etc - just what more would have to happen for the market to switch at this point?
Secondly - nobody "invests" in tether or any other stablecoin other than its creators - there is zero upside, after all. I don't buy any narrative where long term tether holders - who aren't its creators - exist outside of large exchanges. A Binance attack is certainly possible but there is not much upside to taking down tether - unlike with FTX (a competitor).
From my viewpoint: failure most likely occurs due to foolishness/incompetence by its operators ranging from embezzlement to structural losses from how tether operations transact/trade incoming crypto vs. outgoing crypto.
But let's not forget that tethers are ultimately just funny money; tether must be charging some premium for its service otherwise the structural losses would be enormous. It would seem to me that tether would have long since imploded if it had major structural issues and/or embezzlement/fraud given the massive crypto swings which tether has weathered at least twice now: 2017 and the last year.
Tether doesn't need to charge anything. They're making billions as the asset side of their balance sheet earns interest while the liability side pays none. It's the greatest business.
...And just to add to this, these type of “tail wagging the dog” events happen all the time in markets and economies. It’s somewhat ironic that the crypto world is preferring to ignore the lessons of history and learn them all at once and totally on their own.
Excellent reporting, per usual! Would also love to read your insights and learnings as to how Tether developed so much market share, so quickly. You alluded to one reason here and in another piece...it's ties with FTX. Thank you!
There’s gonna be a run on popcorn when this steaming pile of nastiness gets a sunlight bath. I for one am hodling my comedy Godl and fully intend to cash it in when Tether goes pop and all of the Hopium leaks out of the clown balloon.
We need Jerry McGuire in there, “show me the money, Jerry”!
Excellent report sir!
Load zhe Tether fud....
I still don’t get how it’s so popular. Why would anyone want USDT over USDC, or even DAI?
Because it is 99% of liquidity of all crypto trades. If you want to cash out in crypto or have an easier way to deploy capital at a moments notice, holding a stable coin has its perks. Although after reading this, i agree, why would anyone want to hold these
I understand the use of stablecoins. My question was about the choice of which one to use. Unverifiably Treasury “backed” seems way worse than simple algorithmic backing.
As for the act of “holding” them, it’s too difficult to earn interest. True, you could hold cUSD, but that’s still a conversion process.
Thanks for the report - but nothing new here. And realistically speaking: it is both unlikely and operationally negative for the leading (or any) stablecoin to have real reserves.
Unlikely because Tether would have to be selling crypto to get cash to buy said reserves - which would be both noticeable and trackable; the amount of net cash spent to buy tether or any other stablecoin is probably very tiny compared to crypto.
Operationally negative because, for example, ETFs get front run all the time - it is inconceivable that Tether would not also get front run were it to really tightly couple reserves vs. activity.
So Tether is a faith-based fraud upon which FTX probably drew at least some inspiration. But ultimately, I have a hard time seeing this as being that much of an issue.
People don't buy Tether to make money; they buy tether to enter/exit other crypto. This function generates profit for Tether but ultimately its stablecoin is a function that would occur either way - and Tether's method sadly is probably more cost efficient than actually having the backing.
Or in other words, their shoddy and criminogenic accounting practice isn't going to implode or cause much systemic harm short of imploding, unless they do something particularly stupid like get caught red-handed stealing/misusing funds. Given the numbers of investigations to date that have come up empty, it seems that they're being smart about it.
Exceptional article. 2023 is going to be interesting.
Excellent article, thank you for all the work you do.
Now I have a question. Supposedly there’s a hedge fund (or funds) shorting Tether, which would seem to be a phenomenal trade from a risk/reward standpoint. How would one do this without entrusting capital to a centralized crypto exchange that can go up in smoke overnight?
To short Tether, you can take out a Tether denominated loan. Those exists, but those offered to retailers carry a 4BPS per day interest rate. That's more than 15% per year. No way that trade is profitable unless you think Tether will collapse in a short amount of time.
Pretty unrealistic.
First of all - where would the hedge fund borrow all the tether to short?
Secondly - what is the mechanism to borrow, even if it were possible? You can short bitcoin by shorting GBTC - which is a type of investment geared specifically for institutional trading. Is there such a thing for tether? I think not precisely because Tether is not supposed to change in value. The only way I could see this happening is borrowing money from Tether and then trying to make them implode by causing a "run on the tether bank". But again, unless Tether has been particularly stupid about the funds it has taken in - this isn't going to work. In particular, I'd guess that Tether would have to be in the 20% or lower capitalization in order for an FTX style implosion to occur.
Put in other words: if tether was "merely" scamming 50% - an FTX style rout wouldn't cause the whole house of cards to collapse.
Now having said that: how much tether is held by say, Binance? According to this link: https://cryptoslate.com/bitfinex-holds-the-highest-amount-of-tetherusdt-at-60/
the largest tether holder is Bitfinex with overall exchange holdings of Tether at 60% of supply. That seems like a lot but really isn't; this isn't a Binance style FTT route where Binance was basically holding half (?) of the actual FTT, non-FTX liquidity (I'm guessing but fairly sure it was a huge percentage). Bitfinex dumping its Tether would be say, 37% of Tether float - unless Tether is sub-60% capitalized, they couldn't pop the bubble themselves.
You can game out various scenarios from there.
Long story short: $137M short of Tether is a pimple on that elephant's butt.
Let’s evaluate a simple scenario. Tether takes in $100 from Customer and issues 100 USDT to Customer. Tether takes that $100 and buys $50 in US T-bills, $49 it puts in a bank and $1 is invested in the equity of (related) Crypto Exchange. In subsequent weeks crypto markets are unstable with a few exchanges going bankrupt. Customer is concerned about (related) Crypto Exchange and decides to redeem their 100 USDT for $100. Tether says “we can give $99 back but you’ll have to hold on to that last 1 USDT until we can figure something out.” “Figuring out” means getting (related) Crypto Exchange to redeem Tether’s equity for $1. At this point in time, to the Customer, what is that last remaining 1 USDT worth? Is it really $1? Hopefully the point is clear, the value of USDT is about whatever that last marginal USDT is worth, not that the bulk of it is “fine” and “fully backed.”
Your scenario is unrealistic and unrepresentative as follows:
1) Pretty much nobody buys Tether in cash. They buy Tether primarily as a vehicle to park crypto in between trades.
2) A single customer redeeming $100 in Tether for cash won't make any difference whatsoever. And unless a large percentage of Tether float arose from cash (see #1 above), it doesn't really matter if even a large absolute number of customers with a large absolute amount of notional fiat value wants to redeem so long as Tether has the liquid reserves to meet their obligations.
Using your example: Customers want to redeem $1 billion of tether for cash. That would be maybe 2% of Tether float - no problem to redeem even if this $1B were fully coordinated.
3) You don't seem to have a very strong idea of how exchanges work. Again, you need to understand better just how much Tether purchasing/selling is cash vs. crypto. It is a very big difference if an exchange is buying Tether for crypto or cash; an exchange customer who is converting tether to cash is hitting the exchange's cash - not Tether's. It would only affect Tether's fiat cash if the exchange purchased said tether for cash to start with - which I would bet large sums is not what happens in general - and mass customer redemptions forced the exchange to try and get cash back from Tether which said exchange had bought tether with to start with. If, in fact, the exchange bought tether with crypto - then that's what the exchange would more than likely get back.
The essence of FTX's scam token transactions was to exchange a worthless token for actual value - whether bitcoin or cash. That's what they did with Binance, that's what FTX did with BlockFi, etc etc - and so Binance's selling of the worthless token in order to get its bitcoin, cash or whatever hard asset back exposed FTX's worthless token's real value. Note that FTX's tokens had zero real value because they were representing fake capitalization to start with, whereas Tether's fake market value won't be exposed unless redemptions exceed the percentage capitalization. FTX's capitalization was pretty near $0, Tether's is clearly nowhere near that since they have been hit multiple times and haven't collapsed even if it may not be the 100% it is supposed to be.
Thus Binance or Bitfinex could try to crash Tether, but that would ultimately hurt themselves first because they owe their customers holding tether, the notional value of said Tether and so it is a very different type of outcome than Binance taking down FTX (a competitor at the end of the day).
Let's say that Tether's mkt cap is 68B, of which 65 is backed by hard assets (cash, or short term treasuries), but 3B are lost in space due to some shady investment or whatever. Suppose now that 60B is redeemed. It doesn't have to be that these redemptions happen because of a run on Tether per see. It could be that over time, Tether loses market share relative to other stable coins for whatever reason. Or perhaps because mkt participants view the other stable coins as more secure and transfer their holdings to those (call that a soft run if you want). Point is, the remaining Tether float is now only 8B, of which only 5B are secured and 3B are not. If investors in Tether wake up one morning thinking that they could lose 37.5% of their stash, or all if they do not withdraw immediately, there will be a run on Tether.
So you're trying to say that a 4.4% Tether underfunding could collapse if it loses 88% of its present market share? Let's say that is true - I don't actually automatically agree with this scenario because you're ignoring the ongoing float consisting of transactions still in the process of switching in/out of tether.
What would be the driver(s) for tether users to switch out?
There have already been lawsuits, fines, etc etc - just what more would have to happen for the market to switch at this point?
Secondly - nobody "invests" in tether or any other stablecoin other than its creators - there is zero upside, after all. I don't buy any narrative where long term tether holders - who aren't its creators - exist outside of large exchanges. A Binance attack is certainly possible but there is not much upside to taking down tether - unlike with FTX (a competitor).
From my viewpoint: failure most likely occurs due to foolishness/incompetence by its operators ranging from embezzlement to structural losses from how tether operations transact/trade incoming crypto vs. outgoing crypto.
But let's not forget that tethers are ultimately just funny money; tether must be charging some premium for its service otherwise the structural losses would be enormous. It would seem to me that tether would have long since imploded if it had major structural issues and/or embezzlement/fraud given the massive crypto swings which tether has weathered at least twice now: 2017 and the last year.
Tether doesn't need to charge anything. They're making billions as the asset side of their balance sheet earns interest while the liability side pays none. It's the greatest business.
...And just to add to this, these type of “tail wagging the dog” events happen all the time in markets and economies. It’s somewhat ironic that the crypto world is preferring to ignore the lessons of history and learn them all at once and totally on their own.
Excellent reporting, per usual! Would also love to read your insights and learnings as to how Tether developed so much market share, so quickly. You alluded to one reason here and in another piece...it's ties with FTX. Thank you!
Alameda will not withdraw anymore USD from tether company. So they have been very lucky.
There’s gonna be a run on popcorn when this steaming pile of nastiness gets a sunlight bath. I for one am hodling my comedy Godl and fully intend to cash it in when Tether goes pop and all of the Hopium leaks out of the clown balloon.
Great summary as usual. Thanks, Dirty Bubble
Spot on.
Great summation. A good question is why Tether has such a large share of the market. Is there more to this story?
yes... perhaps we will get to that.
Great article dirty bubble! Fascinating