- Jul 9, 2006
USDT is a cryptocurrency asset issued on the Bitcoin blockchain via the Omni Layer Protocol. Each USDT unit is backed by a U.S Dollar held in the reserves of the Tether Limited and can be redeemed through the Tether Platform. USDT can be transferred, stored, spent, just like bitcoins or any other cryptocurrency.
USDT and other Tether currencies were created to facilitate the transfer of national currencies, to provide users with a stable alternative to Bitcoin and to provide an alternative for exchange and wallet audits which are currently unreliable. USDT provides an alternative to Proof of Solvency methods by introducing a Proof of Reserves Process.
In the Tether Proof of Reserves system, the amount of USDT in circulation can be easily checked on the Bitcoin blockchain via the tools provided at Omnichest.info, while the corresponding total amount of USD held reserves is proved by publishing the bank balance and undergoing periodic audits by professionals.
The notion that BTC spot price is driven by free market price discovery is absolutely false. The vast amount of BTC trading volume and price ‘discovery’ happens in and on the grey market that is totally unbanked. The shadow grey market does not have access to real USD banking, instead it uses a fake proxy ‘price peg to USD’, known as Tether Tokens, misleadingly referred to as USDT or more often just USD in the most popular wallets and grey market exchanges. Bitfinex, Mycelium, Dash, Safello, and many more.
Tether is persistently making the price and have done so over 1 Billion times. Every Tether that is printed and enters the market does so at the expense of some other market participant who’s price moved as a result.
Fake price pumps pushing the price of BTC to new milestones and reports in the media of new paper billionaires and hundreds of paper millionaires, trick the popular sensationalist mass media to reprint BTC/Tether propaganda “All Time High Bitcoin Reaches 10k USD(t)”. What is not being reported by the unsophisticated popular presses who are parroting these headline grabbing lies is that there is no free market USD price discovery at the heart of Bitcoin. Instead there lurks a centralized token proxy which has an unlimited printing press, which has magicked up over 1 billion fake USD in the last year to drive the price of BTC to greater than 14K USD.
The other real USD exchanges (as well as newly created futures markets) then set their prices based on this fake Tether lead price while benefiting from all of the ‘naive believers’ who come flooding into these markets with fresh USD wanting the opportunity to get rich quick, while unconsciously paying crazy high trading fees (the sort of fees not seen in equity markets for years), many of whom have never traded stocks or shares in their lives and such participants have little regard for risk or understanding the technology they are buying, during one of the biggest Gold Rushes the world has ever known. Millions of sheep are being rounded up ready for slaughter and are flooding into these markets not wanting to miss the opportunity of a lifetime, driven by their personal biases and distrust of central banks who have been letting the tide out ever since the printing press ‘revolution’ displaced gold backed money.
This frenzy and market mania has replaced critical thinking and the sub culture adopting these ‘digital gold’ assets, espouses a cult following around a popular meme in Cryptoland known as ‘Hodl’. Reports of people making millions of easy USD is driving these market chasers who don’t care about risk or the cost to participate or enter into this fake ’market’ as long as they get to play the game as well, buying in with real cash ’not fake tether tokens’, they are promised to make money, as long as they don’t look too closely at the trading fees, or care too much about being hacked or exploited by market fraud, or taken out by flash crashes or pump and dump market manipulation. In fact the more market manipulation the better. “I want market manipulation too” if this is what is pushing the price up, many claim.
Calling attention to the obvious fraud is treated as a potential threat to everyone in the party thereby spreading FUD. No one wants the music to stop. Hostility and discreditation await any calm voice alerting of fraud that questions the legitimacy of price discovery process that is driving the market mania and attracting fresh money into this system.
Everyone has heard the old conspiracy “Give me control of a Nation’s money supply, and I care not who makes its laws” but the modern day equivalent of that meme is “Give me 10% of every Tx and I will care not how you set the spot price or who prints the Nation’s money supply”.
Who cares about 10% trading fees when these paper ‘profits’ are in the thousands of percents and continue to be reported and there are thousands of new paper millionaires. The new poster boys ‘Winklevoss’ billionaires take ‘The 4-Hour Workweek’ to a whole new level, setting new standards others try to emulate. Other early adopters and cunning investors like Roger Ver and Barry Silbert show by example that if you too convert into digital gold cryptotokens you will be rich. Why adopt a more sophisticated strategy. Why look too closely at any of the details. It’s all so complicated that even these icons of the industry apparently also don’t understand it anyway so what chance have you got. As long the masses can be bedazzled with notions of magic money conjured into existence, with the illusion that real money, in this case ‘USD’ (I know the ironies) are going to magically appear in their wallets and account balances right next to their names sometime soon then this party can continue until the rot sets in.
A brief timeline:
• Bitfinex operators Phil Potter and CFO Giancarlo Devasini set up Tether Limited in the British Virgin Islands, but told the public that Bitfinex and Tether are completely separate. Throughout 2015 and 2016, the amount of Tether stays relatively flat.
• In August 2nd, 2016, the second-largest digital currency exchange heist in history happened, when Bitfinex lost nearly 120,000 bitcoin. Bitfinex never revealed full details of the hack, but BitGo (the security company that had to sign off on the transactions) claims its servers were not breached.
• Just 4 days after the hack Bitfinex “socialises” its losses from the theft by announcing a 36 percent haircut for almost all of its customers. In return, customers receive BFX tokens, initially valued at $1 each.
• Two weeks after the hack Bitfinex announces it has hired Ledger Labs, to investigate the theft and perform a financial audit of its cryptocurrency and fiat assets. The public never sees the results of the investigation, and months later, Bitfinex admits it never actually hired Ledger Labs to perform an audit to begin with.
• In May 2017, after long standing calls for an actual audit, Bitfinex hires Friedman LLP to "complete a comprehensive balance sheet audit.”
• November 7, 2017: Leaked documents dubbed “Paradise Papers” reveal Bitfinex and Tether are run by the same individuals.
• November 19, 2017: Tether is hacked, with 31 million USDT suddenly disappearing. Tether Limited reacts to this by creating a hard fork.
• December 4, 2017: Right after hiring the PR firm 5W to help improve their image, Bitfinex hires law firm Steptoe & Johnson and threatens legal action against critics.
• December 6, 2017 – CFTC issues a subpoena to Tether and Bitfinex. This news isn't made public until the end of January.
• December 21, 2017 : Without making any formal announcement, Bitfinex appears to suddenly close all new account registrations. Those trying to register for a new account are asked for a mysterious referral code, but no referral code seems to exist.
• After a month of being closed to new registrations, Bitfinex announces it is reopening its doors, but now requires new customers to deposit $10,000 before they can begin trading.
• Friedman LLP completely cut ties with Tether on January 27, 2017.
Most common misconception: Tether is only a small part of the total market cap
One of the most common misconception people have about cryptocurrencies is that the "market cap" amount they see on CoinMarketCap.com is actually the amount of money that is invested in each coin.
People online dismiss any issue with tether by simply claiming its not big enough to cause any effect, saying "Well Tether is only $2.2 billion on CoinMarketCap and the market is 400 billion, its only 0.5% of the market".
But this misunderstands what market capitalisation for cryptocurrency is, and just how different the market cap for Tether is to every other token. The market cap is simply the last trade price times the circulating supply. It doesn't take into account the order book depth at all. The majority of Bitcoin (and most coins) are held by those who either mined or purchased for a very low price early on and simply held on as very small portions of the total supply was rapidly bid up to their current price.
An increase in market cap of X does NOT represent an inflow of X dollars invested, not even close. A 400 billion dollar market cap for crypto does NOT mean that there is 400 billion dollars underwriting the assets. Meanwhile a 2 billion dollar Tether market cap means there should be exactly $2 billion backing up the asset.
Nobody can tell for sure exactly how much money has been invested in cryptocurrency market, but analysts from JPMorganfound that there was only net inflow of $6 billion fiat that resulted in $300 billion market cap at the time. This gives us a roughly 50:1 ratio of market cap to fiat inflow. Prominent crypto evangelist Julian Hosp gives the following estimate: "For a cryptocurrency to have a market cap of $1 billion, maybe only $50 million actually moved into the cryptocurrency."
For Tether however the market cap is simply the outstanding supply, 2.2 billion USDT is actually equal to 2.2 billion USD. In order to get $50 USDT you have to deposit $50 real U.S. dollars and then 50 completely new tokens will be issued, which never existed before on the market.
What is also often ignored is that Bitfinex allows margin trading, at a 3.3x leverage. Bitfinexed did an excellent analysis on how tether is entering Bitfinex to fund margin positions
There are $2.2 billion in Tether outstanding and the current market cap of the entire market is $400 billion according to CoinMarketCap. You can actually calculate Tether as a % of total fiat invested in the market according to the JP Morgan estimate, the following table outlines for a scenario of no margin lending and 15/25% of tether being on a 3.3x leverage margin account:
Fiat Inflow/Market Cap Ratio
JP Morgan estimate (50:1)
Tether as % of total market (no margin)
Tether as % of total market (15% on margin)
Tether as % of total market (25% on margin)
Even without any margin lending Tether is underwriting the worth of about 27.5% of the cryptocurrency market, and if we assume only 25% was leveraged out at 3.3x on margin we have a whole 43% of the market cap being driven by Tether inflow.
A much better indicator on CoinMarketCap of just how influential Tether is actually the volume, its currently the 2nd biggest cryptocurrency by volume and there are even days where its volume exceeds its market cap.
What this all means is that not only is the market cap for cryptocurrencies drastically overestimating the amount of actual fiat capital that is underwriting those assets, but a substantial portion of the entire market cap is being derived from the value of Tether's market cap rather than real money.
Its incredibly important that more new investors realise that Tether isn't a side issue or a minor cog in the machine, but one of the core underlying mechanisms on which the entire market worth is built. Ensuring that whoever controls this stable coin is honest and transparent is absolutely critical to the health of the market.
What happens if its revealed that Tether doesn't have its US dollar reserves?
According to Thomas Glucksmann, head of business development at Gatecoin: "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."
According to Nicholas Weaver, a senior researcher at the International Computer Science Institute at Berkeley: "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 tether into real money is to buy other cryptocurrency then move to another exchange. That is a bank run."
US Commodity Futures Trading Commission (CFTC) subpoenaed cryptocurrency exchange Bitfinex and the company Tether in December 2017.
Get ready for a GFC style melt-down in crypto.
This will be Chernobyl & Fukushima x 100
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