USDT / Tether: Trail of Destruction
Too Lazy; Didn’t Read — One of 2 scenarios: EITHER Tether is a scam and they have destroyed everyone’s value OR they actually do have all the deposits and they are destroying their brand and opportunity. Either way, USDT coin holders have a moment of truth coming when it’s time to systematically get out.
Based on my ‘Golden Goose Theory’ Tether is not a scam. But they are headed for trouble. To read my prediction only, scroll down to ‘WHEN IT COMES TIME TO SHRINK MARKET CAP’ section below.
Tether (USDT) is a coin pinned to the US dollar because for every coin issued, it is backed by a dollar of fiat currency that is deposited in the bank.
Supposedly.
There is HUGE demand for the product.
The market cap of USDT has grown to > $2.2 billion in a matter of a few months:
DEMAND
One of the most staggering things about the $2.2b market cap of USDT is that the market cap is driven by coin count which is driven by actual fiat purchases at $1 each. $2.2b actual dollars invested. This is different from a speculative coin which can ICO a modest amount of cash investment, but suddenly have a mega market cap because trades go up on thin volume, it’s just a number.
The reason USDT has grown so much so fast, is that it satisfies a pain point in the crypto markets. USDT offers a simple place to park cryptocurrency and have a chance to take a breath and escape exposure during expected down markets or times of extreme volatility. The alternative is actually converting to fiat currency which is expensive, time consuming, and involves banks from which crypto adapters are pining for escape.
FUD — FEAR, UNCERTAINTY, DOUBT
Tether is owned and operated by the same management team as Bitfinex. They claim to be the largest and most advanced Bitcoin trading platform. In the New York Times, dated November 21st, there was an article on Bitfinex that was drowning in red flags about the team and their history. A trail of destruction.
There is no shortage of FUD. One blogger going by the name of Bitfinex’ed is a fine place to begin to understand the negative sentiment. ←understatement, lol.
I personally do not think Tether is fraudulent or a scam. But I think it stinks because it does not have to be like this. I think they are total PR derelicts and they destroyed their brand opportunity and they will lose their position as the prominent place to escape exposure in the crypto markets. I also question whether or not there will be a real bid in the market for USDT pairs when it comes time for USDT market cap to shrink.
GOLDEN GOOSE
My biggest argument that Tether is not a scam, is that USDT is a ‘Golden Goose’ and too valuable to risk, especially in an environment of rising money market rates. Think for a moment about the business model (assuming they legitimately have deposits).
The most obvious value to their business is capturing deposits and collecting interest. With current overnight USD LIBOR rates at 1.44%, they would earn $32 million per year on $2.2b deposits. They return none of that to coin holders.
They could make a reasonable argument to extend the the maturity of the bulk of their deposits to juice returns. They could reasonably keep 10% overnight, 10% a week out, and the balance a month and two months out. This may actually be their excuse for their alligator arms when it comes redemption time.
The less obvious and arguably more valuable part of their business is market making. Tether can either issue coins directly in the primary market for $1.00, or they can issue and burn coins as a market maker in the secondary market:
Excess demand (growing USDT market cap)
- Print 1 USDT coin on blockchain
- BTC/USDT pair (example): Bid $1.01 worth of BTC using 1 USDT coin
- Fiat market: Sell BTC for $1.01 cash
- Deposit $1.00 in bank
- Put $0.01 in pocket
- Collect interest on $1.00 deposit and put interest in pocket
- Repeat
Excess supply (shrinking USDT market cap)
- Withdraw $1.00 fiat from bank
- Fiat market: Buy BTC (example) for $0.99 for cash
- BTC/USDT pair: Offer $0.99 worth of BTC for 1 USDT coin
- Put leftover $0.01 in pocket
- Burn coin on blockchain
- Repeat
This is how it could and should work. Sure, there are fees and risks involved, but do not underestimate how profitable market making is. This is especially true in developing and volatile markets, particularly when self serving on their own unregulated exchange.
WHEN IT COMES TIME TO SHRINK MARKET CAP
Suppose for a moment that Tether is totally legit, they have deposits. They just don’t know how or don’t care to protect their brand with proper PR and ensuring trust from their customers. When it comes time for people to exit USDT and shrink the market cap, who’s going to bid for it?
What is Tether’s incentive to put a strong and reasonable bid in the market to burn USDT coins when they are losing market share and their brand is already destroyed?
If they were good stewards of their brand and truly protected their customer’s interest, they would bid at a fair price, call it 99 cents worth, pocket the penny and burn the coin. They would expect their customer to be happy and to return when it’s time to grow the market cap again.
However, they have proven to be fantastic brand destroyers. Their statement about why they no longer have a relationship with an auditor is an absolute joke. They are out of touch. Go home Tether, you’re drunk.
However, I stand by my ‘Golden Goose’ theory about why they probably are not a scam. They just don’t know how to manage their brand. I believe they underestimate how hungry the market is to switch to a product that they can trust and feel secure as a place to park crypto while escaping exposure.
New products are arriving now to take their market share. The most direct replacement will be different brands of asset backed coins such as the Trust Token who will be competing on transparency and of course trust. For those that appreciate true innovation, stable coins such as MakerDAO DAI coin is an amazing new alternative, with it’s own potential risks that I intend to write about.
SO WHAT?
The Tether brand is all but destroyed. With competitors coming to the market, when it comes time for the Tether market cap to shrink, it’s going to require a bid.
Supposedly, Tether can be directly redeemed. Their Terms Of Service do not have details of the redemption process, but TOS includes: “Beginning on January 1, 2018, Tether Tokens will no longer be issued to U.S. Persons”. I imagine that during systematic redemption demand, they will want to protect their market cap and point to the market as your means to get out. Of course it can be tough to fit too many people through a door at a given time.
Remember playing kickball in the street as a kid? The kid that brought the ball has leverage. If he’s a weasel and losing the game there’s risk that he’s going to take his ball and go home. Even come up with a stupid excuse.
My bet is that when demand turns to supply, and it comes time to shrink market cap, Tether is going to be awfully difficult to directly redeem. They will be slow to release funds to put their own bids in the market for USDT. Pitchforks and torches will show up. Fear will show up. Salvage value of the brand will be gone. I do not expect it will impact the market as whole, but it will be a test between Tether and USDT holders to see how cheap holders will sell and how attractive it will be to Tether to finally put in a bid, close out their position and pocket the difference.
They will take their ball and go home. But the question is, how cheap will their bids be when this all goes down, and how strong will holder’s resolve be? How difficult will redemption be? That will be Tether’s last big opportunity to make money.
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