Can A Tether Crisis Lead To A Bitcoin Collapse?
Stablecoins are an exciting new innovation for cryptocurrency. But stablecoins like Tether are also mired in controversy and legal troubles. Can a crisis involving stablecoins with alleged shady practices cause a market crash?
Tether has been used as the proverbial ‘stablecoin,’ providing cover and insulation from market downturns.
Tether is a stablecoin that is pegged to USD, which has been used as a safe haven during market downturns. In other words, the USDT token offers traders who are concerned about cryptocurrency volatility an opportunity to hedge against market fluctuations by converting their digital assets into a more stable asset class.
Tether has also been used as a means of exchange between cryptocurrencies and fiat currencies by providing liquidity on exchanges that don’t have fiat trading pairs or when there’s heavy demand for certain altcoins but no matching supply at exchanges with fiat trading pairs.
Tether has long been accused of not having the funds on hand to back their full claim of stablecoins created.
Tether has long been accused of not having the funds on hand to back their full claim of stablecoins created. In fact, the company has not been fully transparent about their reserves and many believe that Tether is printing money.
Additionally, many have claimed that Tether creates artificial volatility in bitcoin’s price by creating market manipulation with cryptocurrencies such as USDT.
A recent investigation sparked by legal action cast further doubts on whether or not Tether actually holds enough USD to back its USDT stablecoin token.
A recent investigation sparked by legal action cast further doubts on whether or not Tether actually holds enough USD to back its USDT stablecoin token. Tether has long been accused of not having the funds on hand to back their full claim of stablecoins created.
Tether has successfully merged with Bitfinex, another firm involved in the scandal, creating a regulatory grey area.
Bitfinex, the cryptocurrency exchange that was recently involved in a scandal involving Tether and Noble Bank before the latter shut down its operations, has merged with Tether. The United States Commodity Futures Trading Commission (CFTC) had previously alleged both companies were engaged in fraudulent activities and taken steps to stop them from continuing their practices.
The merger means that Bitfinex is now owned by the same people who own Tether, creating a regulatory grey area for both projects. Cycles of controversy have plagued both companies since they entered into business together — Bitfinex was hacked in 2016 while Tether’s accounts at Noble Bank were seized by regulators shortly thereafter — but this recent development gives pause to those concerned about their future prospects: Will it be enough to bring down bitcoin?
Recent issues have shown that a crisis involving stablecoins could cause market disruption similar to major bear markets.
The recent issues surrounding Tether and its stablecoin USDT have shown that a crisis involving stablecoins could cause market disruption similar to major bear markets.
Stablecoins are not backed by real fiat currency, real assets or gold/silver. Instead, they are backed by nothing but faith in the system itself. While this is fine as long as users believe in the system, there can be problems when things go wrong and people lose faith in it — which seems to be happening now after Tether released an audit report that raised more questions than answers.
Stablecoins are a potential issue for cryptocurrency markets, and more evident measures need to be taken to ensure that they are backed by legitimate reserves.
The issue with stablecoins, and the one that could potentially tear down the whole cryptocurrency market, is that there’s no way for people to verify whether or not a given stablecoin is backed by legitimate reserves. If you’re not sure what a stablecoin is, it’s basically a cryptocurrency pegged to another asset like gold or the US dollar. The value of this kind of token then can be locked in place by having its reserve held in an institution like a bank or even just by printing more tokens when needed. This creates a lot more stability than what we see in traditional cryptocurrencies like Bitcoin and Ethereum where prices fluctuate wildly based on supply and demand alone. BitMEX published this article explaining why they think these kinds of coins are bad news:
Ultimately, the crypto community should make it a goal to find a stablecoin that is regulated and backed by legitimate reserves. This will help provide greater stability for the markets, allowing traders to make more informed decisions on when to buy or sell assets. It may take some time for this process, but in the meantime we can use Tether as an example of what not to do when creating a stablecoin.
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