Biggest misconception about Tether market cap and why it’s totally different from all other coins

Sam Aiken
Sam Aiken
Feb 6, 2018 · 11 min read

Other languages: 中文

Disclosure: I’ve lost money during Bitfinex multiple flash crashes presumably due to technical issues, so I’m not fully neutral regard Tether/Bitfinex/Ethfinex. However, my portfolio is heavily in crypto, so on a short run I’m financially incentivized not to spread any FUD about Tether, but on a long run I’m financially incentivized to warn people about projects that can corrupt the whole ecosystem.

Centralization of control is the biggest side effect of any scaling choice. (by Andreas M. Antonopoulos)‏

There is so much hate and fight going on between BTC vs BCH, while Tether threat is still undervalued and only recently got some attention due to CFTC subpoena and following huge price dip.

In this article we will not speculate if Tether is backed by U.S. dollars or not, because there are more savvy people to do that and I’ve already wrote a few articles last year about Tether/Bitfinex/Ethfinex bad business ethics.

Instead, we will talk about Tether market cap, how it’s different from all other coins, why it can potentially crash the whole crypto market if all allegations turn out to be true or governments will shut it down as a threat to real USD, and what can we do about it.

Recently Bitfinex/Tether got lots of attention again due to CFTC subpoena and following huge price dip, but many people don’t understand how market capitalization actually works, so they falsely allege that $2.2 billion market cap of Tether cannot seriously influence a $400 billion market, because it’s just 0,5% of all the money.

Biggest misconception

People with a background in finance understand that Tether market cap is nothing similar to any other coin, but we have many new investors who a not that savvy yet, so we should share our knowledge with them.

This is the most common statement I’ve seen last week.

If you think that only newbies don’t realize how huge is Tether, then here are some more examples:

Doug Polk recently said that Tether is only 0.4% of a total crypto market cap, so it seems legit. Don’t get me wrong, he contributes a lot to community by exposing scams, but that was a false assumption on the fastest growing crypto-oriented YouTube channel (150K followers).

Not only beginners, but even financially literate people like David Hay (110K followers) say that Tether is too small to cause any substantial problem.

And even early bitcoin adopters like Charlie Shrem think (or intentionally misinform) that Tether market cap is extremely small.

Which makes it vital to explain to all people in crypto how market cap works and finally destroy the myth that Tether is “just” 0,5% of all cryptocurrencies market cap and thus cannot really influence the market.

Let’s start with simple examples and then move to a bit more advanced stuff.

Apples market capitalization

Note: for simplicity let’s assume that the first trade will always be buying 1 apple for the lowest price.

Let’s say there are 3 traders and 3 apples on the market.

Current order book:

  • sell 1 apple for $5
  • sell 1 apple for $3
  • sell 1 apple for $1.

What is the market cap of all apples after the first trade? $(5+3+1) = $9?

Wrong.

The market cap is $3. ($1 price of first trade * 3 apples circulating supply)

Price aggregators calculate market cap by multiplying a current price (average last closing price among all exchanges) and circulating supply. They don’t care about the order book depth. You can try to sell your apple for $100, but that won’t change market cap unless somebody actually buys your apple for that price.

Market moves up

Now let’s say Bob came to the market and decided to buy cheap apples and sell them at the higher price.

Bob bought 1 apple for $1 and 1 apple for $3 (totally 2 apples for $4).

Then Bob started selling his apples for $5 each.

Now the order book looks like this:

  • sell 2 apples for $5 each (Bob)
  • sell 1 apple for $5

What will be the market cap after the first trade?

Right, $15! (price of first trade $5 multiplied by 3 apples)

So Bob invested $4, while the market cap increased by $12 (from $3 to $15).

This is very important, so let’s repeat. Bob invested only $4, but the market cap was increased by $12.

Ponzi scheme crash

Current order book:

  • sell 2 apples for $5 each (Bob)
  • sell 1 apple for $5
  • Market cap: $15

Now suppose people discovered that all apples were slightly spoiled, so all traders dropped the price to $3, because nobody will buy bad apples for $5.

Now the order book looks like this:

  • sell 2 apples for $3 each (Bob)
  • sell 1 apple for $3
  • Market cap: $9 (after the first trade)

So the market cap lost $6 (from $15 to $9), but no fiat money were actually withdrawn from the market. That is what happened with BCC tokens after the Bitconnect scam crash.

Fake money crash

Current order book:

  • sell 2 apples for $3 each (Bob)
  • sell 1 apple for $3
  • Market cap: $9

Let’s say that people discovered that Bob was buying apples with fake papers to drive the price up. Immediately people reevaluated a current apples price so all traders dropped the price to $1, because they are scared to hold apples and nobody wants to buy at the high price due to FUD.

Now the order book looks like this:

  • sell 2 apples for $1 each (Bob)
  • sell 1 apple for $1
  • Market cap: $3 (after the first trade)

So the market cap lost $6 (from $9 to $3), but no fiat money were actually withdrawn from the market. That is what happening right now, the amount of FUD is increasing and thus price is going down, because less people want to buy and more people want to sell.


Money in/outflow doesn’t drive price as much as emotions (FUD/FOMO) do.

On some days you can pump BTC price by $1,000 with just $50 million. Since there are 16.8 million BTC coins in circulating supply, the market cap will increase by $16.8 billion even though you invested 336 times less real USD.

Tether is different

Now when we understand that $500 billion market cap doesn’t represent the actual amount of fiat money that entered the market, let’s talk about Tether and why it’s totally different from all other coins.

Tether (USDT) is a dollar-pegged token, which means that 2.2 billion USDT is actually equal to 2.2 billion USD regardless of emotions.

In order to get $100 USDT you have to deposit $100 real U.S. dollars and then 100 completely new tokens will be issued, which never existed before on the market, unlike in the example with apples.

One can argue that similar process is happening during ICOs when many new tokens are being created out of thin air and enter a market. But it’s not exactly the same process, because during ICOs people buy tokens with BTC or ETH which were already on the market, and new tokens are not dollar-pegged and they will have a floating price after being listed on exchanges.

source: Kraken

USDT can also be freely exchanged to USD e.g. on Kraken, but here’s a funny thing. Since USDT is a dollar-pegged token, there is a huge “morally justified” price manipulation going on that keeps the ratio approximately 1 to 1. Every time you sell a large chunk of USDT the price will go down, but the bots will bring it back, and visa versa. And this is a very lucrative business, because all you have to do is buy below $1 and sell above $1. No technical or fundamental analysis, no stress, just pure profit.

Net inflow

Now when we know that Tether market cap is completely different from all other tokens, let’s talk about actual size of Tether comparative to all money that were ever invested in cryptocurrencies.

Nobody can tell for sure how much money were invested in cryptocurrency market, but analysts from JPMorgan say that net inflow of $6 billion resulted in $300 billion in market cap. Since then the market cap gone up a bit, so let’s assume that the net inflow is $9 billion, which means that $2.2 billion Tether is a quarter of all money that were ever invested in cryptocurrency market.

25% in very different from 0.5%, right?

Of course there is COI (conflict of interest), because JPMorgan is a part of an old banking system that profits from all your transactions as a middle man and enslaves people with credits. JPMorgan is financially incentivezed to disrupt Bitcoin and call it a bubble, so their estimation of $6 billion net inflow might be too low.

But even if we assume that the net inflow is $15 or $20 billion, Tether is still a significant part of all money that ever entered the crypto market.


If you still think that I’m talking total BS and Tether cannot seriously influence the whole crypto market, then try to sort all coins by trading volume and see that suddenly Tether becomes a top 3 coin.

source: livecoinwatch.com

Some days USDT trading volume is even higher than its market cap, which doesn’t happen with any other major coin.

Is Tether backed by USD?

After understanding the importance of Tether, some of you want to know my opinion on this topic. Well, no legit audits for such a long time it’s a red flag, but I think that both options are possible and the truth might be somewhere in between. The best illustration of my current position is this tweet.

The problem with Tether is not even a debate whenever it’s backed by real USD or not, but rather the fact that it’s a centralized system based on trust that can be easily manipulated or shut down by the governments, which is completely the opposite to what Satoshi Nakamoto and all early adopters were trying to build.

The idea of a centralized dollar-pegged coin is fundamentally toxic for the crypto market that is based on decentralization, censorship-resistance and anonymity.

In changing the scale of the system, we have to think about what compromises and trade-offs are being made. This is a decision everybody has to make.

You have to think carefully about convenience versus liberty. (by Andreas M. Antonopoulos)‏

Tether can help with arbitrage and shield us from cryptocurrencies volatility by converting to USDT during dips without a need to comply with KYC/AML laws, but as a trade-off it can disrupt the whole system.

If you are in crypto just for a quick buck, then it’s a fair trade off. But if you want cryptos to be the future monetary system that will eventually subvert aggressive governments, unite people and stop wars, then you might double-think your choice.

If not Tether, then who?

This is a good question that many people ask. There are always many different opinions in the community and that’s OK as long as we can reach a consensus.

You lose your privacy today, but you go to jail 6 years later based on something from your browser history today. (by Andreas M. Antonopoulos)

Today we reap what we sow years ago. Tether was an interesting experiment and it showed us a consequence of relying on centralized systems. I’ll strongly argue that any centralized pegged coin is a ticking bomb and thus it’s not a good solution to avoid regulations, so community should avoid it as a plague.

Even if Tether turns out to be fully backed, it’s still the weakest point that banks, governments and media will use to attack the crypto community and cause crashes.

As a solution to regulations we can have two types of centralized exchanges:

  • Exchanges with crypto/real fiat pairs that comply with KYC/AML laws.
  • Anonymous exchanges without crypto/fiat pairs, but with decentralized stable coins.

If a person doesn’t care about core principals of crypto community, then he can reveal his identity and use exchanges with real fiat pairs, so he can save himself from volatility if he times the market right.

If a person highly values anonymity and censorship-resistance, then he can use anonymous exchanges that don’t have any fiat pairs. That’s not a big trade-off for the safety of a whole ecosystem, because user still can use other decentralized stable coins like bitUSD or DAI. And to acquire cryptos he can use peer-to-peer decentralized platforms.

Fair to mention, that community has already started some positive moves and Bittrex considers ditching Tether and adding USD deposits.

Update: several new stablecoins have arrived on the market in 2018 to challenge Tether’s domination:

  • Circle’s USD Coin (USDC)
  • the Paxos Standard Token (PAX)
  • the Gemini Dollar (GUSD)
  • TrustToken’s TrueUSD (TUSD)
  • Maker’s Dai (DAI)

Update 2: NY Prosecutors Alleged that Bitfinex Covered $850 Million Loss Using Tether Funds

Update 3: Good sum up video from May 1, 2019

TL;DR

  • Market cap is not the amount of real money inflow.
  • Tether’s market cap is totally different from all other coins.
  • Tether represents a significant part of all fiat money that were invested in crypto market (up to 25%), so it’s not “just” 0.5% of all market cap.
  • Tether is a third cryptocurrency by daily trading volume and being used by most biggest exchanges.
  • Tether’s subpoena already caused a huge panic and thus a price dip.
  • Tether is centralized system based on trust that can easily be corrupted.
  • Tether will always be used by banks and governments to attack cryptos.
  • There are other decentralized stable coins like bitUSD or DAI.
  • Some exchanges consider giving up Tether in favor of real USD.
  • More stablecoins arrived on the market: USDC, PAX, GUSD, TUSD, DAI.

Disclaimer: I am not a licensed financial advisor, and this article is not a financial advice. The information presented here is for educational purpose only, it represents my personal opinion, and is not purported to be fact. Cryptocurrencies are very volatile and can move quickly in any direction. I’m not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods, services or companies mentioned in this article. Seek a duly licensed professional for an investment advice.


Use the most secure, private and intuitive way to exchange ether (ETH) with others for your local currency — LocalEthereum. You can either create a new password-protected account or log in with your favorite wallet like Ledger, MetaMask, or mobile apps like imToken.


If you’ve never heard of Tether/Bitfinex/Ethfinex allegations, then this article is a good start, because it has many links to different sources that you trust.

A new series about Lightning and Raiden networks:

  • Help inform other people about Tether marker cap misconception by 👏 (you can clap up to 50 times).
  • Now, when somebody is arguing about small 2 billion Tether market cap, you can just give them a link to this article.
  • Store your cryptos on a hardware wallet.
  • Follow me on medium and twitter to stay informed about cryptos.

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Sam Aiken

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