The Untethering

On the last days of September, the rumors about the financial uncertainty of Noble Bank, (one of) the supposed reserve holders for Tether, broke loose. Tether began to lose what little traders’ trust, it had left.

It wasn’t a coincidence that only a couple of weeks before, the 3 new, regulated, stable coins (USDC, GUSD, Paxos) have launched under the New-York Department of Financial Services supervision.

The market has been waiting a long time for an alternative to Tether and it seems that the rise of alternatives along with the ongoing ambiguity about Tether’s actual reserve backing and Bitfinex banking instability have managed to pull the rug from underneath Tethers virtual fit.

In the chart below, we see the initial decoupling between exchanges who trade BTC vs fiat money and those that trade BTC vs USDT. On September 29, The Noble bank rumors started. On October 5, Bitfinex went down for a no-so-scheduled maintenance causing many traders to start asking questions. On October 11, it was Bitfinex’s halt of fiat deposit and withdrawals that sent BTC down almost 7% in less than 2 hours.

Tether-hell breaks loose

And this brings us to yesterday. At 5AM UTC, All Tether-hell broke loose. The value of Tether began to fall as Traders started disposing Tether in fear they might not be able to in the future. 
So what do you buy when you want to get rid of Tether? Everything you can, starting from Bitcoin, to stable alternatives such as Paxos and TUSD (currently still trading at a 10% premium over their pegging price) if available on your exchange and all the way to any other asset you can trade against USDT.
This has brought BTC to peak at $7680 on Binance, with a spread of over 11.5% over Fiat-trading exchanges and the market cap to increase by over 10% in a couple of hours.

After several more hours, it seemed like things are getting back to normal (as much as you can call a 5% spread on BTC and 6% discount on Tether normal). In the midst of all this mess, OKex, one of the biggest crypto exchanges by volume according to CoinMarketCap announced a listing of stable coin alternatives. Rumors of other exchanges delisting Tether have also started floating around as Binance (which account for 20 percent of the trading volume for Tether) and KuCoin stopped Tether withdrawals and deposits for a short timeframe during the day. That brought the heat on Tether once more, bringing the spread back to over 8%.

What’s next for Tether and Bitfinex?

Yesterday morning (US time), Bitfinex released a statement saying they are bringing fiat deposits and withdrawals back online no later than today.

Right now, traders don’t trust Tether anymore. Bitfinex is not in a good place either. Up until last month, there weren’t too many alternatives to Tether, so even when shit hit the fan, Crypto-only exchanges didn’t have anywhere else to go. Now that they do, Tether is going to have a much harder time walking away unscathed. While Tether still accounts for 98% of stable coins trading volume, it seems that today’s events have shown a glimpse of a not-so-bright future.

How will Tether crashing effect the crypto market?

That depends on how fast it’s going to go. If events like today keep repeating in the future, we’ll likely see more and more exchanges delisting USDT and replacing it with its regulated alternatives. This would mean that people holding USDT will try to get rid of any USDT they still hold, causing USDT’s price to crash even more.

Short term
This will probably increase Bitcoin and most large-cap cryptoassets’ value to increase as people will look to trade those against their remaining Tether, swooping the rest of the market upwards with a growing spread (like yesterday).

Medium term
We will probably see a short to medium drop in cryptoassets, closing the spread between USDT to Fiat exchanges as USDT’s market share grows smaller. The priced might even drop further as momentum and overall lack of trust would make it harder for people to stay in the market.

Longer term
This might be one the best things we could have wished for the crypto market. As Tether’s market share will continue to shrink, and other regulated stable coin alternatives will take its place as the dominant fiat-alternative in crypto exchanges, we might finally get to see more institutional money coming in. As I mentioned in one of my previous posts, regulated stable coins could allow better liquidity options and facilitate inter-exchange settlements. This can also ease manipulation concerns between exchanges and can convince the regulators to approve a crypto ETF.


This analysis was originally posted on our Daily Crypto Briefing, which aggregates all the news, products updates, new product launches, research and analysis you need to up-to-date.

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