Monday, February 5, 2018

Tether In A Bitcoin Bear Market, And Can Tether Be A World Currency?

What is Tether.

Tether is a token issued on the Bitcoin and Ethereum blockchain. and promises to pay out 1 USD for every Tether issued. This led to the community;s concern as to whether the $2 billion in reserve exist. Tether.io did not, could not or would not provide proof of this. News of Tether.io parting company with their auditors made the situation worse.

Lets examine the facts

1)  The price of Tether remained stable throughout this controversy, meaning that even though there was a strong and targeted campaign against it, Tether holders remained steadfast. There was no sell off and the number of Tether issued actually increased. Action speaks louder than words. Therefore we have to conclude that Tether must have an important role in the Crypto economy.

2) One year ago the daily volume of Tether traded was about a million dollars. Today it is 3.5 billion dollars. This is a phenomenal increase. Something is happening.

3) There were claims that Tether was issued to prop up the price of BTC. This can't be true because the price of BTC is down in spite of the increasing number of Tether issued.

Like it or not, Tether is now a huge part of the Crypto economy. It is already second behind BTC in trading volume. ( Adjusted : BTC 6.5 Tether 3.5 billion ) I have no doubt that Tether will surpass BTC in trading volume soon, especially with BTC losing utility and usage daily.

A "Reserve Bank" For Crypto

Does Tether.io have 2.2 billion USD deposited and/or in assets as they claimed? It is dangerous for Tether to reveal their fiat holdings as these can be subjected to confiscation. More than likely if it exists they will mostly be in accounts not directly attributable to them.

They could be held in pledges and guarantees in fiat or assets. However this is done, all that is necessary is for their holders to believe that they can have their Tokens converted to USD on demand as promised. This really makes Tether.io for all intent and purposes "A Bank". It exist because we believe it is solvent. If not there would have been a huge "run on the bank".

This means that USDT can be just printed into existence by Tether.io at whim. We have no way of knowing if they have the full reserve backing for every Tether they issue. What this means is that Tether is now basically backed by the full faith and trust of the Crypto community. This is the reality. If this is not true Tether will not exist, as they have not or cannot prove that they have full reserves. They only have their promise to convert Tether tokens on demand.

It is possible that the number of Tethers issued follows demand, so that its' value always remain at approximately 1 USD. If the units of Tether issued was fixed then demand would have push the price upwards. There must be some mechanism that is keeping the price of Tether stable. Perhaps it is the belief that there is 1 USD backing every Tether issued.

Now comes an interesting thought. What if the whole world starts pricing everything is Tether. Initially we will view Tether the same as 1 USD, but over time Tether may be deemed to be  the stable unit of monetary value and the USD gets to be priced in Tether, together with every other world fiat currency. If this happens, Tether becomes a world currency! This is not so far fetched as how we view money is a generational thing. The younger generation have more faith in the Crypto economy because they are basically excluded from the legacy economy.

Is Tether a huge risk to the Crypto economy? Will Tether crash to zero?

The whole crypto market is crashing. The only Token increasing in market capitalisation is Tether. Based on this it is unlikely that Tether will crash ahead of other tokens. More than likely it is actually underpinning the whole crypto economy.

Can a government shut Tether.io down? The Chinese government is already clamping down on anything crypto. The currency most at risk is the USD. I really have no clue. If the US government could shut down Tether's accounts, I am sure that they would. All that is needed for crypto to survive is for one country to legalise it and Japan has.

We will have to watch this play out, but the bigger the market cap of Tether the harder it will be to shut it down. The value of a token is in the minds of the people using it, and Tether may actually get the full appreciation, support and protection of the whole crypto community.

Tether is not a threat to the crypto economy. It is a stable unit of measure for the crypto economy.  Even the legacy economy does not have this stable unit of measure. Hopefully a system of decentralised governance for Tether may evolve.

Tether in a bear market

Having seen so many boom and bust cycles in the Bitcoin space I have come to appreciate the value of a stable coin like Tether. A market indexed to BTC rises and crashes with the price of BTC. When the market is index to Tether, each coin will rise and fall on its' own merit.

Current demand for Tethers is fuelled by investors wanting a stable unit to hold value while the crypto market is falling. These investors have not cashed out. Perhaps they are looking to buy back in when they belief the market have bottomed out. Perhaps its' arbitrage value is significant. Maybe it will be a hedge against inflating fiat currencies. Time will tell.

Questions Questions and more Questions.

a) What happens when the market turns bullish again? Will supply and demand for Tethers still be kept in equilibrium?

b) Who is the counter party for Tether is a bear market?

c) Will unscrupulous parties print Tethers out of thin air to manipulate the market?

d) Can Tether become a world currency?

Update 10/2/2018

Another interesting observation on Tether is that its' trading volume is equal to its' market cap at the moment. Meaning that the trading volume is at least 1X the number of coins issued. All other coins trade at only a percentage to its' market cap eg Bitcoin at 0.05X. (1/20th) If this observation holds then Tether will have the highest trading volume if its' Market Cap reaches 8 Billion or with the issue of anoher 6 Billion coins.

Tether is an interesting development as it really can be the glue that connects the whole crypto market. It is an issued token so it is not subjected to mining. It is built on the Bitcoin blockchain as a second layer and is therefore secured by the Bitcoin blockchain. Compared to all the other wannabe stable coins, Tether has achieved the network effect.

It has a very interesting use case in that centralised exchanges uses it to offload most of their KYC AML requirements to Tether.io.

Its' function as in intermediary coin between those who believe that the market is rising and those that believe that the market is falling in any particular coin can only gain more usage and prominence.

Another feature is that it trades in a small price band of +/- 10%. This could be deliberate in the sense that more Tethers will be issued if the price trades above 1 USD and redeemed f it trades below. It now makes it possible for risk adverse traders to enter the market knowing that there is a floor bottom for the price of Tethers. This will bring more liquidity to the whole crypto market.

The Tether database is under reconstruction at the moment, perhaps due to the recent 30 million hack. Even with this negative news the price of Tether did not tank, and Tether continues to trade on the exchanges.

Pushing the virtues of Tether does not mean that I am pro Tether against all the other coins. In fact it means that I am pro Crypto. Tether being a stable coin allows all other coins to rise and fall on their own merits against it. This makes it somewhat like Shapeshift.

Can you see where this is leading? If Tether wallet becomes a spending wallet, it means that you can spend whatever coins you have in Tether on the fly. Merchants need only worry about one currency Tether, and for he moment it is equivalent to USD.

There is no mental gymnastics required to convert between Bitcoin or Ethereum or Litecoin or whatever coin when spending or receiving Crypto. The decision to use or hold any particular crypto or fiat comes before or after the Tether transaction by both parties if needed.

This reasoning taken to the extreme may mean that we could easily drop the USD equivalent. It could just become a stable Tether in its' own right. Can this happen/ I think yes. Will it happen? This is hard to predict.

Tether's advantage here is that it has achieve the most network effect as a stable coin. It is neutral. No one holds Tether expecting the coin to "go to the moon" so to speak. That aside, if Tether.io ever goes for an ICO, their tokens will be a very good buy.

There has been much controversy about the connection between Bitfinex and Tether. I do not know much about the politics in this relationship but I think that it has been positive for Bitfinex and probably all exchanges that uses Tether without dealing in fiat. I hear from a reliable source that Bitfinex is giving out a $1.01 dividend in its' 3rd quarter. That is 100% its' share value and comes after 2 previous dividend issue of  25 cents and 37.5 cents respectively. Without a doubt Tether provides liquidity to the Crypto market and more Tether can only mean a stronger Crypto industry.