Tether is Breaking its “Peg” to the Dollar

The market is losing faith in the third most actively traded cryptocurrency in the world. Known as Tether (USDT), this token was designed to have a 1-1 peg with the US Dollar. Supposedly, each Tether is backed by a US Dollar held in trust. There has always been skepticism about this claim, and the market has been abuzz with the news that the company behind Tether recently broke off its relationship with its auditors. Moreover, the supply of Tether's has increased markedly in recent months, going from under 500 million tokens in circulation in the beginning of November 2017, to over 2.2 billion tokens now. The audit was meant to calm fears voiced by some market participants that Tether was printing un-backed tokens.

Now Tether is losing its peg to the dollar. At pixel time, the exchange rate of tether to dollars, known at USDT/USD is hovering around 0.9818.

This chart is taken from Kraken.com, the only exchange to offer a tradable USDT/USD pair.

Why does the Tether to Dollar peg matter? Because major exchanges, to avoid money transmission laws and other regulations, decided long ago to use Tether instead of Dollars as the base in many cryptocurrency trading pairs. For example, on Poloniex you can trade Bitcoin against Tether, not dollars. The change might not be noticable to new traders: BTC/USDT instead of BTC/USD. But the difference could be massive in the event of a complete breaking of the peg.

Here's a list of the largest Tether addresses. Note the number of major liquidity centers on the list.

While its too early to tell if this breakage is permanent, its probably worth continuing to watch the USDT/USD pair closely, and also starting to think about what could happen if the peg becomes completely unmoored.

One scenario is that holders of Tether start to convert those into cryptocurrencies en masse. We would likely see a premium start to develop between "Tether" exchanges, like Bittrex and Poloniex, vs fiat to crypto exchanges like GDAX and Gemini. This is already starting to happen slightly in the prices. We would also see a rush of transfers of crypto out of the exchanges. This could put strain on exchanges that have been playing around with their reserves; basically you could see not one but multiple Mt. Gox's. Hard to put an exact prediction on price movement in this scenario, but its clear to say that the market's would become unhinged so to speak as a result.

Another scenario is that Tether turns up the printing presses into high gear and attempts to defend the price of USDT/USD on the only exchange where its listed, Kraken. One could easily envision a scenario where a short squeeze is engineered in the USDT/USD pair.

Another option is that there really are over 2.2 billion US Dollars sitting in trust for all those Tether. That is exactly the kind of thing an audit solves, however, so here we are. Keep your ears to the ground and your eyes glued to the screen, this one could get very interesting.