People have talked a lot about Tether and Bitcoin, with some economists saying the former is a potential financial stability risk. However, other investors believe the lost confidence in Tether could spark an unpredictable event, severely impacting the market. Nevertheless, the Tether and Bitcoin manipulation issues hold significant implications for the crypto world, with investors worried it could also affect other markets besides digital currencies.
What is Tether?
Tether is a cryptocurrency, like Bitcoin. It is the world's third-largest crypto in terms of market cap. However, it is quite different from Bitcoin and other digital currencies. Tether is a stable coin, a digital currency tied to real-world assets such as the USD to maintain its value. What distinguishes it from other virtual currencies, with higher volatility?
Tether's developers pegged it to the US dollar, meaning its price is equivalent to $1. However, that's not always the case for spooking investors. Crypto traders often use Tether to purchase cryptocurrencies on exchange platforms such as Immediate Edge. That cushions them from financial risks in times of sharp volatility because of its ties to a more stable asset.
The Controversy Surrounding Tether and Bitcoin
Some investors and economists are concerned Tether's issuer does not have enough dollars to justify its ties to the USD. Tether broke down its stable coin reserves in May 2021, with the firm revealing only 2.9% of its holdings were available in cash as the rest existed in commercial paper. That would put Tether among the world's top ten commercial paper holders.
Many have compared Tether to traditional money-market funds, although it is unregulated. It currently has over $60 billion worth of tokens in the market, with more deposits than most US banks.
Financial experts have expressed concerns that tether might have played a significant role in manipulating Bitcoin prices in the past. One study claimed tether issuers used it to drive Bitcoin's value in 2017 when the latter's prices experienced one of the sharpest declines in history.
A US-based academic research firm released a report in 2020 claiming fraudulent trading in Tether influenced Bitcoin prices. The firm argued that the crypto exchange, Bitfinex, has created tether coins from thin air and used them to buy Bitcoin, pushing its price upwards. Although many other academics, investors, and economists have reiterated similar allegations, questions about market manipulation remain.
Tether's popularity on many crypto exchanges and its substantial market cap could significantly impact the entire cryptocurrency market if anything were to go wrong. Most people are still persistent that Tether Operations Ltd, the company behind Tether, has not been transparent on their holdings. Investors warn that could impact a sudden loss of confidence in Tether, creating severe liquidity shocks to the larger crypto market.
On the other hand, other investors are concerned a sudden surge in tether withdrawals could result in a potential market contagion, negatively impacting other assets besides crypto. Stable coins like Tether are becoming more popular and deeply entrenched in the financial market but remain unregulated. That means Tether's sudden mass redemption could destabilize short-term credit markets.
Tether's Response to Bitcoin and Market Manipulation Allegations
Tether Operations Limited has vehemently denied the allegations linking it to manipulating Bitcoin price and the crypto market. The company insists it has the dollar reserves to back up all the tether coins in circulation. They maintain the company is using its funds properly but cannot disclose information about the recent Bitfinex Twitter account hack.
The company released a statement in early 2021, saying that neither Bitfinex nor Tether is or has ever engaged in any market or price manipulation. They added tether issuances could not prop up Bitcoin's prices or other cryptocurrencies' values on crypto exchanges.