JCG
4 min readJan 13, 2021

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Tether vs. Bitcoin: where has cryptocurrency ideology gone?

A while ago I first heard about the ongoing debate and accusations of tether printing “fake dollars", in order to sustain and allegedly manipulate the Bitcoin price. This was first formulated in a study by Griffin and Shams [1], who claim that tether already actively contributed to the btc price run and bubble ending in 2017.

Meanwhile, in the current bull run, Bitcoin has skyrocketed to ever higher levels. So did the amount of tether in circulation. The situation now becomes increasingly heated and many expect an imminent crash.

While reading about the tether-bitcoin-dynamics, many questions came up to me. It feels like there is a feedback between the issue of tether and bitcoin. If tether really prints fake dollars, it simply means that the true exchange rate between a unit of tether and unit of US dollar would not trade at parity. Instead, every tether should be worth less than a real US dollar. Furthermore, the explanation for the current bubble could then be that the increasing supply and trading activity of tether starts to dictate the price. Instead of looking to the real US dollar BTC exchange rate, people look only at tether-btc. As this rate would play by its own dynamics, investors might wake up to a sudden crash if it became public that tether really prints fake dollars. On the other hand, it could be that tether simply and logically follows the surging price of bitcoin, as the demand for trading tether increases. Then, the increase of the tether supply would be a normal consequence of the increased demand.

Over the past years, a large amount of real money must have found its way into the cryptomarket, not via tether, but via direct exchange of fiat into btc, eth and so on. People bought crypto for fiat. The fiat then is deposited in the accounts of the exchanges that sell the cryptocoins. Cryptoexchanges are happy to sit on a stash of real world cash, that they obtained by selling “digital ideas” to people who believe (or want to participate) in them. All logic.

By now, apparently, the majority of bitcoin, ethereum, …, transactions are carried out against tether (more than 60%). Thus, tether counterparty trades dominate the market right now. In response to this increase in usage and popularity of tether for many cryptocurrencies, exchanges needed to adapt.

More specifically, they need to buy more units of tether from the company tether, in order to satisfy the increasing demand for tether in their markets. If they did not do so, the tether price would not trade at parity to the US Dollar, anymore, due to the increasing demand for tether. Hence, practically, exchanges are forced to buy tether, as otherwise the tether rate would be destabilized. This in turn should have the consequence that, in order to keep up, exchanges have to transfer increasing amounts of money to the tether company and hold tether instead of this real money. However, it is real money that they need to make a profit in the real world, to pay their employees, their cost, etc. It seems like the only party profiting in this whole situation is tether which holds more and more fiat (obviously with the promise that any tether can be exchanged back into a real US dollar in the future).

I see a huge risk in the increasing extreme dependence of exchanges on the digital currency tether and the associated company. In other words, the fate of many exchanges depends on the stability and value of tether, more specifically, on a single company. Usually, the promise behind the stability of a currency is backed by an entire state and their central bank. Please think twice about that last sentence. Entire states back currencies. In the case of tether, however, it seems that a single company, with its few individuals takes control over billions of dollars.

This disappoints me. Isn’t one of the main crypto-ideas to get rid of dependence??? Tether determines according to its own “gusto” when to release and burn coins. Seems just like a central bank, however with the distinct and immensely important difference, that it is led by fewer people (who are probably less educated than central bankers), intransparent policies and does not really obey a set of regulations that currency-controlling institutions are usually subject to. So far, the company did not even manage to perform an official audit, for gods sake! And we trust in it more than in a central bank, just because we have this idea from somewhere that central banks are the big evil and stealing our money and crypto-guys are the good guys? Believe me, especially as a European, I am really not an advocate of central banks and their policies, but this is madness.

The current situation seems to me like a failure of the principles of crypto-independence and democratic distribution of responsibility across networks. A whole network of exchanges and millions of investors seem to depend on a single “node” that becomes more and more significant and pace-setting for the future of the entire system.

How can exchanges make themselves so incredibly dependent on a single entity? Especially with the accusations of fake dollar printing, how can they trust in this company? And, thinking beyond, if they wake up at some point and start to bank-run tether, will they ever see their money, again? In the end this boils down to: will the small investor ever see their money again?

In case someone reads this article, :D, could you please shed light on this situation by leaving a comment? If there is much feedback to this, I might summarize the thoughts of the community on this in a future article.

[1]: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3195066

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