Why Bitcoin didn't collapse after the Bitfinex/Tether FUD

01 May, 2019 | Updated: 01 May, 2019
by Will Heasman
Analysis
Why Bitcoin didn't collapse after the Bitfinex/Tether FUD

Yesterday brought to the open something that many within the cryptocurrency community had feared/believed for a long time. Tether is not 100% backed. While a revelation like this would ordinarily sink the market in a pit of despair, this time was different, in fact, Bitcoin cited a modest rise of 2.2%... not bad considering this could be classed as pretty earth-shattering news. So why didn't the market collapse after this latest Tether FUD?

For those of you not fully clued up, a recent investigation into Tether was launched by the New York Attorney General’s office, shortly after Bitfinex dipped into is USDT stabilizing cash reserves.

According to Tether representatives, the company did this in order to regain what they dub as “temporary” losses of $850 million which - according to the firm - is currently frozen within a Panama based account. The proceeding court filings forced the hand of Tether’s legal counsel who signed an affidavit which read: 

“As of the date [April 30] I am signing this affidavit, Tether has cash and cash equivalents (short term securities) on hand totaling approximately $2.1 billion, representing approximately 74 percent of the current outstanding tethers.”

So why didn’t this latest piece of Tether FUD cause Bitcoin and the wider market to dump?

Let’s first start by laying down why Tether not being fully backed is pretty worrying…

For starters - and not to pour fuel on the flames of controversy - but Tether has a fairly chequered past when it comes to checks and balances; so much so in fact that the firm and its sister company, Bitfinex actually have their very own detractor, the anonymous blogger, Bitfinex’ed (how many stablecoins can claim a dedicated antagonist, ey?). 

Bitfinex’ed has noted the shortcomings of Tether a myriad of times over, including their failure to provide a formal audit, in which they misrepresented consulting work by Friedman LLP. As well as that time they sneakily change the terms of their 100% backing to include assets other than fiat. So, yeah, chequered past.

With an average daily volume exceeding $11 billion, you’d expect the firm issuing these stablecoins to keep to their word, especially when it comes to the stable part…

The biggest problem with Tether only being backed 74% is that it leaves 736 million USDT unaccounted and unbacked in the meantime.

But let's not tempt fate, the fact is, the market didn’t move significantly either way, it just carried on it’s day to day business.

A sign of things to come?

According to prominent Bitcoin bull and head of research at Fundstrat, Tom Lee, this is an example that the final nail in the coffin of the bear winter has finally been hammered in (hurrah!).

Lee suggests that if this story had broken during the market downturn of 2018, we would have seen a mass exodus of cryptocurrencies with many disillusioned with the idea of an unbacked stablecoin. However, this not being the case, Lee sees this BTC apathy as a strengthening of the market: 

In addition, Lee postulated that if this relative market stability continues over the next few weeks, his case for the end of crypto winter would be further solidified.

It didn't really matter... 

However, some argue that this latest Tether debacle is less than newsworthy, (at least as far as fundamentals are concerned) therefore providing a reason as to why the price hasn’t really been affected. 

Instead, these people point to the fact that many banks aren’t backed, many of which run on a fractional reserve; a system in which only a fraction of bank deposits are backed by fiat, making only a fraction of those deposits available for withdrawal. 

The comparison is perhaps a fair one, with many banks around the world working on a fractional reserve system of banking, and in some cases being less backed than Tether.

Bitcoin pumped on Tether? 

Moreover, this FUD could have actually helped bolster BTC, with the fallout from the revelation of unbacked USDT sending investors running to jump into BTC as the relative safe haven and therefore causing that 2% increase we saw on the day the news broke.

In fact, this point was noted by Yoni Assia CEO of eToro who noted that while the news was “bad” it may lead to further gains for the #1.

it's still earlier days but it looks as though the market will survive this, and so it should, Tether FUD is so 2018…

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