Tether, creator of the world’s largest stablecoin, hasn’t kept control of its one-dollar target for the better part of two weeks. Crypto investors ignore this at their peril.
Certainly, holders of the digital token, called USDT, did not suffer like those who invested in TerraUSD. This “algorithmic” stablecoin imploded in early May and is only worth around 7 cents on Monday.
USDT, on the other hand, fell earlier this month to around 95 cents and has spent most of the past two weeks trading at 99 cents or higher. On Monday, it stood at around $0.999, 0.1% below its target. According to at CoinMarketCap.com, it has not been worth $1 on crypto platforms since May 10.
A Tether spokesperson in an email to barrons said that USDT falling below $1 in price on crypto platforms “doesn’t mean USDT has broken its ankle.”
“It only means that there is more demand for liquidity than there is in the order books of this exchange,” the spokesperson wrote.
But functionally, for most US investors, that means a dollar’s worth of Tether won’t translate to a dollar’s worth of cash in a bank account. Understanding why the mismatch has held could be key to investors’ decisions to continue holding the stablecoin and regulators’ efforts to put guardrails around tokens like this.
Unlike algorithmic coin providers, Tether says it holds real-world assets to back each token. When a USDT drops below a dollar, even by a small amount, arbitrageurs can make money by buying the Tethers at a discount and trading them with the firm.
This process should eventually clear the discount, and it is clear that some institutional investors have traded the tokens. Since May 10, the market capitalization of USDT has fallen by around $10 billion to $73 billion.
One problem is that the takeover of Tether is not without friction. Investors must withdraw at least $100,000, according to the company, and Tether charges the greater of $1,000 or 0.1% to execute the withdrawal.
Even though US investors can buy USDT on crypto exchanges, they can’t do business directly with Tether, unless it is a large institutional investor and has an exception.
So in the US, Tether is less like a money market fund and more like a closed-end fund, where investors can sometimes watch desperately as shares trade below the price of the underlying assets. They can go out but only at the reduced market price.
Another issue is the ongoing fears over USDT assets. Tether’s latest asset report said most of its holdings in March were US Treasuries and cash equivalents, although the company also held foreign government bonds, commercial paper and digital tokens. among other assets.
To complicate matters, some regulators say Tether hasn’t always had the support it claimed. In October, the Commodity Futures Trading Commission mentioned he had discovered that USDT was not “entirely backed” by reserves in a bank account, as the company had said in the past, mostly from 2016 to 2018. Tether in response to the settlement mentioned it always maintained sufficient reserves.
While USDT appears to have “liquidity buffers,” it’s not yet clear whether the token could hold up against investors looking to redeem it en masse, wrote
‘ Joseph Abate and Zoso Davies in a research note last week. So far, crypto investors who need cash fast have seemed content selling their USDT at a discount in the secondary market rather than buying it back from the company.
This could subject the USDT to “preemptive executions,” the researchers wrote. The risk is that an investor who thinks they may need cash soon will be prompted to sell their USDT immediately before other investors do the same and drive the price down further.
“Ultimately, the comprehensive warranty helps reduce stablecoin risk, but does not eliminate it,” Barclays analysts wrote.
Email Joe Light at [email protected]