Why does the market need USDT and other “stable” cryptocurrencies?
The mechanics of the markets are based on the fact that when buying or selling cryptocurrencies on the market, traders want to fix their profits in something stable and reliable – in something that will remain unchanged in value for as long as possible. Classic “paper” money is well suited for this, they are also fiat.
Why is USDT so popular on crypto exchanges?
Each of us holds fiat and fiduciary money in our hands or in bank accounts every day. These are coins and banknotes that are used as the main currency of our country, with which we pay for goods and services.
The names come from the Latin words fiat — “will” and feducia — “confidence”.
A small part of the 300 collected in the list CoinMarketCap.com cryptocurrency exchanges allow trading in fiat currencies, and an even smaller part of exchanges trade cryptocurrencies to the US dollar. Centralized cryptocurrency exchanges with fiat are highly dependent on regulators who require the disclosure of users’ personal data. This is related to the fight against money laundering and terrorist financing.
The use of fiat money on cryptocurrency exchanges creates several problems for exchanges: regulation, strict KYC requirements (know your customer), fees for transfers from one account to another. Therefore, crypto exchanges are so fond of “stable” cryptocurrencies: there are no borders for cryptocurrencies, there are no prohibitions, there is no regulation (so far).
But they have a high transfer rate compared to fiat money in bank accounts and fixed low fees for transferring to another person. For example, in the Binance blockchain, transactions cost 0.01-0.1$. This is a tangible advantage over fiat money, for this reason, “stable” cryptocurrencies have become very widespread.
The largest, most popular and dominant over all others is USDT.
Why can a giant like USDT fall?
Trying to bypass the panic news on the market about problems with USDT security, until the moment of writing this article, I thought: what if USDT really loses the nominal value of 1 USDT = $ 1? Is such an event possible in the market? How will the market behave in this case?
The market will remember the problems with USDN, UST, USDD for a long time. Therefore, the inflated FUD about USDT adds alertness.
Using the example of UST, a popular “stable” token, we already know that giants are also falling. The price of the “stable” UST token decreased from its stated value of $ 1 by 97%, and this = bankruptcy for those who bought and held UST.
Since the loss of the peg to $ 1 (May 8), the UST price fell to $ 0.02 on May 26.
At the beginning of July, the capitalization is about $ 500 million, which is 36 times less than the capitalization before the fall ($18 billion)!
capitalization USTCAPITALIZATION UST
UST definitely has its own technical shortcomings, to which, if pushed, an extremely irreversible “spiral of death” will start, which occurred in May. USDT is a different fruit and behaves differently.
A bit of history: the behavior of USDT in the past
I am not defending USDT, I understand that Tether’s business model has been stable for 7 years now. It has taken root so much that it allows itself to pay fines to the SEC regulator of $ 18 million on the profits from the USDT printing business in order to smooth out a long-standing conflict. But if the flight from USDT starts in the market, this rocked boat may capsize and drag us all to the bottom.
The first tangible negative news on the market about USDT security appeared in October 2018.
FUD news from October 15 will spread on the market, saying that USDT is a dummy that is not provided with real $.
The main problems were brought by the fake news that Binance is delisting USDT. The Kucoin exchange, which blocked the withdrawal of USDT for a couple of days. BitFinex, which froze over 600 million USDT for a month. All these news together provoked the market to sell USDT by buying other stable coins. Coincidentally, the USDC appeared at that time (coincidence?). Bitcoin, meanwhile, grew by 10% on this news.
USDT capitalization growth USDT capitalization growth
After 35 days, the panic with USDT subsided, the capitalization began to grow again, and the market calmed down on this.
Capitalization of USDT May 10 Capitalization of USDT May 10
In the picture above — from May 10 to July 5, for more than 56 days — USDT is being sold. Large, medium and retail investors continue to get rid of USDT in favor of other stable cryptocurrencies, including USDC, whose capitalization has increased. Although it is noticeable that the rate of rocking of the boat has slowed down.
USDT capitalization growth since May 10 USDT capitalization growth since May 10
In the screenshot above — since May 10, the capitalization of USDC has increased by $ 7.3 billion.
Each market participant, in order to save his capital, takes into account all possible risks, the loss of his precious cryptocurrencies :). Who calculates these risks poorly, sits with a pack of UST in their pockets and a wagon of terra on their accounts. Therefore, we see a continuing outflow of capital from USDT.
But even before the October events of January 30, 2018, the Bloomberg news agency published information that the Commodity Futures Trading Commission had sent subpoenas to Bitfinex and Tether Limited. The reason for this was the regulator’s doubts about the fact that 2.3 billion tokens issued by Tether are really backed up by the same amount of US dollars. There is no confirmed evidence of security to this day.
Now, at the time of writing, the number of negative news has increased. Is it justified?
As publicly stated by Tether Ltd, the company responsible for issuing new tokens to the market, Tether is a stable coin backed by fiat in a ratio of 1 to 1 with the US dollar held in bank accounts. This was the case until March 2019.
What is now known about USDT security
In March 2019, Tether updated its disclosure statement, stating that its tokens are no longer 100% secured by US dollar deposits. Instead, Tether is now 100% backed by reserves that include traditional currency and cash equivalents, as well as from time to time other assets and receivables from loans granted by Tether to third parties, which may include affiliates.
The last information provided from Tether Ltd on March 31, 2022 is about the USDT collateral reserves. (picture below)
reserves breakdown Tetherreserves breakdown Tether
Tether regularly, 2-6 times a year, audits its balance sheets, ensuring the stability of USDT. However, in its public reports, it writes that the reports are not financial statements and represent unaudited financial information extracted from its accounting records. And also declares that the capitalization of USDT is based on the provision of consolidated (all taken together) assets, which include: dollar, euro, Chinese yuan, gold, Mexican peso, corporate bonds, loans, other investments (cryptocurrency) and other assets that Tether specifies in the type of collateral.
From their own reports, it can be seen that of the claimed 85% of “cash and cash equivalents”, only 5.81% are the same cash on the company’s accounts. The reliability of the remaining securities to ensure stability will depend on liquidity in those markets where Tether will be able to quickly sell its “other assets” to buy back its USDT from the market.
Since Tether does not disclose information about which specific assets it holds for collateral, but only discloses information about the asset class and its content as a% of the total collateral, it can only shed light on what a “different” class of their asset is. Let me remind you here — there is no open information that can be verified or refuted. The information is provided by Tether, and there is no confirmed information from an independent auditor.
Money market funds are investments with low risk and high liquidity.
Commercial securities are short—term debt obligations that give a fixed income and are sold at a discount from the nominal value. The period of circulation of securities is from 1 to 365 days. The company issues commercial papers in order to receive financing in a very short time. Thus, the company receives immediate liquidity. When a commercial paper is secured by the assets of the company’s business, the owner of the commercial paper has a greater guarantee in case of default of the issuer.
US Treasury Bills are a short—term discount security of the US Treasury with a maturity of 3 months to a year. Highly liquid with low risk.
As a result, it is especially interesting to notice the distribution of risks and diversification. Tether, receiving fiat funds to its accounts, distributes money to other assets, receiving % of the profit from this. And here we can conclude that, if necessary, Tether will really start selling its securities to buy USDT from the market, and so far they have succeeded.
Can I sleep peacefully and stop worrying about USDT?
Capitalization of USDT until May 10 is $ 83 billion.
The capitalization of USDT has decreased by minus $ 17 billion to $ 66 billion since May 10 and continues to decline.
The wind of distrust of USDT is blowing… Will there be a storm?
On June 21, Tether Technical director Paolo Ardoino announced that the company is preparing for a full audit. The audit will be conducted by one of the top 12 leading companies in this field.
The purpose of the audit is to ensure transparency of USDT reserves.
The picture is not very impressive: if Tether really had money in a ratio of 1 to 1, then most likely they would not have worried so much about the audit and calmly passed it even earlier and disclosed the information.
Tether has already had an independent audit, which was stopped for unknown reasons.
