The Danger of Tether

Just this past Friday, we released some important ratings changes on major cryptocurrencies. If you’re a subscriber, check your inbox for the issue we sent you Friday afternoon. If not, you can join here.

Now, for today’s topic: My opinion on Tether.

This is a cryptocurrency that’s supposed to be backed by the U.S. dollar in a one-to-one ratio. In other words, the idea is that there’s only one dollar of USDT (Tether) for every dollar they have in deposits.

Why is it important? Because a lot of exchanges rely on Tether for their markets. “Crypto only” exchanges like Binance or OKex (which dominate crypto trading) do not accept fiat. So they use Tether as an equivalent to the USD.

Just to give you an idea of how important the stability of Tether is for crypto trading today, let me cite this stunning factoid:

Tether is the third-largest cryptocurrency by trading volume, behind Bitcoin and Ethereum, which are also used as liquidity. Thus, most exchange pairs are against Bitcoin, Ethereum or Tether.

The big issue: There’s never been an audit, and the folks behind Tether have not been transparent when asked. They have continuously claimed their tokens are backed 100% by actual dollars, yet they have failed to present evidence to support this claim.

On social media, there appears to be consensus that what Tether is actually doing is running a fractional reserve system.

In other words, most observers claim they DO NOT have the dollars to back up all those Tether coins.

I tend to agree it’s suspicious, and I encourage you to check out this Twitter handle if you want to learn more about the activity related to Tether and Bitfinex, one of the largest crypto exchanges.

Some other critical facts:

Fact #1. Tether is the only “cryptocurrency” with trading volume that regularly exceeds that of its market cap.

Fact #2. This means the entire Tether supply changes hands regularly, sometimes more than once a day. In economics, we call this the “velocity of money.”

Fact #3. This is important to know because it tells us that Tether is used for trading A LOT. It’s one of the main sources of liquidity in the cryptomarkets.

Fact #4. Liquidity is the lifeblood of a market. It’s what makes prices stable and seamless trading possible.

Fact #5. The consequences could be far-reaching. What happens if Tether does turn out to be shaky? Or what happens if a major government determines that cryptocurrencies like Tether are being used by exchanges to avoid regulations? What if this large source of liquidity suddenly evaporates?

I don’t want to speculate on what the exact sequence of events would be if there were a run on the Tether company — if investors rush to redeem their Tether for U.S. dollars.

Suffice to say that, if the liquidity rug is pulled from under the market, the consequences will not be good.

Conceivably, it could cause exchange failures. It could drive investors to liquidate their positions, causing sharp declines in market prices.

It’s hard to say. But we do know one thing for sure: This type of liquidity event has a silver lining. It can help expose all sorts of shenanigans that went by unnoticed before.

“Only when the tide goes out do you discover who has been swimming naked,” as Warren Buffett likes to say.

So, this Tether story isn’t just FUD (“Fear Uncertainty and Doubt.” There are real reasons to be concerned.

What’s the best way to protect against this sort of event?

First and foremost, stick with the cryptocurrencies we rate among the best. (For our latest list, go here if you’re a subscriber, or here if you’re not.)

Even the best can also fall in price, of course. But their strong technology and fundamentals give you solid protection against serious long-term damage.

Second, do NOT keep your crypto on the exchanges, especially those that use Tether.

Third, no matter which cryptos you buy and no matter where you trade, do not use USDT-based pairs.

Fourth, always bear in mind that these kinds of dislocations have occurred before and will occur again.

Even if Tether causes a temporary panic, in the grand scheme of things, it is not a lasting threat.

Cryptocurrencies and blockchains will revolutionize everything from finance to the legal industry to society itself.

Don’t lose sight of this long-term picture. Take advantage of these crashes as a buying opportunity.

Use our ratings to buy the cryptos that have the best chance of succeeding in the long term.

The next Apple, Google or Amazon is among those names. And with the help of our ratings, plus your own due diligence, you can find those diamonds in the rough!

Best wishes,

About the Editor

When econometrician and pro trader Juan M. Villaverde first applied his algorithms to Bitcoin years ago, he discovered a regular cyclical pattern. And he has since used it to build the world’s first crypto timing model based on cycles. Thanks to his analysis, the Weiss Ratings team has accurately picked the top and bottom of major crypto booms and busts.

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