For those of you who don't know, Tether is a major currency in crypto right now. It is "tethered" to the US Dollar, meaning that each Tether is bought and sold for $1 and (more importantly) there is $1 held in Tether's reserves for every Tether token in the market.
This is where things get slimy.
Without going into great detail, crypto sleuths have known for months that Tether almost surely does not have $1 in reserve for each token. In fact, it's not unusual for Tether to "print" 100 million or more new Tethers in a single day. The company has resisted audits and has recently parted ways with the auditing company reported to be checking its books. Tether has intimate business ties with international crypto exchange Bitfinex, which is the entity that issues Tether tokens.
Why does this matter? Today, a US regulatory agency subpoenaed Tether data. In response, the market soiled itself in anxiety and prices across the board are dropping like a stone.
This is because:
- Traders hold a lot of Tether. If Tether doesn't have innate value as its parent company claims, what happens to these holdings?
- It is thought by some that Bitcoin's price has been propped up by Tether. On days when Bitcoin has dropped, for example, these tend to be the days when hundreds of millions in new Tether are created out of thin air.
If #1 is the only problem, this will represent a blow to crypto as a whole, as a very real bubble is popped. Think of this situation like a bank run, where Tether may only have 10-20% of funds on hand. This would be bad and crypto's total market car would fall as people's Tether crumble and other traders pull their funds into USD.
If #2 is also a reality, the whole market is going to partially implode. Bitcoin is still the foundation of crypto, and if its fundamental value is inflated by phony money, who knows how far it, and the rest of the market, will drop. This would be very bad and wouldn't be fixed overnight.
SO WHY AM I NOT FREAKING OUT?!
There's nothing we can do about the Tether situation (except not hold your wealth in Tether). It's possible that the Tether scam is a mirage, but I think it's likely that Tether does not in fact hold the US Dollars they claim. If they don't, the truth will out and the bubble will pop.
BUT, as with all other recent crypto crashes, the market decline has nothing to do with the underlying technology of cryptos best projects. We will lose value in the short term, but the market will recover stronger and wiser. My personal holdings, I don't plan to sell for a year or more. By then, the Tether fiasco, large or small, will be something of a distant memory.
What's more, DigixDao is a great project nearing completion. Like Tether, its tokens are tied to real world assets, in this case physical hold. Every Digix token will be worth the current market price of 1 gram of gold. What's more, the gold reserves will be audited and even tourable (token holders can show up at the vaults and look for themselves). Finally, DigixDao will even send you your gold grams via mail if you want to trade in your tokens. I could see DigixDao completely taking over for Tether in the event of its collapse, and it wouldn't be a day too soon.
It hurts to see our unrealized gains dissolve into thin air in times of market anxiety like this, and if Tether pops there's a lot more bad news where this came from. But again, it's temporary. If you're holding for the long term, just continue to hodl. This will hopefully usher in sensible regulations that will protect investors, which the market currently lacks. I'm interested to hear your thoughts, but as of right now, I'm not sweating this one too badly.