Bitcoin and Tethers: A Problem Relationship

Trading Bitcoin against coins tethered to fiat currencies, especially USDT, may be distorting the market and creating artificial rises in price.

With the price of Bitcoin steadily above $7,000, the way the price is established invites more scrutiny. Users and investors believe that trading Bitcoin against the so called Tether cryptocurrency, or USDT, may be distorting the real value discovery.

Jeff Garzik, developer at the dawn of Bitcoin, tweeted:

One of the leading exchanges, Bitfinex, relies on Tether for most Bitcoin deals, and so far has captured more than 12% of the total trading volume for Bitcoin. But Tether is an asset with hidden mechanisms, chiefly the printing of new coins. Bittrex and Poloniex also go through USDT to trade Bitcoin.

Tether and Bitfinex are connected since March this year, when both firms were in fact cut off from traditional banking and could not exchange Bitcoin for fiat. Wells Fargo and Taiwanese banks declined to service the exchange and the Tether blockchain. Since that moment, Tether has started to increase its supply, relying on a banking workaround, although the firm promised it would not mint new Tethers.

Since cryptocurrencies are on the rise, the price of Tether quickly goes above a dollar- and the remedy for this is to print more USDT. Investors believe this is putting an upward pressure on the Bitcoin price when more Tethers are printed, which would mask a drop in the price otherwise.

The trading against Tethers is just one price pressure for Bitcoin, and it is hard to define how much of the climb is due to the activities on those exchanges. With institutional money flowing in and Asian trading happening against fiat currencies, the problem may be small- but investors and users remain wary.

So far, Tether has not issued an unambiguous proof that all Tethers issued are backed by the same amount of fiat, as audits have been incomplete.

If Bitcoin was left to move organically, it would drop against Tether, thus looking worse to investors. But traders have noticed that regular issuances of Tethers have caused robust bull runs, as seen on this Poloniex chart:

Since the end of October, there have been three issuances of 20 to 25 million Tethers tied to the dollar, or USDT. The latest happened only a day ago:

The problem is, the three influential exchanges that use Tethers may hesitate to refund users if they need to cash out. While it is easy to buy Tethers once the KYC process is completed, selling is not so straightforward.

The problem with Tethers has been spoken of before, but the current high market valuations are drawing more attention to it, especially as Bitcoin is headed to be accepted as a mainstream asset class.

But in case of panicked selling, possibly caused by the SegWit2X hard fork, it is possible that the fragility of the system would be exposed, especially if more people try to move from USDT to dollars.