What Effects Did the Tether Reserves Breakdown Have on Bitcoin and The Market?

[Pmalek]

Elon Musk and his negativity about bitcoin’s non-eco-friendly mining process gained plenty of media coverage this week. But something else happened a few days ago that certainly affected the whole market.

The stablecoin Tether published a report that shows their entire reserves breakdown until 31 March 2021.

This is how it looks:



We know that Tether has claimed that all of their USDT tokens are backed by actual cash deposits. Throughout the years, they have changed this claim to say different things, though. Looking at the pie charts they made public, we can see that their whole reserves aren’t backed up by cash and cash equivalents.

“Cash & Cash Equivalents & Other Short-Term Deposits & Commercial Paper” take up 75.85% of their reserves. But how much of that is actually backed up by cash? According to the chart, only 3.87%.

The biggest reserves of over 65% are commercial papers. This category should represent some type of securities. According to the source, a similar type of commercial papers was part of the problem that led to the bankruptcy of Lehmann Brothers, which signalled the beginning of the financial crisis of 2008.

Wall Street investor Caitlin Long, who has defended Tether many times in the past, was critical of Tether’s choice of assets to keep as reserves. If Tether wanted to keep the risk for users as low as possible, she believes that government bonds would have been a much better choice. The commercial papers introduce a credit risk that could result in USDT no longer being pegged to the USD. Instead, Tether went for “commercial papers” to profit on the interest rates. According to the same source, a 1% interest would net the company a profit of $582 million annually.

If that is true, Tether makes money with the funds users invest when they buy USDT but leaves all the risks on the users by keeping inadequate reserves.


What is your opinion on this?
Is Tether cancer we have to get rid of for bitcoin and the crypto market to have a prosperous future?
How big of an impact do you think this Tether disclosure had on the recent downtrend of bitcoin and the whole market?


Source: https://bitcoinblog.de/2021/05/17/nicht-so-prickelnd-aber-auch-nicht-so-katastrophal-tether-veroffentlicht-zusammensetzung-seiner-reserven/

[tranthidung]

Manipulators try to re-cook old things, of course, with some new spices for different times. Very generally

• The market can not rise if it does not have big falls previously.
• News are used adaptively with market trends.

With the bloodbath, the market has re-cooked news

• Energy
• Cryptocurrency ban in China
• Illegal use of Bitcoin for criminal activities
• Tether

The market will march onwards with a more prosperous price for Bitcoin, not instantly, of course it takes time.

[Smartvirus]

If that is true, Tether makes money with the funds users invest when they buy USDT but leaves all the risks on the users by keeping inadequate reserves.

Am afraid this is obviously true of Tether as I've seen similar thread from a cropped tweet on this revelation and it's really bad of Tether. I I can't say they played much of a role in this bear market observed lately but then, its so unfortunate to to bank our hopes on claims such as this. Tether is a coin where we run to bank our coins worth in times like this and it was or is really helping and for as many as those who uses there service's, I think they would continue to act ignorant of this claim as further reaction could result in the bankruptcy of Tether and the breakdown of the system. In my opinion, we could manage them for the while though, the risk it poses is the more high now than ever before.

[Lucius]

~snip~
What is your opinion on this?
Is Tether cancer we have to get rid of for bitcoin and the crypto market to have a prosperous future?
How big of an impact do you think this Tether disclosure had on the recent downtrend of bitcoin and the whole market?

The news that only about 70% of what they released is really backed up with fiat is old news, this was discussed back in 2017, and then something like that was confirmed in 2019 Tether Says Its USDT Stablecoin May Not Be Backed By Fiat Alone. The whole thing has been very clear about this for years, but has it influenced people to stop using this stable coin? Well, of course not, because all that matters to them is that they can make fast and cheap transactions, everything else is less important. So I think this news has almost no impact on what happened yesterday.

In the long run, I think that USDT is certainly a risk, as most stablecoins are actually in the gray zone, which allows their owners to print the quantities they need at some point - of course without covering with anything. Bitcoin is based on POW (Proof of work), and stablecoins on POFP (Proof of false promises) - and that's a huge difference.

[Vishnu.Reang]

This is extremely disturbing. Cash makes up less than 4% of their reserves, at a time when the stock markets are deemed to be inflated. Apart from the 65% plus exposure to equities, there is another 24% plus exposure to fiduciary deposits. Now the term "fiduciary deposit" covers a wide range. Basically it is a deposit made on your behalf, by one financial institution on another. Now Tether hasn't given any details of the institutions involved here and therefore we can't calculate the absolute risk involved in this step.

In short, USDT reserves can't be trusted and I would advice the stablecoin users to shift to more reliable coins such as USDC.

[Lucius]

In short, USDT reserves can't be trusted and I would advice the stablecoin users to shift to more reliable coins such as USDC.

I would not advise anyone to use something that is completely centralized to the extent that it can be frozen at any time, even if it is in a non-custodial wallet. I don't want to repeat myself, but the idea of stablecoin is based on someone's promise that something is as he says - and what kind of cryptocurrency is that, what are the mechanisms for protecting its users?

For all those who are wondering how safe their funds are when they transfer them to stablecoins, I suggest you read this thread - posted by @mk4.

PSA: Most Stablecoins Can Be Frozen, Even in Your Own Wallets

[bitmover]

Wall Street investor Caitlin Long, who has defended Tether many times in the past, was critical of Tether’s choice of assets to keep as reserves. If Tether wanted to keep the risk for users as low as possible, she believes that government bonds would have been a much better choice. The commercial papers introduce a credit risk that could result in USDT no longer being pegged to the USD. Instead, Tether went for “commercial papers” to profit on the interest rates. According to the same source, a 1% interest would net the company a profit of $582 million annually.

If that is true, Tether makes money with the funds users invest when they buy USDT but leaves all the risks on the users by keeping inadequate reserves.

Ofc Tether is making money out of their reserves, as they are paid interest over their (or our) money.

There is nothing wrong with that... They are probably receiving much more than 1% per year, and that is good for us. The more money Tether makes, easier it will be for them to pay for their debts when needed.

I believe the problem lies with the idea that holding USDT is an investment. I see a lot of people, specially in my country, buying USDT and holding it as an investment. This is not a good idea, because you are basically lending money with 0 interest rates. There is also a risk that Tether (or circle or paxos in case of USDC and BUSD) do not pay back their loans.

As you mentioned  there is an inherent risk within commercial papers, and there are also other risks involved.

When we are deep in a bear market, exchanges may need to get more fiat currency to pay their customers. Will exhcnages such as binance send billion of USDT to tether and ask for fiat?

Stable coins have low volatility, but they are a risk investment.

[Pmalek]

The news that only about 70% of what they released is really backed up with fiat is old news, this was discussed back in 2017, and then something like that was confirmed in 2019 Tether Says Its USDT Stablecoin May Not Be Backed By Fiat Alone.

Too be fair, I think this is the first time we can get some sort of insight into what their reserves look like. The article you linked also states what I mentioned in the OP: They used to claim that each USDT was backed by a real USD (traditional fiat). They changed that part in their terms to say: well ok maybe not everything is 100% backed up by traditional currencies. In reality, very little are actual cash reserves (2-3%) and the majority consists of various intangible financial instruments.   

I remember that thread by mk4. The only stablecoin that is different and can't be frozen is the decentralized DAI.   

[eaLiTy]

Is Tether cancer we have to get rid of for bitcoin and the crypto market to have a prosperous future?
How big of an impact do you think this Tether disclosure had on the recent downtrend of bitcoin and the whole market?

Finally the magic money Tether showed what they are using as reserve and printing unlimited amount of Tether flooding the market whenever the market rallies and they were able to do that using Commercial Paper as majority reserve currency which means unsecured promissory note and what i would like to know is whether any of these are audited.

For everyone who are hearing about these unsecured promissory note for securing money, everyone needs to checkout Harshad Mehta scam where he was able to manipulate the stock market for billions of dollars using almost the same method using unsecured promissory note and the banks were happy to pass the credit without much thinking. I would advice everyone to stay away from it because you cannot predict when it will burst and it will wipe out billions from the market.

[bbc.reporter]

Manipulators try to re-cook old things, of course, with some new spices for different times. Very generally

• The market can not rise if it does not have big falls previously.
• News are used adaptively with market trends.

With the bloodbath, the market has re-cooked news

• Energy
• Cryptocurrency ban in China
• Illegal use of Bitcoin for criminal activities
• Tether

The market will march onwards with a more prosperous price for Bitcoin, not instantly, of course it takes time.

On the news about the ban on mining in China, this is real. There are people close to the situation in social media who say that miners are in the process of migrating to other countries for the last 48 hours and others are selling their mining hardware.

[tranthidung]

On the news about the ban on mining in China, this is real. There are people close to the situation in social media who say that miners are in the process of migrating to other countries for the last 48 hours and others are selling their mining hardware.

It does not bad at all. There are times FUD with crypto exchanges in China and they gradually made migration beyond China mainland.

If the geographical decentralization of Bitcoin mining is forced to happen quicker, it brings better things to us. Does the geographical decentralization is what we want to see for a long time?

The almost similar picture is with DEX, if governments put pressure on crypto exchanges and crypto enthusiasts, the developments of DEX will become more seriously.

[bbc.reporter]

@tranthidung. I did not say this news was bad, however, the news is not re-cooked. It is real and the Chinese miners have dumped their coins. Some dumped in panic and some dumped because they have no choice.

In any case, I speculate that those commercial papers were issued by exchanges to be granted loans in USDT to use for pumping the market to all time high.

[Pmalek]

There are people close to the situation in social media who say that miners are in the process of migrating to other countries for the last 48 hours and others are selling their mining hardware.

The closest countries with cheap electricity they can migrate to are Russia and Kazakhstan. I am not sure how popular the United States is for Chinese miners, but I have read reports in the past that some of them are moving their equipment to the US. The price for industrial electricity in the States is decreasing year by year. It is good for bitcoin mining in general to lower the impact Chinese miners have on the whole network.   

[buwaytress]

First source I read related to this news put it at an even lower figure, but I actually thought that they already say they have audits (not transparent but apparently, shown to regulators) that already satisfy requirements?

Not that I care, or that regulators should. If FDIC banks in the US don't even need fractional reserve anymore (indefinitely at the moment), then why should Tether need it? They're all printing magic money now;)

[justdimin]

There are people close to the situation in social media who say that miners are in the process of migrating to other countries for the last 48 hours and others are selling their mining hardware.

The closest countries with cheap electricity they can migrate to are Russia and Kazakhstan. I am not sure how popular the United States is for Chinese miners, but I have read reports in the past that some of them are moving their equipment to the US. The price for industrial electricity in the States is decreasing year by year. It is good for bitcoin mining in general to lower the impact Chinese miners have on the whole network.   

I think the closest one that is by far the best rate right now could be Georgia. I am not sure how the world is there, never really studied Georgia and do not know life there, maybe it is a horrible nation to live in, or maybe it is a very nice nation to live in, there is really nothing that could be done about it, but the fact is that we are talking about cheaper than almost any other modern nation that could make a huge amount of profit there with low rates if you are a miner.

Chinese miners will probably not move neither, they will probably make a deal with the party, tell them the half of all the money made from miners will go towards the party and they can keep mining there for sure. That is what the getting out jail card there as well, just give them money and you can do anything illegal, party only cares about the money they can make and that's it.

[ene1980]

Chinese miners will probably not move neither, they will probably make a deal with the party, tell them the half of all the money made from miners will go towards the party and they can keep mining there for sure. That is what the getting out jail card there as well, just give them money and you can do anything illegal, party only cares about the money they can make and that's it.

Not really sure about the political climate but still if they are going to pay half of what they are making it will be better for them to move out of the country and they have invested millions and why would they pay half of what they make and what kind of business model that would be .

Not that I care, or that regulators should. If FDIC banks in the US don't even need fractional reserve anymore (indefinitely at the moment), then why should Tether need it? They're all printing magic money now;)

Magic money might vanish all of a sudden and many of us who invested in crypto might be affected as well and hence it is better to avoid them.

[Pmalek]

Magic money might vanish all of a sudden and many of us who invested in crypto might be affected as well and hence it is better to avoid them.

I might sound a bit pessimistic, but I don't think the magic money will disappear. I am not talking about Tether but fiat in general. Those in power have put to much effort into it (printing day and night ) to just one day have it go to waste. It might be substituted with some type of digitalized federal asset, but it will still remain in control by the associated government.   

[bbc.reporter]

First source I read related to this news put it at an even lower figure, but I actually thought that they already say they have audits (not transparent but apparently, shown to regulators) that already satisfy requirements?

Not that I care, or that regulators should. If FDIC banks in the US don't even need fractional reserve anymore (indefinitely at the moment), then why should Tether need it? They're all printing magic money now;)

I would like to see audits made in those commercial papers. I want to laugh together with everyone if those commercial papers were issued by Binance, Okex, Huobi and Poloniex. The Chinese hustling gang hehehe.


Also, for everyone. Read all the articles about iFinex, Bitfinex and Tether  from this website.

https://bennettftomlin.com/

It is one of the best source of information for tether skeptics.

[buwaytress]

I would like to see audits made in those commercial papers. I want to laugh together with everyone if those commercial papers were issued by Binance, Okex, Huobi and Poloniex. The Chinese hustling gang hehehe.

Also, for everyone. Read all the articles about iFinex, Bitfinex and Tether  from this website.

https://bennettftomlin.com/

It is one of the best source of information for tether skeptics.

Hot damn I always thought Okex was S.Korean, a quick look up confirms I was wrong. Not that it would have mattered, their reputation precedes them.

I come from a non-profit background and I used to think some of the audits in the field cut a lot of corners (but I accepted it as a consideration of the complexities of record keeping and security in environments with extreme instability)... and then I saw audits for small corporates in Europe later on and got a bit of a shock.

So no surprise if Chinese hustlers can get away with more ridiculous ones.

Thanks for the link! I feel like I've read some of his writing before. Used to follow Tether-drama a bit in 2016/17 (?), back when the idea of Spoofy enthralled me.

[dezoel]

I have always said that people should not be putting this much trust into something that could go away in a single day and yet for some reason the whole world still doesn't care and just keeps using USDT.

The only way to get USDT out of the world is to get it not be used in big exchanges, even though Binance has their own stablecoin called BUSD they still use USDT as well and that is one of the biggest reasons that USDT still keeps being used. They can literally just go away in a second and nobody could do anything, sue them? Don't be crazy so many people with illegal money gets a safe harbor in some nations, they would be living like kings in some third world nation for sure.