Let’s explain how tether should work, before we get into the issues of tether and some other facts that we think you should know. Tether Limited is the company that created the Tether Token.
Their goal was to create an Ethereum token that is pegged to the US Dollar.
This way the price of the token was always $1. This is valuable for obvious reasons, but the most obvious is that my Ethereum portfolio is down 22% today, but it was up 12% just a few days ago. In other words, crypto is quite volatile, however many people want to get into DeFi projects without the volatility.
Anyways, in a perfect world, Tether Limited will give you 1 Tether token if you went to them and gave them $1. They would hold this dollar forever, or until you came back and gave them your Tether token. When you come back with your tether token, you can ask for your $1 bill back, and in a perfect world, they would pay it. Along with that, the tether you gave them, they would destroy it. This way the tether they have given out, is always equal to the USD in their bank account.
This way, they are essentially giving you blockchain versions of a dollar, while holding a real dollar in their bank account – so that whenever you wanted to – you could trade these two seemingly equal assets back and forth. This is a perfect way to have a stablecoin, in theory. The token isn’t mined, it is just created whenever Tether Limited wants to create more, and they just have to say which accounts to give it to.
The issue is, we don’t know how much true cash Tether actually has in its reserves. Sometime in the 1930s, an event called a “bank run” happened. It’s when a bunch of people went to the bank and said “We want our dollars” and the bank said “We don’t have enough to give everyone all their money”. In short, a lot of people think the same thing is happening with tether. Why is this bad? Well, the only thing that makes a currency valuable, other than it’s intrinsic use… is it’s perceived value. Paper dollars, or cash, don’t have much use other than to use as fuel for a fire, or maybe insulation, so the perceived value is what keeps them at $1 instead of $10 or $0. If we apply this same thinking to Tether, what is holding them up? The perceived value, because the inherent value of a blockchain token isn’t much. The inherent value should be that you take the Tether to Tether Limited and they give you a dollar, but the question is: Can they do that if everyone asked for their dollars?
What is FUD?
When it comes to crypto, there is a lot of what we call “FUD”. FUD is an acronym for Fear, Uncertainty, and Doubt, which are very powerful emotions when it comes to investing and spending your money. FUD is commonly used as a simple way to manipulate markets. You release an article that says “Warren Buffet thinks Dog poo is more valuable than Bitcoin” and suddenly a bunch of headline readers dump their bitcoin because of the simple idea that Warren Buffet doesn’t see any perceived value in it. In this video, we are going to make sure we stay away from FUD as much as possible and only give you the facts.
Tether Limited Company backing
The big blazing issue with Tether, is that it’s parent company Tether Limited can literally click a button, and give themselves FREE tether, to which they can trade it for other cryptocurrencies. Actually do you think it’s a button or do you think they have to do something else like write some code? Let us know what you think in the comments below because we’re interested to know what your guesses are. But moving on what makes it a big blazing issue is that Tether’s current market cap is around $60,000,000,000. Do you think they have 60 billion in a bank account? Many people do not.
Tether Limited is not in the United States, so that the government can’t tell them what to do or force an audit, they purposefully set themselves up in the British Virgin Islands. In fact, The US Attorney General did some investigation and due to that investigation, you cannot buy Tether in New York.
According to their own reports on March 31st, Tether says they have only 2.9% of their reserves in actual cash. 12.5% is literally loans, around 10% is Corporate bonds and precious metals, around 50% is commercial paper (which is technically also loans), some is treasury bills, and some is actually other cryptocurrency tokens. This is what they self-reported at least. Let’s get into their audit.
Tether has hardly been audited. From the information we could find about a Tether Limited audit, there has only been one professional audit (Friedman LLP), but Tether backed out of the audit because the company was asking for too much information. So an audit was started, but not finished. This is an issue for a lot of people. Since any company who wants to last long-term will go through almost any audit for the trust of their customers, no matter how invasive the questions may seem. In fact, giving answers to invasive questions only goes to show they aren’t doing anything sketchy – so why would they avoid this?
There are actually rumors about Tether Limited and Bitfinix, which is a centralized exchange like Coinbase, actually in cahoots together to manipulate the price of bitcoin. This part of Tether is a bit out of the scope for this video, so if you’d like to see a video on the romance of Tether and Bitfinix, plus any future Audit updates, leave a comment below please.
Moving on, let’s talk about a rumor that has been spreading in the past couple weeks.
If Tether crashes, so will most all other Crypto theory – Tether = liquidity
Since tether is a token, mostly on the Ethereum network, we can track exactly who holds the most of it. Right now, large exchanges like Gemini and Binance actually hold a lot of Tether. Some big apps also use them, like Curve and AAVE.
There is a theory out there that since Tether is so big, I mean 60 billion market cap right now compared to Ethereum’s 228B and Bitcoin 614B makes it the 3rd largest cryptocurrency, that since it’s so big if it crashes, it could bring down the rest of the crypto market. Now this isn’t completely crazy, since a lot of the liquidity in certain decentralized exchanges actually uses Tether.
To explain this theory, you must know how a liquidity pool works and how the automated market maker algorithm works, which sounds like a lot of nonsense if you’re new to the crypto space, but we do a great job explaining both with stories and examples in our videos, if I do say so myself. The theory says that if Tether’s prices dumps or skyrockets, or basically becomes not $1… then those liquidity pools will be vulnerable to attack via flashloans, which will cause a big panic, and could result in people cashing out their coins to FIAT. If part of a liquidity pool changes in price dramatically, the other part of the pool also changes in price, and so many pools are reliant on the fact that Tether stays roughly $1.
Moving on, What can Tether do to be better?
Like we said earlier, we aim to be the #1 educational resource for crypto and we believe that the technology surrounding blockchains will keep improving. With that in mind, what do you think Tether could do better to improve their product? We have a few ideas in mind:
First is transparency, since tether is the 3rd highest market cap coin, transparency needs to be on the top of their list. One of the biggest foundations of blockchain is transparency. This includes in-depth audits and answering any questions that their customers have. This would be a big step forward for them. Verifying their funds via a third party would clear up a TON of FUD.
Secondly, a big part of the idea of tether is to allow a bridge back and forth from the crypto USDT and the real world USD in cash. We think they would greatly improve their product simply by allowing access to this bridge for everyone. Imagine if you could buy tether straight from Tether Limited without any restrictions or background checks or KYC. Then imagine if you could cash out your Tether without the IRS knocking, or any waiting period. If they truly believed they were the stablecoin bridge, they would work on this.
Third, the only thing I can think of is to actually hold most of their reserves in cash, instead of using loans or gold or even stocks. It would make a lot of people happy if they saw 80% of Tether’s reserves were actually, truly, cash in their bank account.
Wrapping up, we want to know your thoughts. Are you afraid of a collapse of Tether leading to a crypto bear run similar to what happened to banks in the 1930s? Do you have any ideas that would improve Tether? Let us know in the comments below, along with any future video ideas. We currently have like 100 video ideas, but we need to get the important ones out first – and the most important ones are the ones you guys want to see!
Thanks for watching our video, we hope you enjoyed it, we really hope you learned something, and most of all – we hope to see you in our next video!