What is a Tether?

I can honestly say that for the first time since I began adding bitcoin to my portfolio, I am giving credence to a bear case that has been put out there. The case is presented in this note and largely centers on the prospect that the recent run up in the price of bitcoin was a function of demand using a currency called Tether.

A Tether is a stable coin that is supposed to be backed one to one with US dollars. You deposit dollars into your account, you convert them to Tether, you use Tether to buy bitcoin. This seems like a lot of work and I do not do it this way when I transact on Gemini.

Here is how I understand it and I may not have it fully fleshed out yet but I am working on it. Tether Ltd is a company that issues a currency called Tether. They claim the Tethers (the currency) are backed by dollars but they have never produced an audit to back this claim. In fact, Tether Ltd has admitted that the backing is more like $0.74 to 1…meaning that there is 74 cents backing each Tether.

So essentially, this is the same as me depositing 74 cents in an account but getting $1 of buying power which I can then use to buy bitcoin? OK, that seems off. Oh by the way, Tether, Ltd (the company) is under investigation by New York’s OAG.

So to summarize thus far, a company which is under investigation may be issuing unbacked currency which is being used to buy bitcoin. That does not sound great to me. What does this mean for bitcoin?

Being new to the space and admittedly still learning, I reached out to a friend of mine who is much more expert than I am. He left a job at a traditional Wall Street bank to dive full-time into the digital asset space. He told me that this is actually an issue that has been known for a while and that he was not overly concerned. I asked him how big the Tether market was and he said ~$25 billion. By comparison bitcoin is worth about $650 billion. But if we assume that there is only 74 cents backing each Tether, then the inflated Tether market is worth something closer to $33 billion, so about 5% of bitcoin.

This does not seem like all that big of a deal but I also know that people will not be as open minded. They will assume that there is something nefarious going on and dump their bitcoin. It could happen and I am not blind to this fact. Human nature bothers me here. The other thing that bothers me is that the person who wrote the article is not someone who has been bearish all along and is sticking with a dogmatic view. No, this is someone who had been bullish and invested in a big way. The Tether story was enough to make him/her change their mind. That’s interesting to me. I would rather hear from the person who was objective enough to change their view rather than a person who is dogmatic.

But lets take a step back. Tether may actually be a fraud! But Tether is not bitcoin. My initial thought is that this is a supply / demand issue. Tether is on the demand side of the equation. Let’s assume they go away. Five percent of the buying power leaves the market. Now, if they truly are a fraud, the number is something more than 5% since, in theory, they can create as much Tether as they want but I can’t begin to estimate what the number could be. Regardless, this does not alter the case for bitcoin in my mind. It simply removes part of the price momentum story for now.

I would actually prefer to see Tether shutdown, even if it means the price of bitcoin goes lower in the near-term. It would make the story cleaner.

So from the top. A former bitcoin bull uncovered a potentially fraudulent asset that is being used to buy bitcoin. This former bull turns bearish and sells their bitcoin. After doing so, they publish their findings.

Here is what I think. If Tether is a fraud that has been used to buy bitcoin, bitcoin will trade lower on that news. It may even get cut in half from recent highs, down to $20,000 as momentum takes hold to the down side. That would take it back to the November breakout level. However, the trend would still be to the upside. for my time frame.

For now, I am open to this idea. I would actually be fine with it because, assuming that the cause is all due to Tether, it would present me with an opportunity to add more bitcoin at lower prices. I dollar cost average. I buy the same dollar amount twice a month. That’s my plan. The lower the price, the more I buy. As long as my core reason for investing remains in place AND the long-term trend is up, I will stick with it.

PS: After writing the bulk of this a couple of other concerns have cropped one. One has to do with comments from Janet Yellen and how crypto assets may be used for terrorist activities, but the real story may be more nuanced than that. Here is a link. The other has to do with a possible “double-spend issue. I will have to watch these closely.

*As always, please remember that this is not investment advice. This is simply a place for me to share my thoughts and clarify my thinking. My time frame on bitcoin is very long-term. Have a great weekend.

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