“Tether is the biggest threat to all of crypto, it’s going to collapse soon and take down the crypto world with it.” At least that’s what the critics want you to believe, but over the past few years Tether has become more and more successful, and today it accounts for over 80% of all stablecoin volume.
Are the critics right or are they just spreading lies? After following this controversy for years and doing my deep research, I find myself disagreeing with the critics more and more. I believe that Tether is perfectly fine, and the doomsday scenarios will never happen. I realize this is a controversial position but I’m going to prove my point by sharing the nature of the FUD, the motivation behind it, and why all the critics are wrong.
But there are tons of new and interesting projects out there, why even bother talking about Tether? Well, Tether is arguably the most important project behind Bitcoin and Ethereum, certainly the most important stablecoin. Whether you just came into crypto a week ago or you’ve been here for years, you’ve likely come across Tether in some way, shape, or form. It is so intertwined with the crypto world that if something bad were to happen to it, things would be catastrophic. That’s why any bad news about Tether quickly dominates the news cycle.
What’s interesting is that the attacks, criticisms, and FUD aren’t just one-time occurrences. We see them pop up every year and it’s usually accompanied by a crash in crypto prices. For that reason, I think it’s worth setting the record straight once and for all.
Let me quickly explain Tether and the criticisms against it. Tether (USDT) was released back in 2014 as Realcoin, and it was one of the earliest stable coins ever created. The company behind it is called Tether limited, and its goal was to create a coin that could represent the price of U.S. dollars on the blockchain. To mint USDT you’d have to first send them USD and the company would mint the stablecoin for you. For the longest time, they claimed that every USDT was backed one to one by U.S. dollars, but that later turned out to be false.
As Tether grew over the years, so did the accusations against it. In 2017, Wells Fargo decided to cut off its banking services to Tether, which made it really hard for them to move their money around, which caused the price of USDT to fall from one dollar down to 91 cents. There were major doubts that Tether had the backing required to support its stablecoin.
Later that year the infamous paradise papers were leaked, out of the 13 million confidential documents, there was a tiny portion that confirmed the ties between Tether and Bitfinex, which was something they denied up until that point.
In mid-2018 a team from the University of Texas published an extensive study that argued that Tether was used to manipulate the price of Bitcoin. In October of that year, Tether once again lost its peg, dropping as low as 85 cents on certain exchanges.
In 2019, the New York attorney general’s office filed a bombshell lawsuit against Tether, accusing them of fraud. As part of that process Tether’s top lawyer came out and admitted that only 74% of USDT was backed by cash or cash equivalents at that time.
In mid-2021 the department of justice announced that they were also investigating Tether but this time for bank fraud. And in 2022, news came out that some big hedge funds were shorting USDT. They believed that Tether had exposure to risky Chinese debt that was likely to default.
Now, let’s pause right here and take a step back. Do you see what I mean when I say there’s never-ending FUD against Tether, and yet they’re still alive and well? That makes me wonder, what’s the motivation behind these attacks? Sure, some of them are just reporting the facts, but a lot of it is sensationalized and backed by unfounded rumors or speculation.
To answer this motivation question, we have to look at the three types of people who benefit the most from spreading this FUD. First are your price manipulators who want to buy crypto at a lower price. Since Tether FUD has been very effective at moving markets, if you’re a whale who wants to buy bitcoin at a discount, you could easily combine Tether FUD with your ability to crash the price of Bitcoin, to scare retail newbies into selling their Bitcoin to you at a lower price. Sadly, that is how wealth is transferred from naive retail investors to the more experienced whales.
The second group of people who love Tether FUD is your general crypto critics. I’m talking about the Peter Schiff and Nouriel Roubini of the world. They hate all of crypto and they want to see it fail, so whatever criticism sounds convincing, they will happily spread it as proof that crypto sucks.
Third, you got your crypto influencers or other media entities that love to spread this FUD because ultimately it does sound scary, and we know how well fear drives clicks. However, if you watch their videos or read their articles, you’ll find that they’re mostly fluff and don’t make a convincing argument.
I used to be worried when I heard those dire warnings from the critics, but now I don’t care. They’ve been shouting grave warnings for years now and yet Tether is still alive and well. Yes, they did lose their pegs several times in the past, but they’ve always been able to regain their peg while increasing usage and adoption.
I think something called the lindy effect explains my perspective perfectly. It’s the phenomenon where the longer something survives, the longer it is likely to last in the future. This applies to non-perishable themes like technology or an idea. If we look at Tether through this lens, we see that it’s been battle-tested for eight years now, there’s no reason to believe that it won’t survive for years to come.
Of course, this doesn’t mean that something bad can’t happen, after all, we might have just been lucky up to this point. Let’s look at some specific criticisms against Tether to see how they hold up.
Some of the top criticisms don’t even make sense. For example, some people accuse Tether of printing staple coins out of thin air to pump up the price of Bitcoin. They look at the chart of USDT’s circulating supply and match certain supply increases with Bitcoin price pumps and they’re like “Look! this is proof of manipulation!”
That is just so wrong, Tether mints new staple coins when there’s demand from clients, and it makes perfect sense that a wave of demand comes as the price is going up. Sam Bankman-Fried himself said that FTX regularly mints USDT with actual dollars, there was even a study out of UC Berkeley that analyzed three years’ worth of Tether data and found zero correlation between their minting activity and the price of Bitcoin. And finally, during bear markets we’ve seen the circulating supply of Tether drop as demand decreases, and the team burns the USDT that has been redeemed for USD. Therefore, for all these reasons this particular argument never made any sense to me.
On the other hand, some arguments make sense but they’re getting weaker and weaker over time. For example, there’s been a concern that Tether puts their USD collateral into risky financial instruments such as commercial paper, if something bad happens to those assets then it will leave a huge hole in their balance sheet, and they’ll be unable to fulfill redemptions back to USD.
However, the Tether team has heard these concerns and they’ve taken steps to mitigate them. In May of this year, they had over 20 billion dollars in commercial paper assets, but they’ve cut that down multiple times and the number will drop to 3.5 billion by the end of July, this criticism is quickly becoming a non-issue. We know they’re telling the truth because they have to release quarterly transparency reports per their settlement with the New York attorney general’s office. There’s something else here that really boosts my confidence in Tether, it’s the fact that they’ve been subject to all this criticism and scrutiny over the years.
This may sound counterintuitive, why would scrutiny be a positive thing? I think it’s positive because of the incentives it provides. Think about it, the team behind Tether is fully doxxed and they keep a pretty public profile. Do they really want to ruin their cozy lives just to make some extra money by doing shady things with Tether? Or would it make more sense to be conservative with Tether, and still make good money without the risk of getting thrown in jail? What decision would you make if you were in their shoes? For me, I would definitely be on the side of caution.
Now, some may say “Wait a minute, three arrows capital was also public and yet they did all that shady stuff.” Sure, that is true. But the big difference here is that 3AC did most of their shady activity in the background, without any of us knowing about it, whereas Tether has been attacked and criticized non-stop for years. Perhaps they were doing some shady stuff in the past, but they’ve had years to shore up their business practices and clean up their operation.
Charlie Munger once said, “Show me the incentive, and I’ll show you the outcome.” The incentive for the Tether team is to run a tight ship so that’s exactly what I think they’re doing.
There’s something else that makes this argument even stronger and that’s Coinbase’s decision to list Tether on their exchange back in early 2021. That was a bombshell announcement and honestly, it took me by surprise. Personally, I saw it as a massive vote of confidence.
Coinbase had just gone public with an army of lawyers in tow. With all the crazy FUD surrounding Tether, do you think they’d make such a controversial decision without doing a ton of due diligence? Of course not, I’d even bet that they got to look at Tether’s books before making their decision but under strict NDA of course.
That being said, my faith in the stablecoin is at all-time highs right now and I’m not worried about its present or future at all. But let’s just say for the sake of argument that something bad does happen to Tether, I would still not be worried because I’m pretty sure the largest crypto companies would bail them out. It’s been reported that two-thirds of all USDT ever minted were done for Alameda Research and Cumberland. This is especially relevant because Alameda has strong ties to FTX while Cumberland has ties to Binance, both those exchange giants are very closely intertwined with Tether. They have massive war chests that could be used for a bailout if needed.
All things considered; I am super confident about the fate of Tether. I do feel like I’m sticking my neck out a little bit with this article, but I genuinely believe that my arguments are sound.
