“Every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USD₮ is always equivalent to 1 USD.”
But Tether made headlines earlier this year when concerns arose over the legitimacy of these claims. Despite promising regular audits, no independent audit has been undertaken to prove the underlying funds. Researchers at Texas University looked into it and concluded that tether backing is “incomplete.”
“Bank statements reviewed by Bloomberg News suggest those fears may be unfounded.”
Bloomberg has reportedly seen statements spanning four separate months that confirm tether is fully backed. The documents were revealed by someone with access to company records, and confirmed by government officials.
One statement confirmed that Tether held $2.2 million in its bank account at Puerto Rico’s Noble Bank Ltd. on January 31. At the time, there were 2.195 billion tether coins in circulation.
Statements in September and October also confirm that enough funds existed to back the circulation.
Not a complete account of Tether’s finances
Bloomberg admits the documents are not a complete account of Tether’s finances. For example, they don’t shine any light on where the funds originated from, only that they flow between Tether and crypto exchange Bitfinex. Tether and Bitfinex share an executive team.
Although the investigation may put some accusations to rest, Tether’s lack of transparency will continue to worry some traders.
Since the concerns dominated headlines this year, alternative stable coins have gained traction including Dai, Paxos Standard and Gemini Dollar.
Cryptocurrencies are notoriously volatile, with falls of 20% in a day not uncommon. It’s one of the reasons why some people are nervous about entering the market.
Stablecoins, however, aim to bring stability to a hot market by acting as an anchor.
Stablecoins are designed to hold their value, even when the rest of the market is swinging wildly.
But they don’t always work…
The stablecoin debate was ignited recently by Tether (USDT). The world’s largest stablecoin, which is supposed to remain at $1, lost more than 15% of its value in a day, falling off its crucial $1 peg.
So what is a stablecoin? And how can we make them more secure and trustworthy?
Stablecoins Are “Pegged” to a Stable Asset
As we’ll see in this article, there are many different ways to keep a cryptocurrency stable, but it usually involves fixing the price to something else.
Stablecoins fall into four different categories depending on how they are backed:
1. Fiat-backed stablecoins – pegged to a fiat currency, like the dollar. This is the most common form of stablecoin.
2. Crypto-backed stablecoins – backed by another cryptocurrency, but “over-collateralized” to absorb the bigger swings in value.
3. Non-backed stablecoins – pegged to nothing, but regulated by an automated central bank system. This is much like how normal currencies work.
4. Asset-backed stablecoins – pegged to an asset like gold, oil, or diamonds.
Coins backed by fiat currencies are certainly the most popular stable cryptocurrencies. The US Dollar is the most common fiat currency used as a collateral.
In this method, every token is backed on a 1:1 basis against real USD deposited in a bank account. If a stablecoin holder wants to liquidate his position, the coins will be destroyed and the deposited USD will be paid out.
However, as recent developments of Tether have shown, it is often not as simple as it seems.
To build trust in the coin, we need to know it really is backed by dollars on a 1:1 basis.
Tether claims its reserves are 100% backed by real dollars. But a major issue is the auditing aspect – an independent review to confirm the claims. If the issuer does not provide public audits on a regular basis, people quickly assume the tokens are created out of thin air.
That’s exactly what happened to Tether when it crashed well below its $1 peg.
But Fiat is Flawed…
Then there’s the debate around fiat currencies in general. Since the abolishment of the gold standard in 1971, fiat currencies are constantly losing value through inflation.
As a consequence of the economic crisis in 2008, Satoshi Nakamoto invented bitcoin as a hedge against the current monetary system. With that in mind, it appears quite ironic that bitcoin supporters are now using fiat-backed cryptocurrencies.
If you still want to use a fiat-backed stablecoin, you might want to take a look at the alternatives of the notorious Tether. Three emerging stars in the stablecoin sectors are the True USD, the Gemini Dollar, and the Paxos Standard Token.
The companies behind those tokens claim that they are fully regulated under US law and aim to provide audits on a monthly basis.
Coinbase has also added support for a stablecoin issued by Circle, USDC. In addition, we might see a coin that is backed by Swiss Francs in the near future.
A promising alternative to fiat-backed coins is tokens that are collateralized with volatile cryptocurrencies.
In order to maintain price stability, the tokens need to be over-collateralized by 50 to 100%.
Assuming you want to buy $1,000 worth of stablecoins, you will need to deposit crypto assets worth at least $1,500. This over-collateralization will be used to absorb the volatility of the underlying asset. If the price of the assets drop by 25%, the stablecoin will still be able to maintain its value.
Threat of a Falling Market
However, in the world of cryptocurrencies, where assets previously dropped by 90% and more, it could make sense to deposit 100% or even more of the initial value. If your collateral is in danger, due to plummeting prices, you immediately need to increase your position. Otherwise, it will be liquidated.
Experts frequently warned of a so-called “black swan event”, wherein a crypto-backed stablecoin would lose its value in case of a heavy market crash.
Using Crypto-Backed Stablecoins to Speculate
The main incentive for locking assets that actually carry a greater value is the fact that you can use the stablecoins as leverage (i.e. bet on an asset with more money than you actually have).
If you think the price of a particular altcoin will rise in the future, you can easily use you stablecoins to buy even more altcoins.
A well-known project is called MakerDAO with its stablecoin DAI. In order to mint new DAI tokens, which are pegged to the US Dollar, investors need to deposit a premium amount of ether.
The platform uses smart contracts in order to keep the price stable. In the future, MakerDAO plans on allowing other cryptocurrencies as well as tokenized real-world assets, like gold or stocks.
After two methods backed by collateralized assets, it’s time to take a look at a radically different approach: a stablecoin that isn’t backed by anything at all.
While it might sound like a bizarre idea at first, it’s exactly how the dollar works.
Since 1971 when the dollar moved away from the gold standard, it is solely backed by the belief that one unit will have the same buying power on the next day. So why shouldn’t this work in the cryptocurrency world as well?
Examples include bitUSD, which was founded by EOS, BitShares and Steemit inventor, Daniel Larimer. BitUSD was one of the first non-collateralized stablecoins on the market.
Since late 2014, the price managed to stay more or less around the one dollar range. Its market capitalization is not as high as with other stablecoins, at only around $10 million.
A very promising candidate for becoming a way bigger non-backed stablecoin is a cryptocurrency called Basis. The company raised $133 million in a private placement through various venture capitalists in 2018.
An Automated Central Bank?
Basis works by expanding on an idea by macroeconomist Robert Sams. It means the blockchain acts like an automated, or algorithmic, central bank.
It’s actually a very simple idea. If the price of one coin rises above one dollar, the blockchain will issue and sell new coins to the market until the price falls down to one dollar again (it uses a smart contract to do so).
During this stage, the smart contract generates profit by selling new coins. These will be kept as a reserve.
If the price falls below the value of one dollar, the smart contract will use the reserves to buy back coins from the market.
Cryptocurrencies backed by real-world assets are the latest members of the stablecoin family. But this type of stablecoin tries a completely different approach than its relatives.
In these cases, the price of the stablecoin is defined by its underlying asset whether it’s diamonds, oil, gold, or something else entirely.
Perhaps the most high-profile case is petro – a cryptocurrency created by the Venezuelan government. Its value is backed by the price of an oil barrel. The petro, however, has been wrapped up in controversy since its launch.
The UK Royal Mint was also planning a digital gold token, but it has since suspended the project.
We’ve also seen the launch of gold-backed coins. The DigixDao’s Gold Token is the best known. Although the value of gold generally increases in the long term, its price still fluctuates quite a lot on a typical day. This means it might not be the best candidate for a stable currency in the short run, but rather as a safe investment for the future.
Stablecoins “Necessary to Replace Payment Systems”?
Sir Christopher Pissarides, Economic Nobel Prize winner of 2010, concludes that asset-backed stablecoins might have a great impact on the adoption of digital currencies.
“Blockchain technology has the potential to disrupt the current financial system, but it is still mainly used for speculation. If we can eliminate the volatility and bring in stability, we now have the financial tool necessary to replace the archaic payment systems in place today.”
Whether a stablecoin is backed by real-world assets, fiat, crypto, or nothing, we probably need to wait a few more years until we can really see which stablecoin class proves to be the least volatile cryptocurrency.
Tether is a “stable coin” designed to mirror the price of one dollar
20% of all cryptocurrency trades use tether as a proxy for the dollar.
Tether claims its coins are 100% backed by real US dollar reserves, but this has never been independently proven.
Tether is linked to controversy over close links to the Bitfinex exchange and market manipulation.
Tether is wreaking havoc on the markets this week as traders move money out of the stable coin and into other cryptocurrencies.
Tether (USDT) is known as a “stablecoin” as its value is pegged to the price of a dollar.
When it was first introduced, it brought a degree of stability to the volatile cryptocurrency market. It allowed investors to easily trade bitcoin against the dollar and was even used by Taiwanese banks to execute international transfers.
But this week tether slipped off its “peg,” falling as low as $0.85 on the Kraken exchange.
It was triggered by claims that tether is not fully backed by real dollars. To add fuel to the fire, tether is closely linked to Bitfinex – a cryptocurrency exchange rumored to be on thin ice financially.
Because tether mirrors the price of a dollar, we can use it to trade against bitcoin and ethereum as it moves against the dollar without actually using fiat currency itself. It’s faster and more efficient.
2. Keep money on the sidelines
Traders often keep their money in tether while waiting for the perfect moment to enter a position or investment.
In the ongoing bear market, for example, traders can keep their money stable in tether while the rest of the cryptocurrency market declines.
Why don’t they just withdraw their money to real dollars? Well, some cryptocurrency exchanges don’t even support dollars. And by the time traders have moved their dollars onto an exchange, they may have missed an opportunity.
By keeping money in tether, they can execute a trade quickly.
3. Exchanges don’t always support dollars
Many cryptocurrency exchanges don’t support dollars. On Binance, the world’s largest crypto-crypto exchange, for example, you can’t deposit, withdraw, or trade fiat dollars.
Supporting fiat currency means complying to complex regulation and setting up bank partnerships. Some exchanges don’t have the means or inclination to do this.
Instead, they rely on tether to provide dollar liquidity. Tether is simply used as a proxy for the real dollar.
Who Created Tether?
Tether’s CEO is Jan Ludovicus van der Velde. He’s also the CEO of Bitfinex, a controversial Hong Kong cryptocurrency exchange.
Both tether and Bitfinex also share a chief strategy officer, Phillip Potter.
This close relationship with Bitfinex has fueled rampant speculation about tether and its legitimacy.
Is Tether Really Backed by $2 Billion Dollar Reserves?
The speculation ultimately comes down to this question: is every tether token backed by a real dollar?
Tether certainly claims so. Its website says every tether is 100% backed.
It’s worth pointing out, however, that FSS later confirmed this was not an official audit.
Why Does it Matter?
If tether doesn’t have a fully backed dollar reserve, there’s a risk of cryptocurrency “bank run.”
To explain, let’s start with your normal bank account for a moment.
Let’s say you’ve got $1,000 in your account. Your bank doesn’t actually have that $1,000 cash sitting in a vault.
The bank only keeps a small amount in reserve for people to withdraw (the rest is loaned out or invested in other assets).
This is called “fractional reserve” banking. Banks only need a “fraction” of the total reserves on hand.
Usually, that’s not a problem because most people have savings accounts they don’t touch very often. No-one needs all their money at one moment.
But let’s say there’s an economic crisis. Everyone might flood to the banks to get their money out. If there’s not enough money in the bank for everyone to withdraw, it’s called a “bank run.”
The same thing could happen to tether.
If everyone holding tether simultaneously decides to sell their tokens, tether needs to be able to give them back their dollar equivalent.
And if tether doesn’t have those dollars available in reserve, it could crash the system.
Controversy Around Tether and Bitfinex
This week’s controversy around tether isn’t new.
Tether has been accused of market manipulation in the past. One research paper earlier this year claimed that tether manipulation was responsible for bitcoin’s phenomenal all-time-highs in December 2017.
In simple terms, the researchers claim that Bitfinex (which we know is closely linked to tether) was creating tether tokens out of thin air when traders bought USDT.
These “magic” tethers were then used to purchase bitcoin – artificially inflating the price.
Of course, if this is true, those tether tokens were not backed by real dollar reserves.
Tether is a fantastically useful cryptocurrency. It brings an element of stability to the cryptocurrency market and provides an easy way to trade against the dollar.
However, tether and the team behind it are unable to shake the claims of controversy. Until tether releases a full independent audit, critics will continue to question their dollar backing.
Similar stable coins like the Gemini dollar and Paxos Standard gain momentum every time tether stumbles. For now, however, tether remains the largest stable coin by far, and the eighth largest cryptocurrency by market cap.
The price of bitcoin spiked more than 10% on Monday morning. Ethereum, XRP and bitcoin cash also exploded to double-digit gains before settling later in the day.
Bitcoin Price Teases $7,000
According to CoinMarketCap, bitcoin’s price spike hit $6,965 before dropping back to $6,660. However, Bitfinex – a cryptocurrency exchange in Hong Kong – charted bitcoin at $7,788 at its highest point.
So, what accounted for this rapid price rise?
Huge Sell-off in Tether
Bitcoin’s surge was triggered by traders selling tether – a “stablecoin” which is pegged to the US dollar.
Tether is typically used to trade cryptocurrencies against the dollar without having to use fiat currency itself. Tether is also used to keep money “on the sidelines” before entering a particular trade. Since it’s pegged to the US dollar, it is a relatively stable asset.
That’s a problem for tether because Bitfinex and tether share a CEO.
The nerves about Bitfinex’s financial health appear to have spilled over into concerns over tether.
In an attempt to downplay concerns, Bitfinex was quick to point out that “all cryptocurrency and fiat withdrawals are, and have been, processing as usual without the slightest interference.”
FALSE RUMOR: Binance is Delisting Tether
One rumor circulating Twitter on Monday morning hinted that Binance – the world’s largest crypto-to-crypto exchange – was set to delist tether. It was fueled by an image that reportedly showed an email from Binance announcing the forthcoming delisting.
Headquartered in Kiev, Liqui is a crypto-only cryptocurrency exchange with a 235 trading pairs. Liqui offers both a public and private API for programmatic trading and states a 24-hour volume of around 1250 BTC. Liqui’s numerous trading pairs are all against its three main currencies, BTC, ETH, and USDT, meaning that those looking to trade with fiat will want to find a different exchange or a method of converting their crypto after the fact. Overall, It is a good choice for small to medium traders, especially those looking for the ability to trade programmatically against a large number of cryptocurrencies.
Trading pairs: 235
Deposit Fees: No
Withdrawal Fees: No
Trading fees: Yes
Margin Trading: No (coming soon)
Fees and Limits
Liqui lays out its fees in the usual maker/taker scheme, where makers pay a 0.10% fee and takers pay a 0.25% fee. All of Liqui’s trading pairs currently have the same fees applied to them. Fees are listed on Liqui’s Fees and Limits page, with the fees specifically only listed for the three ‘main’ cryptocurrencies you trade against; Bitcoin, Ethereum, and USD Tether.
Limit-wise, Liqui has three levels; New accounts are split into three 24 hour periods, where their withdrawal limit increases by 5,000 USDT or equivalent per day, starting at 5,000 USDT. Following the new account restrictions, an account receives the “Basic Account” withdrawal limits of 50,000 USDT or equivalent per day. And lastly, for “Enhanced Accounts”, the limit is 500,000 USDT or equivalent per day. Note that the Enhanced Account’s limit requires both verification and 2FA to be enabled on the account.
Registering an account on Liqui is simple, and requires a username, email, and password. A confirmation email will be sent to you once you have completed the registration form. And after following the confirmation link in said email, you can begin to trade. Note that new accounts have withdrawal limits that are explained above.
Liqui has one verification level, the requirements for which are not published. Getting verified begins with a support ticket at their support site. Assume that for verification, the usual information is required. Namely a photo ID and proof of residence.
Liqui has a soft feel to its interface, which by default is a cool white with blue highlights. Liqui’s interface also offers a dark mode, which can be toggled with the lamp icon at the top of the page. The dark mode maintains the same highlights but trades the light background and dark text for a dark background with light text. Almost all of the interface switches seamlessly, with charts requiring a refresh. Some users may find the dark mode difficult to read, as the contrast between the text and the background is not very high.
On Liquis main trading page, there is a chart and summary front and centre, with buy and sell dialogues below. Further below is an area to select trading pairs, the current order book, trade history, and your personal trade history.
Liqui offers decent security measures, including 2FA. When logging in to your account, without having 2FA configured, you are emailed a security code for that login. The security code is a massive 64 character string, making it safe from brute forcing in the 5 minutes which it works. Two Factor Authentication is offered via Google Authenticator and is simple to set up, using the standard ‘scan this QR code’ approach.
Otherwise, Liqui offers a complete overview of account login activity. Specifically, you can see all active sessions, with the ability to close them, and you can see all login activity, successful or otherwise. Both account information sections have the date, time, and IP address of the occurrence listed.