what is tether logo
  • 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.

tether price chart

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.

All this combined on Monday, resulting in a mass exodus from tether. 

But what is tether, exactly? How does it work? Why do cryptocurrency traders use it, and why is it so controversial?

What is Tether?

Tether first emerged in 2015. It’s a coin designed to bring stability to a volatile cryptocurrency market.

The price of tether is pegged to the US dollar so, theoretically, one tether token should always be the same as a dollar.

In reality, the price of tether fluctuates against the dollar slightly. Generally speaking, however, it’s as stable as cryptocurrency gets.

There are currently 2.3 billion tether tokens in circulation.

According to Tether, each token is 100% backed by a real US dollar in a reserve bank.

“Every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USD₮ is always equivalent to 1 USD.”

what is tether website screenshot

This claim, however, is a huge source of controversy (we’ll get into that shortly).

How is Tether Used?

According to Bloomberg, tether is used in 20% of all cryptocurrency trades. And as you can see in the chart below, tether is the second-most traded cryptocurrency by volume, according to CoinMarketCap.

tether trade volume coinmarketcap

There are many good reasons for this:

1. Easily trade against the dollar

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.

bitfinex logo

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.

Tether’s white paper also promised that:

“Professional auditors will regularly verify, sign, and publish our underlying bank balance and financial transfer statement.”

However, no independent audit has ever been able to prove the underlying funds.

A report by researchers at Texas University concluded that tether backing is “incomplete.” In other words, there aren’t enough real dollars to back every tether.

Tether has always disputed this claim. They even hired a law firm to provide documentation. Freeh, Sporkin & Sullivan LLP (FSS) produced a report that concluded that Tether’s two banks held $2,545,067,236 USD. That’s enough to cover the tether tokens.

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.

How?

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.

Conclusion

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.

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city skyline banks goldman sachs crypto trading

This week was dominated by rumors that Goldman Sachs has ditched plans for a crypto trading desk, sending crypto prices into a panic. But this is actually good news. Goldman Sachs is instead focusing on a safe, long-term crypto strategy rather than volatile trading.

Bitcoin traders threw themselves into a panic on Wednesday as the market collapsed beneath them.

Bitcoin fell 13% in a day. Altcoins fell as much as 20%. Ethereum hit its lowest price in 12 months.

While other factors were at play for the selloff, many blamed Goldman Sachs, which reportedly sidelined plans for a crypto trading desk.

The Long-Rumored Goldman Sachs Crypto Trading Desk

Goldman Sachs began eying up bitcoin in October 2017. Rumors of a trading desk emerged after they hired Justin Schmidt, a veteran crypto trader. An official from the bank said they were looking into bitcoin possibilities after receiving interest from clients.

This news was among the flurry of optimism that sent bitcoin to $20,000 last winter.

However, nothing was confirmed. In fact, Goldman Sachs distanced itself from crypto trading in January when CEO Lloyd Blankfein said day-to-day trading was not the bank’s priority for crypto. Instead, they would consider buying bitcoin futures contracts for some of its clients.

So Wednesday’s news shouldn’t come as too much of a surprise.

Clearing up the Rumors

To be clear, Goldman Sachs has not ruled out the possibility of a crypto trading desk. The bank’s CFO even called the recent rumors “fake news.”

“I never thought I would hear myself use this term but I really have to describe that news as fake news.” Martin Chavez, CFO.

The bank is not ditching its plans. A crypto trading desk has simply moved down the priority list while they look at better ways to work with bitcoin.

So What Exactly is Goldman Sachs Doing in Crypto?

Right now, the bank is helping its clients get into crypto by executing bitcoin futures contracts. Bitcoin futures are a way of betting on the future price movements. Goldman Sachs is using the bank’s money (“providing liquidity”) to do this.

At the same time, they are working on some form of derivative for bitcoin. A derivative is like an exchange-traded fund (ETF); an easy investing product that would track the price of bitcoin.

A Safe Way to Store Crypto

Most importantly, Goldman Sachs is working on a custody solution that would allow institutional investors to store millions of dollars in crypto safely.

“Physical bitcoin is something tremendously interesting, and tremendously challenging… From the perspective of custody, we don’t yet see an institutional-grade custodial solution for bitcoin, we’re interested in having that exist and it’s a long road.” Martin Chavez, CFO

Good News for Bitcoin

Don’t believe the panic. Goldman Sachs’ strategy is a sound and sensible way to approach bitcoin.

Goldman first needs to prove it can store bitcoin safely. Can you imagine if Goldman Sachs’ bitcoin accounts were hacked? A custody solution is a necessary first step before traditional investors trust their money to a relatively new phenomenon.

Secondly, the bank’s focus on bitcoin futures and derivatives reveals a long-term approach to trading. They are taking cryptocurrencies seriously. They’re looking to build products their investors understand.

It’s no wonder a crypto trading desk is low on the priority list. They simply don’t yet have the infrastructure to store and handle millions in daily, physical bitcoin trades.

Not only that, but high-volume, daily trading at a Goldman Sachs trading desk would introduce yet more volatility to a volatile market.

Wall Street Isn’t Ready for Crypto Yet

Although Wall Street is dabbling in bitcoin, it’s not yet ready to fully embrace it. As we have seen with bitcoin ETF rejections, Wall Street adoption will take time. But, rest assured, the foundations are being laid.

“When we talked about exploring digital assets that it was going to be exploration that would be evolving over time… Maybe someone who was thinking about our activities here got very excited that we would be making markets as principal and physical bitcoin, and as they got into it they realized part of the evolution but it’s not here yet.” Martin Chavez, CFO.

Wall Street is getting on board, but this will not happen overnight. Patience is key.

ethereum logo on a dark blue background
  • Ethereum futures contracts are expected to launch in the near future via Cboe Global Markets.
  • ‘Futures’ provide an easy way for investors to ‘bet’ on the price of Ethereum.
  • Bitcoin futures (launched in 2017) sent the market to an all-time high, before triggering a 60% reversal.

In December 2017, the price of bitcoin hit a record $20,000. One trigger for this price rise was the launch of a bitcoin ‘futures’ market, introduced by Cboe Global Markets. Cboe is now expected to announce an ethereum futures equivalent.

But what exactly is a futures contract? How will it affect Ethereum and the wider crypto market?

Ethereum futures contract: what is it?

A futures contract allows investors to ‘bet’ on the future price of something.

It’s an easy way to speculate on price rises (and falls) without having to buy the asset itself, in this case, ethereum.

It works like this: you agree to purchase ethereum for a pre-determined price, on a specific date in the future. That price may be higher or lower than today’s value, depending on whether you think ethereum will move up or down.

A real-life example

Let’s say you think ethereum will go up in value. You agree to buy at $290 (today’s price), but you won’t pay until the contract expires in two month’s time.

If ethereum has increased in value when the futures contract expires, you have successfully bought in at a much lower market price.

Most speculative investors close the trade before the contract expires to lock in the profit (or cut their losses) without having to buy the asset itself.

Betting against crypto

Futures trading also allows you to bet against the market.

This is what we saw in January 2018, when the bitcoin price came tumbling down, shortly after hitting a record high. Investors now had a way to ‘short’ the bitcoin market, and they pounced.

bitcoin price chart after futures launched in December 2017
Chart: Coinmarketcap

What will happen to ethereum?

We may see a similar pattern if the ethereum futures market is launched. Investors will have the opportunity to flood into the market with relative ease. However, they may also bet against ethereum, sending the price down.

Good news for bitcoin?

Tom Lee, who recently reaffirmed his bitcoin price target of $20,000+, thinks the move could be good for bitcoin:

“Since December of this year, if one was bearish on any aspect of crypto but did not want to own the underlying, they could short bitcoin. They can now short ether, means the net short on bitcoin in futures would fall.”

In other words, if investors want to bet against the crypto market right now, shorting bitcoin is their only option. If ethereum futures are launched, however, they will also be able to short ethereum, which could take some of the pressure off bitcoin.

More details about the ethereum futures market

Cboe Global Markets, which owns the Chicago Board Options Exchange, was the first exchange to offer bitcoin futures. It harnesses the Winklevoss Twins’ Gemini market to track the underlying price of bitcoin.

The ethereum futures contracts are expected to use the same underlying Gemini market. They will be ‘cash-settled,’ which means they won’t trade ethereum itself. Rather, they will simply track the price and all positions will be closed before the futures contract expires.

We’re still waiting for a green light from the Securities and Exchange Commission (SEC). However, there is a precedent since the bitcoin futures market already exists.

Although the SEC is dragging its heels on an exchange-traded fund (ETF), it is much more likely to pass the ethereum futures market proposal.

cex.io chart

CEX.IO is a cryptocurrency exchange and former Bitcoin cloud mining provider. Founded in London in 2013, CEX first began as a cloud mining provider that owned the Ghash.io pool. As an online digital currency exchanger, CEX.IO offers the trading of cryptocurrency for fiat money, including USD, EUR, GBP, and RUB. The exchange charges commissions from 0% to 0.25%  on trades using the Maker-Taker fee schedule. The current list of cryptocurrencies available on CEX.io is Bitcoin, Ether, Ripple, XLM, Bitcoin Cash, Dash, Zcash, and Bitcoin Gold.

cex cryptoName: CEX
URL: https://www.cex.io
Total trading pairs: 15
Founded: 2013
Deposit fees: no
Withdrawal fees: no
Trading fees: 0.00% – 0.20%
Margin trading: no
USA accepted: yes
Verification levels and withdrawal limits:

Verification Level

Limits

Basic Daily: 1000 USD; Monthly: 3,000 USD
Verified Unlimited
Verified Plus Unlimited
Corporate Unlimited

Registration

CEX.io allows for initial registration using email, Google Oauth, or Facebook Oauth. To continue after Oauth, you will still need to manually input your email address. An email verification link will be sent to you. Upon verification, you are directed to the /buysell page, which has prices for currency available for purchase by Credit Card, good for the next 66 seconds. After that, a new price is populated, based on exchange rate, and you are given a further 120 seconds.

cex.io screenshot

Verification

A full guide to account verification is available here. With basic registration, you are allowed to buy and sell bitcoin with a daily limit of $1000 via credit card only, and a monthly limit of $3000. Verification allows you to make bank transfers and take commissions as well as removes the deposit/withdrawal account limits on basic registration.

 

CEX.io verification screenshot
CEX.io verification

The Verified level requires the submission of identifying documentation (DL, Passport, or ID card) and a tax reference number, such as a social security number. This will include your address and scans/photos of your identification documents.

CEX personal information verification
CEX personal information verification

In the personal information section, the registree will be required to submit their Gender, date of birth, first, middle, and last name, place of birth, and contact number. Optionally you can submit social media profiles as well. The following page is a simple address verification form.

From the CEX.io website:

PAYMENT OPTIONS

Most popular methods: Visa, MasterCard, bank transfer (SWIFT, SEPA), cryptocurrency

STRONG SECURITY

Protection against DDoS attacks, full data encryption, compliant with PCI DSS standards

WORLD COVERAGE

Providing services in 99% countries around the globe, including 24 states of USA

LEGAL COMPLIANCE

Registration in the UKMSB status in FinCEN, essential licenses and strong relations with banks

MARGIN TRADING

1:2 and 1:3 leverages, automatic funds borrowing, no extra accounts needed, negative balance protection.

COMPETITIVE COMMISSIONS

Reasonable trading fees for takers and makers, special conditions for high volume traders, strong offers for market makers.

CROSS-PLATFORM TRADING

Trading via website, mobile appWebSocket and REST API. FIX API for institutional traders

ADVANCED REPORTING

Downloadable reports, real-time balance, transaction history with transparent fees

HIGH LIQUIDITY

Fast order execution, low spread, access to high liquidity orderbook for top currency pairs

Coinone is a South Korean cryptocurrency exchange founded in 2015, it is #8 on BlockExplorer’s top 25 cryptocurrency exchanges of 2017 list. Coinone is one of the larger Korean cryptocurrency exchanges, and as such, it is recommended to mid to large-scale traders, specifically those looking to trade in Won. As all trades on Coinone occur in Won, and all Coinone trading pairs are cryptocurrency to Won.

Coinone

coinone cryptoURL:  coinone.co.kr
Total trading pairs: 9
Deposit fees: No
Withdrawal fees: Yes, per currency
Trading fees: 0.00% – 0.15%
Margin Trading: Yes
Verification: Yes, multiple levels

Registration

Registration is simple, requiring you to enter an email address, password, and solve a simple CAPTCHA-like puzzle. You receive an email to confirm your email address, though it is all in Korean. You can change the language emails are sent in the account configuration, though by default this is set to Korean.

Fees

Coinone breaks down its fees into a tiered maker/taker scheme that is based on the total you have traded in the last 30 days. And that total is updated daily at 3 AM. On the low-end fees are 0.1% for both makers and takers with 100,000,000 Won or lower in trades. On the High end, fees are 0% for makers and 0.02% for takers with 50,000,000,000 Won or more in trades. All margin trades carry a flat 0.15% fee for both makers and takers.

There are no deposit fees, and withdrawal fees differ by currency, there is a list of fees per currency available on Coinone’s site.

Interface

Coinone’s interface is a very clean and bright white with blue highlights. While the trading interface is well thought out there are some sections that are in Korean even when the selected language is English.

There is a chart of your currently selected trading pair at the top of the page. Below the chart on the left is the current order book for the selected trading pair and on the right is where you can submit buy or sell orders. On the right of the entire page is an overview of all currencies Coinone trades and their current price, below which is the status of your current orders. Further below on the right is your current fee rank, with how much more you need to trade to move up a fee level.

Verification

Coinone has four verification levels. And to withdraw currency you are required to have at least level one. Each verification level has higher withdrawal limits than the previous one

Verification Level Requirements Withdrawal Limit
Level 1 Email and location 1,000 KRW
Level 2 Phone number based authentication 500,000 KRW
Level 3 OTP Registration 1,000,000 KRW
Level 4 Review by operations team 100,000,000+ KRW

 

Security

OTP (One time password) also referred to as 2FA is available, though the method of configuration is unclear.