Tether's backing and the wonderful snowball rolling

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Written by
3 years ago

I'm probably going to give an unpopular opinion here. But it's mine, so it's the only one I feel compelled toward.

I could start by discussing to what extent Tether is backed by US dollars, to what extent the dollar is itself backed by anything, or what usefulnesses support the prices of Tether and USD in the event they are not backed by anything else. But I don't think it’s worth doing so, because the main point is that, ultimately, the only thing that supports the value of things, and therefore their price, is their usefulness. If Tether is held around USD price it’s because the market perceives its utility to be essentially the same as that of the USD, but in a different arena (the cryptoasset markets). Even if it isn’t backed at all, its price in the recent past is an indisputable fact. The market may not always feel the same and it can change suddenly. But this is the current reality, the only one the market knows, since the future is actually unknown.

Regardless of its backing, the point is what influence can it have on cryptocurrency prices if a stablecoin like Tether loses the confidence of the market. And the answer is actually quite simple. Prices are historical events, not futures. The price of BTC or BCH that we know right now is already a past event, the future we can sense but not know. What we must be very clear about is that BCH, BTC, ETH or other cryptoassets are not backed by Tether, but have been acquired with Tether, which is a completely different matter. In the past, up to this very moment, they have been exchanged for Tether and the latest price relationship between them is what we know.

If first thing tomorrow morning the market completely loses its confidence in Tether, because it discovers that Tether isn't backed by anything, because it finds something more useful for the same function, or for any other reason, what is going to collapse is the price of Tether, not the price of the cryptocurrencies that were bought with Tether. In other words, what can be expected is a collapse of Tether with respect to BTC and the other cryptocurrencies, a brutal flight to these and a massive sale of Tether, either to cryptocurrencies or to fiat currencies.

If, from the moment Tether disappears or becomes irrelevant, there is a negative influence on the prices of cryptocurrencies that were purchased with this instrument, it will not be because in the past these assets were purchased with Tether, but because the absence of this instrument in the market may hinder the flow of demand towards it. In other words, investors may find it relatively more difficult to convert their fiat currencies into cryptocurrencies, since access to exchanges that don't use fiat currencies would be less accessible to those who wish to buy cryptocurrencies with them. And that, of course, would reduce demand for those cryptocurrencies until the market finds a substitute asset for Tether. Since there are already Tether substitute assets, the reduction in demand for cryptocurrencies would last only as long as it takes for the supply of those other assets to adapt to the demand for them, and therefore no lasting influences on cryptoassets prices, other than the extreme volatilities to which we are already accustomed in these markets, can be expected.

In short, it is probably very true that Tether is poorly backed by USD. At least as true as USD is even worse backed by anything else. Moreover, Tether is an asset of irrelevant dimension compared to USD. What underpins the price of both is the market's perceived utility of them as a medium of exchange. All the FUD regarding the danger Tether poses to the price of cryptoassets is based on an unfortunate misunderstanding, that of confusing backing with trading and market price. If Tether one fine day collapses, or if the USD does, it will not be negative for cryptocurrencies, but precisely what those of us who buy cryptocurrencies have been waiting for since Satoshi Nakamoto set this wonderful snowball rolling.

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Avatar for Moeb
Written by
3 years ago

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If tether was printed out of thin air to market buy bitcoin and other altcoins it means much of the price discovery was false. It should blow up because trusting tether and not verifying is the opposite of bitcoin's original credo. Everyone knows tether is shady, but since the scam is working in our favor for now there's no incentive to rock the boat. We don't know what the catalyst is that will trigger the inevitable Minsky moment, 3 billion print in 1 week is not enough it seems.

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3 years ago

I understand what you are saying. I just don't agree with it. It is precisely the kind of position I am trying to refute, for several reasons.

You know, the point of all this is that things have market value because of the utility they have for the users who acquire them. Where those things come from, whether they have been manufactured with sophisticated machines or created out of thin air, is irrelevant. For it is not the costs or the labor incurred by the producers that give value to things, but the utility to others of those things.

So that is exactly why the US Dollar has market value, despite being made "out of nothing". Does that mean that the discovery of the price of all dollar-denominated goods is false? Despite the fact that the USD is produced from thin air, most people make an effort to obtain it because it is useful to them. People don't want dollars, they want the things you buy with them. So what really has value is those things, while the USD only has the value that its usefulness as a medium of exchange gives it. If the USD were to collapse, the prices of things would not collapse, but would go through the roof; that is what is happening in Venezuela with the Bolivar, for example.

With Tether it is exactly the same. In any case, claiming that three billion Tether have been printed out of thin air in a week requires proof. Because the fact that they have been printed does not mean that they are not backed by USD, although they might not be fully backed. What is clear is that there are many, many people and companies that demand Tether in order to make their cryptocurrency purchases, and that is what sustains their market price. The backing serves to tie the price of Tether to the price of the US Dollar. But the truth is that the US Dollar does not serve to do what Tether allows to do, or else Tether would not exist.

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3 years ago

maybe you can explain more, I want to read the rest of this article

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3 years ago

Unfortunately I haven't the time to elaborate a full extent article about it. But if you tell me what aspects you are interested in, I might write something about them. Thank you! :)

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3 years ago