Tether - The Coin That Could Wreck Cryptocurrency
Previously, Tether was a stable coin, but it was not backed by any fiat currency. Instead, it relied on complicated algorithms to keep its value stable.
However, that model has now proven a failure, and the price of Tether has crashed to unprecedented lows. So, what happened to the Tether reserves? Is Tether doomed? Read on to find out.
Tether
The crypto market is already seeing some serious issues. The recent crash in TerraUSD is a reminder of the dangers of loosely regulated stablecoins. Some traders have even started putting their funds in other stablecoins, fearing the next collapse could test the stability of Tether's reserves. The potential for a massive cryptocurrency crash is real and not far away. However, the coin's future looks bleak.
It is not clear who controls Tether, and its founders have never disclosed where the company stores its assets. The company says they have 50 employees across Asia, Latin America, and Europe. The CEO is a Dutch businessman, although they declined to specify where he lives.
Tether has also issued periodic statements disclosing the composition of its reserves, but these have done little to soothe the fears of skeptics.
TerraUSD
The first thing to know about both currencies is their market cap. Tether is one of the top five cryptocurrencies by Market Cap, and many people hold it to prevent extreme volatility. It is also one of the first stable coins and has been widely adopted all over the world.
In contrast, Terra USD is a fairly new coin and is gaining popularity thanks to its companion token, LUNA. Terraform Labs' Defi platform has also helped the coin gain popularity. TerraUSD is currently the fifth-largest stable coin by market cap.
The most striking difference between these two currencies is the nature of the algorithms they use to link their supply to a non-stable coin. Unlike a traditional stable coin, the algorithm used by Terra links the supply to the LUNA token.
That means that if the price of a stable coin drops, its value will fall. This feature was initially unique in the stable coin space, and it has since gained momentum and become a favorite among traders.
Binance USD
Recently, a top U.S. banking official has called for tighter regulation of stablecoins like Tether. He argued that the recent TerraUSD crash showed the risk of relying on poorly-regulated crypto-pairs. Meanwhile, some traders have diverted their funds into alternate stablecoins to avoid being burned by Tether.
But now that Tether has been accused of dumping crypto, some investors are looking to suck Tether out of its stable coin investments.
The first issue Tether faced was that it was not backed by fiat currency. The stable coin relied on complex algorithms to maintain its value. These algorithms skewed the market and made Tether an attractive investment.
But the crypto market took a big hit last week, as the price of major cryptocurrencies dipped below $1 trillion. This isn't necessarily a sign that the crypto market is heading to disaster, as it remains a viable option for investors, despite its high risk.
Tether's reserves
In April, the cryptocurrency exchange Tether retracted claims that its USDT stable coin was 1:1 backed by the U.S. dollar. During the first quarter of 2019, Tether's reserves accounted for 74% of its total value, including cash equivalents. Of this, 65% was in the form of short-term unsecured loans.
However, this year, the exchange has disclosed the breakdown of its reserves. While the remaining 22% is composed of commercial paper and other cryptocurrencies, the rest is made up of corporate bonds and real cash deposits.
Tether's reserves are a concern for some people. The cryptocurrency company isn't transparent about the composition of its reserves. It doesn't disclose how much of its reserves are held in commercial paper or government bonds.
It has previously hidden its asset base by saying it consists of investment-grade securities, including commercial paper. It also refuses to disclose which companies issued the commercial paper. In addition, the company has repeatedly drawn attention to the declining commercial paper portion of its reserves.
In response to this criticism, the company has beefed up language in its reports and included disclaimers from an independent accounting firm based in the Cayman Islands.
TerraUSD's withdrawals from Celsius Community
The demise of the US dollar peg is a blow to the currency. The rise and fall of TerraUSD triggered the devaluation of the currency. While Celsius says that withdrawals will resume soon, it did not provide a timetable.
In the interim, investors can expect their funds to stay in the stable coin for the foreseeable future. But how does the currency perform against the US dollar?
There are many questions regarding the implosion of the cryptocurrency community, and the fate of the Celsius token is a cause for concern. While the Celsius network promises to continue accruing rewards for customers during this pause, it has lost more than half its value today.
The company is currently under investigation by the SEC but will be able to defend itself if it is sued. The CEO of the Celsius network has been attacking critics for years.