Cryptocurrency scholars believe that Tether was used to manipulate Bitcoin prices to reach $20,000.The currency has raised a lot of criticism from financial advisors, who claim it lacks Currency reserves to back it up. A simple explanation of Tether coin is a coin that is tethered to another currency, and in this case, tether is ‘tethered’ to the U.S dollar. If the allegations claiming that Tether is not backed by currency reserves are true, it means Tether has infinite potential to either propel or crash the price of BTC. Another general effect is the ability to cripple exchanges and wipe out crypto markets.
Effect Of Injecting USDT into Crypto Market
The eventual drop of Bitcoin prices and gradual recovery was orchestrated by the pumping of $250 million worth of USDT into the market. The action came at a point of cryptocurrency decline especially giant coins like Ethereum and Ripple. The turn of events raised concern that it might have been Tether’s stakeholders who caused BTC to drop in price to take advantage of low prices. Other investors believe the USDT injection was a god sent and helped the cryptocurrency from further collapse. Bitfinex went to the extent of accusing Tether of buying BTC during the low season and finally pumping the investment back to siphon profits.
The relation between Tether and Bitcoin
The tether was created to act as a stabilizing coin for the cryptocurrency world. Tether is therefore a stable coin which cannot fluctuate in value unlike most crypto coins. Tether is pegged to the USD at a ratio of 1:1. It is more of the equivalent of a federal reserve for the crypto industry. Like any other financial reserve, Tether can alter price patterns. Experts claim that the printing of new Tether USDT is proportional to a fall in the price of BTC. It is theoretically believed that one USDT should always fetch one USSD. A research paper by two students from the University of Texas hypothesized that “Price patterns are most consistent with the supply-based hypothesis where Tether is used to provide price support and manipulate cryptocurrency prices.”
Tether printed $850 million worth of USDT in January raising a lot of questions on whether that action alone could not lead to future problems. The printing also raised doubts that there could be a possibility of Tether being not backed by dollars.
There are others fears that a drop in the price of Tether could also result in a collapse in the price of BTC as well as the rest of assets that have been attached to the USDT. Some exchanges also use USDT as a proxy for investor’s funds. Investors also believe if the crypto world decides to unpin Tether from the U.S dollar it could also cause problems to the exchanges using it as a proxy. Another potential scenario is where liquidity of assets could be created forcing investors to find alternative capital to fund their investments.