What happens when the next stablecoin bomb bursts?

Tether (USDT) promises stability as the largest stablecoin on the crypto market. Because behind the cryptocurrency is the promise that each individual tether unit USDT is worth exactly one US dollar. If there is turbulence with BTC and Co., this should always offer the opportunity to get one’s nest dry. But what happens when Tether loses (“de-pegges”) its dollar peg (“pegging”)? And how likely is that to happen? Does USDT face the same fate as the Terra (LUNA) ecosystem and its stablecoin TerraUSD (UST)?

Tether (USDT): How trustworthy is the stablecoin project?

Tether has always managed to make a name for itself with negative headlines in the past. The two most important in this context:

• Contrary to previous claims, Tether is closely linked to the scandalous exchange BitFinex. Together they were convicted of fraud by the New York Attorney’s Office.

Bitfinex and Tether recklessly and illegitimately have massive financial assets
Covered up losses to keep their system running and protect their profits. Tether’s claim that its virtual currency is fully backed by US dollars at all times was a lie.

Letitia James, New York State Attorney

• Tether originally claimed that its reserves were 100% backed by US dollars. After the New York prosecutor found out about them, they quickly changed the promise on their homepage.
• Tether has since been hedged by “traditional currencies, cash equivalents and, from time to time, other assets, as well as claims against loans that Tether has made to third parties associated companies may belong”. In short: Nobody knows exactly what’s really in it. Accordingly, many investors are concerned that the supposed house of cards could collapse at some point – with devastating consequences for the crypto space.

Can tether de-pegging happen?

Especially those “receivables from third parties” can cause stomach ache. In fact, most of the $74 billion in Tether reserves consists of promissory notes from assets that Tether has loaned to various companies. According to research by “Bloomberg Business Week” These are large Chinese companies as well as some crypto companies.

If Tether were to come under pressure to pay out funds, for example due to a glut of investors wanting their money back, it is questionable whether all the companies that owe Tether money would also be able to pay. In short: Tether would have a problem. And one that is already in the offing: In the last few days, the price of the “stablecoin” has fluctuated again and again, which shouldn’t actually happen.

However, the company has left a back door open: According to their Terms of Use they are not obliged to meet any claims directly. It may be all the more surprising that a large number of investors are apparently tacitly accepting this. Nevertheless: It is questionable whether Tether can guarantee its solvency at all times. A decoupling from the US dollar cannot therefore be ruled out.

Now it all depends on how investors react as soon as Tether shows how their own reserves are doing. Because according to a recent court order, the company is now obliged to disclose this.

The situation is clearly ambiguous: de-pegging may or may not occur. In any case, it should be noted that all the information presented here is already known – both among authorities and in the crypto space.

What happens when Tether implodes?

Should de-pegging actually occur, it would have unpredictable consequences for the crypto market. One thing is certain: should the crash occur, the crypto market would suffer severe damage, at least in the short term.

Should investors start liquidating their Tether reserves, a domino effect could occur and more and more people would lose confidence in the stablecoin.

Since most crypto trading is done via Tether, the market would face massive liquidity problems. The BTC course, but above all the Altcoin courses, would come under massive pressure. Due to the already weakened prices of BTC & Co., the crypto market could lose its reputation. Market expert Stefan Lübeck:

When de-pegging occurs, expect panic selling at all levels. Investors will try to convert their USDT to USD around FTX or else binance into BUSD or USDC, which is likely to exacerbate de-pegging. Another sell-off is also to be expected, especially for altcoins, but also for BTC. Especially if you follow the development here after the start of the LUNA crash. This should finally lead to an outcry for more regulation and stronger control by state institutions.

Investors should do that now

It is best to act before a crash occurs. In other words, if you have tether reserves, you should think twice about exchanging them for fiat or cryptocurrencies. In the event of a major sell-off, there’s nothing wrong with having some cash reserves on hand. Because should it actually happen, there are guaranteed low entry prices for BTC & Co.