Tether's dollar peg broke this week. The stablecoin fell to $0.966, a three-cent gap from where it should trade. For most assets this means nothing. For a coin designed to equal one dollar, it's a war
Tether's dollar peg broke this week. The stablecoin fell to $0.966, a three-cent gap from where it should trade. For most assets this means nothing. For a coin designed to equal one dollar, it's a warning signal.
Tether holders got a master class in what happens when confidence cracks. The last major stablecoin to fail was NuBits. From September 2014 through June 2016, it held its peg. On June 7, it dropped to $0.96, within normal variance. But the next day it fell to $0.90. By June 9, it was collapsing. It hit $0.63 in a matter of hours and bottomed out at $0.21 by June 18.
NuBits climbed back. By September 2016 it had recovered to around $1. The recovery didn't last. Late in 2017, as traders repositioned ahead of a rumored Bitcoin crash, money flooded back into stablecoins. NuBits shot up to $1.43. For a normal coin that would be victory. For a stablecoin it's a problem, a sign the peg controls don't work in both directions. Confidence eroded anyway. In March 2018, the exodus began. Its algorithm couldn't contain the selling pressure. The price tanked to around $0.25 and hasn't returned.
Tether breaking its peg isn't new. In April 2017 it fell to $0.92. The decline spanned from late April through late May. This marks Tether's second break, and the stakes are higher.
The exchange BitFinex created Tether and still holds significant wealth in it. Binance and Kraken both have hundreds of millions locked in Tether holdings. A collapse doesn't just hurt traders who bought the coin as a hedge. It threatens to bring down three of the industry's biggest platforms.
BitFinex is struggling. Customer complaints mount about withdrawal delays and ignored support tickets. The exchange moved from banking with Nobel Bank to HSBC. It's unclear whether Tether's reserves sat at Nobel or moved with them. Tether and BitFinex claim they're separate entities, though they share leadership. Either way, a Tether collapse could push BitFinex toward Mt. Gox territory. The exchange is showing some of those signs.
Tether has claimed that each unit has a real dollar backing it. The company has never submitted to an official audit. Without that verification, confidence is what holds it up. Confidence is fragmenting.
If Tether's price stays depressed, traders will run. How bad it gets depends on whether the reserves exist as claimed. If BitFinex or Tether can't produce them when questioned, the industry will feel the damage for years.
The trouble isn't isolated to Tether. TrueUSD broke its peg in the opposite direction, now trading around $1.05. That suggests TrueUSD's control mechanisms can't scale with demand surges. If Tether's fall kept pushing money toward TrueUSD and TrueUSD's price kept rising, what happens when the flows reverse? Circle launched USD Coin with Goldman Sachs backing. It trades at $1.10. Circle told this publication it saw a 2,000 percent surge in usage over the weekend as traders fled Tether.
The stablecoin market is supposed to be boring. Tether's breakdown proves that promise can evaporate in minutes.
