Can somebody please explain this whole Tether debacle thoroughly? I’ll be brutally honest, I know nothing about it & why it’s making such a bad impact on the bitcoin market.
The idea behind tether is that the team running it (basically the same folks as run Bitfinex) collect US dollars from people via bank transfers to Tether accounts. They are then issued Tethers at a 1:1 rate with the dollar. Tethers can then be redeemed and dollars transferred back out to banks the same way. You can send your tether tokens to any exchange that uses them to buy cryptocurrency, with a transaction very similar to a Bitcoin transaction.
Why use tethers? It gets exchanges out of the regulatory/legal headaches of dealing with fiat currencies, and allows you to move "dollars" around very quickly and easily just like Bitcoin. So long as it is stable, it gives cryptocurrency traders a refuge to flee to in a down market. As such it's extremely useful, and not surprisingly there are probably a lot more exchanges out there using tethers than using actual dollars. (If you find you can't actually withdraw "$$" to a bank account on a given exchange, that means those are actually tethers you are trading there. Many people don't even know it.)
So what could go wrong? Well, in principle there would be nothing to prevent the centralized Tether team from issuing more tether tokens than they've received dollars for, or they could spend the dollars and not have them available if people wanted to redeem their tether. That means it is important for them to be audited so people can trust that they are not doing this. We can see how many tethers are created on the blockchain, but bank accounts are not so transparent.
Another risk is that Tether could have trouble maintaining bank accounts, due to the hostility of banks towards cryptocurrency or issues with sending/receiving dollars to people's bank accounts globally. Being located outside the U.S. aggravates this problem as the U.S. is getting very difficult to deal with when it comes to sending/receiving dollars from abroad.
As a result, Tether has been struggling with getting a stable bank network set up for their accounts for the better part of a year. And the audit we've been waiting for month after month is basically canceled. The Tether team says the auditors were making it too difficult to complete the audit. This could mean the Tether team is hiding something, but the fact that we all know they've been having banking troubles means it could just be related to that. My gut feeling is that Tether has all the $$ they need and then some, but they might have been using shell companies and other "gray" practices that drove the auditors nuts as they try to move dollars around without banks shutting them down. This is partly based on my own interaction with their contact on Skype for wire transfers back in December. (Also, keep in mind that Tether can be very profitable for them if they earn any kind of interest rate on over $2 Billion on deposit. The overhead for the entire operation can't be more than a tiny fraction of that.)
So basically a lot of people are freaking out that the Tether team is printing counterfeit, unbacked "dollars" that people have been using to buy Bitcoin, boosting the price artificially. I doubt it, because the Tether team is also behind Bitfinex, which has worked very hard to create a top-of-the-line, well functioning cryptocurrency exchange that is targeting "elite" traders. (You now need to deposit $10,000 on Bitfinex just to start trading.) I can't see them making such a sincere and strong effort to build Bitfinex if they were running a scam with Tether that would inevitably come crashing down at some point.
TL/DR: Tether's woes can be adequately explained by the facts we already know (the banking headaches), without engaging in conspiracy theories about any dishonest behavior or scam going on.
