Is USDT stable? Or, why Tether is bad for Bitcoin
Most of you traders are familiar with USDT, also known as Tether. It is meant to be a stablecoin that is backed 1:1 to the US dollar, but in practice, USDT is usually a few pennies higher or lower than the dollar. I will explain why this is a problem.
Trading with USDT
The way you're supposed to use Tether is to buy it on exchanges when you want to hedge against bitcoin or some other crypto. Tether has no community blockchain and thus, there is no wallet software for it. It is strictly intended for trading purposes.
I mentioned that USDT's price is not exactly equivalent to the dollar's, and it's a few cents off. So, if you trade the BTC equivalent of $100 to USDT, it will be a few dollars off, say $103. The problem comes when you trade tens of thousands worth of BTC with it. Suddenly, some of your balance is artificially lowered (or raised, if Tether drops below $1), when you have expected it to give you the equivalent in US dollars. In this example you lose about a few hundred in dollars trading BTC to USDT.
And I said it's a problem, because people and whales are trading with such large amounts all the time. So now there is a bunch of BTC floating around in people's trading accounts, that should not exist (or the lack of it that should've existed) but is sent/received anyway by exchanges because of imprecise Tether prices. That is a prime example of manipulation.
I estimate there is a deficit of millions of dollars worth of BTC in exchanges' liquidity because of this error. Tether is bought more than it's sold, if thar wasn't true there would be more sellers than buyers and it wouldn't be used by many people.
Tether's supposed to be liquid, but isn't
All USDT tokens made by Tether are supposed to be backed by the same amount of dollars, which is what Tether claims is the case but when asked for proof, they can't prove it. This is very sketchy behavior from a company that's supposed to be managing a stablecoin.
They actually only have three fourths of their tokens backed by dollars. The rest are backed by nothing, so you are now at the mercy of Tether's ability to correct USDT with respect to the dollar so that your tokens don't suddenly become worthless. And I already demonstrated they do a bad job at that.
As if that wasn't bad enough, what if I told you that some of the reserves they do have are being invested in bitcoin? Reserves should never be based off of volatile currency, does Tether think bitcoin's going to go on a big rally and they can cash it all out to get some liquidity? (No. They can't do that, because if they did, it would immediately trigger a collapse in BTC price. Market manipulation in fine.) We do not know what percentage of their actual reserves, or even their alleged reserves, are hedged in bitcoin, but however much it is, Bitcoin recently crashed to a little more than 5/6ths of its value, from almost $12K, to just over $10K. A lot of reserves have been lost to that.
They also have a different percentage of their reserves backed by loans to other companies, and there have been several cases of institutions failing to pay back their loans, and if Tether runs out of money and defaults, that portion of their reserves will lose a lot of value.
Tether doesn't even have anyone auditing its token anymore, so don't count on the reserves to bail you out of a Tether disaster. Tether has no governmental insurance to save its value if it collapses, there are only its alleged reserves protecting it.
Tether is owned by Bitfinex
You'd expect an independent company to be issuing USDT. Instead, one of the largest exchanges in the world, also happens to own the biggest stablecoin. Talk about control. There is nothing stopping Bitfinex from using Tether to inflate its trading volume, which if too big, will be bad for all bitcoin traders, especially Bitfinex users.
Can we trust Bitfinex? The answer is no, just like any other exchange. You are supposed to verify that exchanges don't engage in this shady behavior, and since you usually can't, the next best solution is to hold Tether only for short periods to evade fluctuations. Besides, Bitfinex was hacked before, so what if Tether and Bitfinex share the same vulnerable code for their platform?
Millions of dollars have already been hedged in USDT
If Tether goes bust, it's going to knock down the Bitcoin price with it because the BTC-USDT trading pair is the largest traded pair ever. People can't trade back to their equivalent amount in BTC, exchanges will suddenly be left with a surplus of Bitcoin, and such a concentrated amount will bring it down to say half its price or something. It can't completely destroy the price, but it has the potential to make a 2018-style crash.
Tether has tied Bitcoin's fate to it, like a spider ties up its prey. A mishap at Tether has the potential to make people leave Bitcoin, a mishap we must not allow to happen. Though as individual traders there is not much we ourselves can do to sway the pendulum.
Sources:
https://thenextweb.com/hardfork/2019/08/08/another-reason-tether-terrible-300-entities-control-80-percent/
https://www.exodus.io/blog/is-usdt-safe/
https://en.wikipedia.org/wiki/Tether_(cryptocurrency)