Tether, the $74 billion stablecoin issued by Tether Holdings Limited, has faced increased scrutiny since the collpase of agorithmic stablecoin terrUSD that partly triggered a $1 trillion bitcoin, ethereum and crypto crash (with more pain thought to be on the way).
The bitcoin price fell last week to lows not seen since the start of the crypto price surge in late 2020—losing around 50% since its all-time high of almost $70,000 per bitcoin in November. Meanwhile, ethereum and other smaller cryptocurrencies have seen an even steeper sell-off as panic suddenly spreads to NFTs.
Now, a Barclays strategist has warned tether, which claims it has adequate reserves of U.S. dollars and dollar-equivalent assets to maintain its one-to-one dollar peg, could be hit by a price spiral if holders rush to sell it “quickly before its price falls even further.”
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Tether holders are able to either swap their tethers with the company or they can sell them in the secondary market to other traders.
However, Barclay’s analyst Joe Abate pointed to a little-known caveat Tether Holdings has put in place to prevent against sudden outflows, requiring tether holders who want to swap their tethers with company dollars to set up a company account, exchange at least $100,000 worth of tethers and pay a 0.1% withdrawal amount fee.
“We suspect that the liquidity in tokens such as tether is directionally sensitive,” Abate wrote in a note seen by Bloomberg, explaining how holders rushing to offload their tethers in the event of a bitcoin and crypto crash could cause a price cascade.
“When crypto asset prices rise, it is easy to sell stablecoins, as there are plenty of eager buyers ready to acquire the token at par. But this liquidity dries up quickly when other crypto asset prices fall, such as on March 17, 2020, or last week. Even modest selling causes prices to gap lower and transaction sizes to shrink as buyers disappear. In Tether’s case, the pressure to sell is intensified by the inability of most investors to redeem directly, as well as the inherent first-mover advantage: to sell the token quickly before its price falls even further.”
Last week, tether’s secondary market exchange rate fell as low as 95 cents before mostly recovering but still remains slightly below $1, according to CoinMarketCap data, as a bitcoin and crypto market crash caused traders to rush for the exit.
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“Tether does not make this easy or cheap, by charging redemption fees and imposing minimum fiat withdrawal amounts,” Abate wrote, adding this “suggests the token might be prone preemptive runs,” as traders forced onto the secondary market rush to redeem their tethers for the best possible price.
Barclay’s warning comes just as Tether Holdings published a report detailing its assets through the first quarter of 2022. The report was put together by an independent auditing company, MHA Cayman, and shows Tether Holding’s consolidated assets exceeded its consolidated liabilities at the end of March—suggesting that tether’s fully backed.
“This past week is a clear example of the strength and resilience of Tether,” Paolo Ardoino, Tether Holding’s chief technology officer who’s also an executive at major crypto exchange Bitfinex, wrote in a blog post.
“This latest attestation further highlights that Tether is fully backed and that the composition of its reserves is strong, conservative, and liquid.”