The price for Tether, the dollar-pegged stablecoin at Bitfinex, crashed over the weekend as investors fearful about its reserve deposits, sold the coin. The extent of damage to Tether’s price varied across various cryptocurrency exchanges from five percent to more than thirteen percent. According to some reports, Tether’s price dropped to $0.85 at Kraken, a prominent exchange. (Since Tether is a stablecoin, its price typically trades near parity to the US dollar).
Tether’s loss turned out to be bitcoin’s gain and the cryptocurrency shot up by as much as 10% within a couple of hours. The surge in bitcoin’s price added $10 billion to its market capitalization. Other coins experienced gains as well. For example, Ripple’s XRP witnessed a 7% increase in its price. As of this writing, however, Tether’s price has stabilized and it is trading at $0.97, according to Coinmarketcap.com.
Why Did Tether’s Price Crash?
Two recent developments fed into investor fears about Tether’s USD reserves. First, Bitfinex changed its banking relationship to HSBC from Noble Bank, a Puerto Rico-based bank that is searching for buyers. It could be construed as a positive development since HSBC is, by far, the more reputable of the two banks. But it also gave rise to suspicions that something was afoot at Bitfinex. Those fears were confirmed later in the week when Bitfinex suspended all fiat deposits to its exchange and stated that it “expects the situation to normalize within a week.”
Bitfinex is reported to have among the largest trading volumes among cryptocurrency exchanges. Tether serves a vital role in its ecosystem. It serves as a fungible medium of exchange between various coins as well as an on-ramp or entry point for fiat currencies. Cross-chain swaps (or the ability to trade or exchange cryptocurrencies from one blockchain to another) are extremely rare and Tether plays an important role in connecting various coins.
Thus, investors interested in purchasing bitcoin or other cryptocurrencies first buy Tether and, subsequently, convert the token into another cryptocurrency. Because of its utility, Tether is among the most widely-traded cryptocurrencies in the market today. A collapse in its price could potentially destabilize the entire ecosystem.
Tether itself is said to be backed by equivalent amounts of dollar reserves in a bank account somewhere as its trading volume. But Bitfinex has refused to submit Tether to an independent audit and publicly discuss its findings. Meanwhile, an account on social media platform Twitter has taken the lead in documenting problems with the cryptocurrency.
Tether’s bad rep has been further compounded by studies published earlier this year that charged the stablecoin with propping up bitcoin prices each time they collapsed. According to the study’s authors, half the gains in bitcoin’s price in the last year came through an influx of Tether.