Notes 3/17: Bitcoin in Tether’s Reserves

Tether is Bitcoin’s new savior.

The crypto world’s biggest stablecoin plans to increase bitcoin holdings in its reserves by investing 15% of its future profits into bitcoin. According to its latest attestation report, Tether had $1.5 billion worth of bitcoin on its books.

The firm said it will use “realized profits”, or profits accruing to it from its investments, to make purchases of the cryptocurrency. Per usual, it did not provide much detail about storing the purchased bitcoin, simply stating that it will self-custody the cryptocurrency.  Tether reported profits of $1.48 billion in the last quarter. It is not clear how much of that figure was due to “realized profits” from investments.

This is not the first time that Tether has purchased bitcoin.

In the past, it has recycled unbacked Tether into bitcoin by purchasing the cryptocurrency using real dollars. A 2018 research paper charged the stablecoin with manipulating bitcoin price by increasing the supply of its tokens to create fake bull runs. Those runs ended with actual dollars, as opposed to unbacked Tether tokens, flowing into the cryptocurrency ecosystem from investors eager to profit from crypto.

The Tether Black Hole

Tether’s latest purchases of bitcoin might shore up the cryptocurrency’s currently floundering liquidity. In the long term, however, a strengthening of the relationship between Tether, a controversial stablecoin, and bitcoin, an unproven asset, is another nail in the crypto coffin.

For much of its short existence, Tether has functioned as an opaque entity and refused to open its books to regulators and third-party auditors. The source of its profits remains mysterious, and its attestations are unconfirmed snapshots that are dictated to accounting firms by the company’s management. We don’t know anything about its banking relationships.

Even as the share of competitors like Circle’s USDC and Binance’s BUSD continues to decline in the current stablecoin market, Tether has made steady advances this year. That dominance is not a function of trading volumes or trader preferences. In fact, stablecoin balances at exchanges have declined this year as compared to the previous one.

Rather, Tether has blanketed the market, simply, by issuing new coins. Those coins reside predominantly at networks like Tron, a blockchain currently being investigated by regulators. What’s more, bitcoin’s well-known price volatility into Tether’s reserves magnifies risk and could make its peg go awry. But the stablecoin has not outlined a plan to mitigate the risk.

Another consequence of an increase in Tether’s bitcoin holdings is that it becomes a whale. For example, bitcoin price will collapse if Tether decides to dump its bitcoin holdings. To that extent, then, more bitcoin in the Tether black hole is not a good development for the cryptocurrency’s price or its future.

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