Analysts are warning that Bitcoin, a cryptocurrency worth close to US 10,000 and growing, could crash by up to 80 percent if experts can prove that Tether, a controversial cryptocurrency, was used to pump up Bitcoin’s prices artificially. To the average “on a whim” investor, the entire issue doesn’t make a lot of sense. However, if you’ve invested money in Bitcoin, and want to understand how this allegation could affect you, read on.
What is Tether?
Tether is a form of cryptocurrency that was created as a “stable coin.” In essence, its value mirrors that of the USD, and its intent is for it to be used as a digital dollar, but maintained at a stable price. As such, it differs from the likes of Litecoin, Bitcoin, and Ethereum, of which the value has substantially increased in the last few years.
Tether, with a value of one Tether to one US Dollar, converts cash into digital currency, and back into US Dollars again. It uses a blockchain just like other cryptocurrencies but is 100 percent backed by the US Dollar which is held in reserve.
Unlike other cryptocurrencies which allow investors to either make or lose a lot of money, Tether is more of an alternative to the USD or is “tethered” to it, offering liquidity to exchanges that aren’t able to deal in dollars or with banks.
What is Bitfinex?
Bitfinex is a cryptocurrency exchange that has been around since 2012. It provides a range of services for digital currency traders and providers of liquidity. It’s not only the world’s most advanced cryptocurrency exchange, and the largest, but it’s also used most often for trading Bitcoin against the US Dollar.
The people who use Bitfinex are those who require exchange trading, margin funding, margin trading, and an over-the-counter market to bypass the public order books.
You can deposit, trade and withdraw cryptocurrencies against the US Dollar with Bitfinex, as well as use it to earn interest on digital assets through peer-to-peer financing, and trade with leverage. The final and most crucial fact about Bitfinex is that it owns Tether.
What’s the problem?
Tether was created as a stable coin, but some people believe it’s anything but. Accusations are rife that Tether was built out of nothing, rather than against US Dollar deposits as it’s supposed to be. The effects of doing so would be the value of Bitcoin skyrocketing. And that’s precisely what’s happening. Bitfinex representatives insist that real dollar deposits back all Tether coins, but Tether issuances have coincidentally resulted in Bitcoin value drops. Coincidence? Many people think not.
In fact, experts believe that no organic growth is taking place. Instead, people think Bitfinex is “printing” more Tether as a result of market conditions. By printing more, the market appreciates. If you were to analyze Bitcoin price movements after the issuance of Tether, you would find there is some exceptionally odd movement.
For example, when 91 tether grants were added to the Bitfinex wallet, Bitcoin’s price rose by nearly 50 percent.
Such are the discrepancies that investors demanded answers in the form of an audit. That audit was promised and never happened. Investors wanted proof that US Dollars indeed backed each Tether, but such a connection has still not been proven.
Furthermore, the auditor assigned to providing such information no longer works for Bitfinex. It begs the question: what happens next? If it’s proven that the US Dollar backs not all Tether, making them effectively unmarked, then experts believe Bitcoin could see up to an 80 percent drop in value – something that could cripple investors, and the market.
Is Tether a scam? It remains to be seen. There’s every possibility we could be seeing a substantial market shift in the weeks to come if that audit if provided, doesn’t give adequate evidence to support the legitimacy of Tether.