It’s a common misconception that Tether’s price fluctuation has something to do with Tether not having enough funds to back its value. People in the cryptospace constantly point to Tether’s price fluctuation and wonder about it, ridicule or criticize it. Tether’s bad reputation as a scam that has gathered enough impact to become a market manipulating force is bolstering this conception. However, it is just a misconception on how the market works.
What happened in October?
Back in the midst of October, Bitcoin surged to $7,200 on exchanges that supported Tether and only to $6800 on exchanges that do not support Tether. What obviously had happened at this moment was that Tether holders for some reason moved there funds into Bitcoin. But if you are an adherer of the Tether conspiracy, you will blame Tether’s creators or Bitfinex artificially tried to manipulate the market could not be confirmed. As a consequence, Tether’s price fell of course. The simple and likely true story where multiple holders of Tether thought that it would be the time to move into Bitcoin again which causes a surge in the latter and a decline in Tether should have been the end of this story. Though, to many news outlets, this is only where the story begins.
Selloff Caused By a Negative Media Hysteria?
An article stated e.g. that “[f]or a cryptocurrency that claims to be 100% backed by the US dollar to drop below $1, questions are bound to be asked.” Financial Times Alphaville, “a daily news and commentary service for financial market professionals” (Wikipedia) reported on how “[p]eople are freaking out about Tether” and echoed the hysteria that went on for some days throughout October. The reason for the selloff was likely caused by Bloomberg with their article “Why Crypto Traders Are So Worried About Tether“. A news article that did not reveal anything new and that just simply summed up the situation. However, Bloomberg has a wide reach in the financial world and it seems to be a plausible reason for the selloff.
Tether’s Most Important Asset Is Trust – Why Would It Undermine It?
Tether’s business model is to profit from the fees of converting Dollars into Tether and vice versa. Trust is the most important asset in this business. Tether has obviously done well from here on. Even if you suppose that Tether would have misused their funds in the very beginning in 2015, why would they continue to do so knowing that all eyes are on them whenever something does not go as planned? Tether has no influence on how its stablecoin will be traded on exchanges. Meanwhile, other stablecoins have used the negative momentum of Tether to market itself. TrueUSD (fig. 2) launched in March 2018 and Gemini (fig. 3) – maybe another candidate that contributed to the selloff – launched in October. And surprisingly, they have very similar price patterns as Tether.
So in conclusion, it is more likely that a negative media echo caused the selloff which turned into a hysteria that both let Bitcoin (as a store of value) surge and Tether decline. This makes Tether seem even more dubious to many people in the crypto space and the price declines even further. A self-enhancing effect that only broke when smart people move in and start to realize that there is a 10% discount on an asset. So, my advice for the next time something similar happens: Be smart.