A New Way To Hedge Against The Ticking Tether Bomb
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Something weird happened today in crypto-world. And it could offer savvy investors the opportunity to hedge against the Tether Bomb – an affectionate term for the fact that nobody really knows if the cryptocurrency is backed by actual fiat cash, as claimed by Bitfinex.
Binance, which is now the largest exchange by trading volume, introduced another set of currency trading pairs. Along with welcome options on Ripple and Iota, there’s one coupling that’s especially interesting: a chance to exchange Tethers (USDT) for True Dollars (TUSD).
And Binance isn’t the only exchange to do so—Kraken also has USD/USDT trades and margin shorts. Bittrex recently launched USD/TUSD and USD/USDT pairings.
Some people would wonder why the world needs to trade two supposedly-dollar valued coins, and that was certainly the case on Twitter. Reactions ranged from bemusement (‘What’s the point of Tether/US dollar TUSD/USDT? Am I missing something?’) to irony (‘when moon?’).
The truth is that this is probably one of the larger crypto-events this year, and that’s saying a lot.
But before we can explain why, we need to talk cats.
Wildcat Tether
In the year 1837, the dollar was backed by gold, and worth a lot more. It was a great time to invest in Bitcoin.
However, there was not yet a Federal Reserve. Instead, paper notes were issued by banks, with the promise to trade them for gold or silver if you brought them to the bank in person. Since most people wouldn’t actually bother redeeming their notes, banks could print a little bit more money than they actually had. Or, in some cases, a lot more.
This led to wildcat banking, named for the fly-by-night banks that printed their notes with local animals and wildlife. That’s right—banks invented the exit scam, too.
Since wildcat money had less-than solid reputations, people might charge a bit more for notes from banks they didn’t recognize. Bills from faraway banks traded for significantly less than money from local banks, and if you travelled a lot, you could even make a tidy profit by arbitraging money from one locality to another.
The Tether Bomb: Dollars for Dollars
Which brings us back to the Tether Bomb and the $2.5 billion Schrödinger’s dollars “in” the company’s bank account. Because Tether’s never released an audit (their one try failed), and because its finances are anything-but-transparent, the company looks an awful lot like one of those Wildcat banks. But when Tethers get printed, the price of Bitcoin seems to go up.
Tether is like a ticking suitcase at an airport. It could be a bomb…or it could just be an alarm clock, or an electric razor. When you’re in a hurry you don’t care, as long as you’re not around to see it blow up.
There have been efforts to create newer stablecoins, but no one’s been able to replace Tether. One startup created “True USD” (TUSD), which unexpectedly reached a brief peak of $1.27 thanks to trading bots and low liquidity. Circle, backed by Goldman Sachs, plans to launch its own stablecoin in the near future as well.
By adding the Dollar/Dollar pairing, Binance has made it possible to hedge against the integrity of Tether and Bitfinex.
If you’re new to crypto and worried about the Tether Bomb, the new stablecoins offer a safer shelter for your money. If you’re really pessimistic, you can short-trade against Tether on Kraken, or Binance, after the latter exchange’s plans for margin trading come to fruition.
As new bridges are built between fiat and cryptocurrency, it’s becoming safe to travel without having to cross the wobbly Tether bridge. Whether that bridge is actually sturdy or not, the addition of new crossings is likely to increase traffic between the two worlds.
The author is invested in Bitcoin.
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