So why hasn't the bottom fallen out of Tether yet?
To actually exit Tether, most of these people would have to buy Bitcoins or another cryptocurrency accepted by most exchanges, register for the account verification processes there (every exchange that handles fiat money has the same KYC procedures as banks, i.e. take a picture of yourself and your driver's license and wait a couple days while an employee manually verifies it), transfer your Bitcoin to the other exchange, sell it to USD, and then move it out to a bank account. That takes time and a lot of hassle. We'd expect to see a rise in the price of BTC at USDT-based exchanges as Tether holders need to convert to Bitcoin to get out, along with a fall in BTC at fiat exchanges as they sell that Bitcoin. To some extent this is happening (Coinbase Pro's BTC price is almost $100 less than Tether-only exchanges like Binance or Bitfinex), but it's less severe than I would expect from a true run on the bank. Most Tether holders probably figure they'll take their chances because the hassle of getting out is worse than the possibility of losing their investment.
Reserve currencies can go a long time before people finally run for the exits. The US dollar hasn't been backed by anything since 1971 and is still ticking strong.
I think you might be overstating. The US dollar is not backed by an asset because it is an asset. At this point, the dollar is backed by the government, the government's authority, its military power, and the future value of its debt. That is not gold, but it is not nothing either.
Tether intrinsically has none of these, but because of its adoption by many exchanges, it's convertible into other currencies that have more intrinsic value. So as long as it remains convertible, it will continue to have value.
Also the gov creates more supply to the dollar than the tax demand always, so its not really clear. And most taxation is a percentage of income or value measured in dollars itself.
This argument never clicked for me: where is it coming from?
The intrinsic value of USD is consoling, because it prevents the value of USD dropping to 0, hence there will always be a possibility of the emergent value reappearing.
It's also worth pointing out that income doesn't always translate to inflows of physical dollars. Complex corporate accounting standards often result in recognizing revenue before any cash is received, and non-cash transactions that affect income.
Umm, yes?
What sets that exchange rate is demand for bitcoins, and demand for bitcoins would be equivalent to what you can buy only with bitcoins. So, I guess in a way that tracks to exactly what you describe. The part that doesn't track is the profit potential. Currency speculation is an interesting thing, but it doesn't usually track with the use of a currency.
I am pretty bearish on the long term viability for cryptocurrency growth, though. I expect transact in bitcoins about as often as I transact in any other currency...almost never. There are no wages, products, services, or geographic areas that require the use of bitcoin.
This is what has happened with the U.S. and China over the last 3 decades. As Chinese goods became more competitive on the global market, American export dollars started to flow into China. China refused to remove the USD/RMB peg, which created a long-term current account deficit in the US and made American goods & labor non-competitive with China. When they finally did remove the peg (after significant political pressure from the US), the value of the RMB rose significantly: it was 1:8 a decade ago, it's now 1:6.73.
Over the short term there are a lot of conflating factors - pegs, speculation, interest rates, wars, creditworthiness, etc. But over the long term, the "backing" for any currency is what you can buy with it.
The small spread is very interesting. I would also expect it to be much higher.
Tether seems to be pegged at $1.00 on Bitfinex but trading (increasingly) below that on Kraken [1].
Do you know of a better free resource for monitoring the situation by chance? No stake, just curious.
I suspect the price is holding up because most holders of Tether don't consider this a big problem. Either they believe that the NY AG will find that there are adequate reserves backing Tether after all, or they believe the reserves don't matter at this stage and other holders of Tether will continue to believe it's worth a dollar. Comments on this HN thread seem to support that. It's unlikely to change unless some exchanges go under entirely, and authorities in the U.S. don't really have the jurisdiction to do this.
I've been following coinmarketcap.com and openmarketcap.com, and also have a Coinbase Pro account that I'm using to track the Coinbase price (which actually diverged pretty significantly from the CMC prices this afternoon...must be a time lag). I don't have enough invested in crypto to get particularly emotionally attached either way.
The situation with tether is much much worse. About 30% of the money invested in tether is gone and unlikly to come back. The books do not balance, it is not a timing issue, it isn't a liquity issue tether or bitfinex is insolvent.
This is important to realize, tether or bitfinex is insolvent/bankrupt if that 850m is truly gone. It is covering up this with loans between related parties, but the legality of those loans is probably questionable at best but bitfinex and tether are intertwined such that they likely have shared liabilities legally.
Someone is bankrupt right now. Maybe both.
The fact that tether or bitfinex isn't dropping or outright dead confuses the hell out of me. Is it so critical to crypto now and so central that even if it is involvement we have to believe in it or the sake of this whole market? This market isn't rational or I must be missing something.
Also, unattended arbitrage bots might end up equalizing the price now but becoming major bag-holders later. Right now, the spread between the Coinbase & Bitfinex BTC prices is > $300. The logical response of an arbitrage bot is to buy Bitcoin on Coinbase (spending USD) and sell it on Bitfinex (receiving USDT); they provide the Bitcoin liquidity that people who want out of Tether need. This creates a counterflow of BTC from Coinbase to Bitfinex, spending down their dollar reserves at Coinbase and accumulating a Tether hoard at Bitfinex. If the bottom falls out of Tether, their accumulated profits (and any capital invested) becomes worthless.
And tax means the ability to force people to give the governmental organization a portion of their productive economic activity.
One other way to look at this is physical security being a service - a fundamental one - being procured by your tax dollars. This is actually mentioned explicitly in the first sentence of the U.S. Constitution: "We the people...to insure domestic Tranquility, provide for the common defense...do ordain and establish this Constitution." By being a citizen of the United States and complying with its tax laws, you enlist the full force of the U.S. military in securing your rights.
You could easily imagine someone offering to provide military services for Bitcoin. Depending on how they wield these military services, this could range from welcome to highly inadvisable; if it turns out they are in opposition to the interests of more powerful militaries (i.e. the U.S, or other major nations), they could quickly find out just how powerful the U.S. military is.
Given the shadiness of the operators they might not even run through all the cash but when half is gone steal the other half and disappear. Or something along those lines.