Tether is exiting, and nobody noticed

Here’s a theory for you: Tether is exiting — and that’s a good thing. But before we dive in, here’s a quick summary of what happened so far.

The rumour mill starts grinding and the peg breaks

For the last month, negative sentiment about Tether and Bitfinex built up on social media. It started with Noble, Tether’s old banking partner. Rumours had been circulating for a while when, in their quarterly analysis, Bitmex research found that Tether had stopped banking with Noble and moved the funds out of Puerto Rico — destination unknown.

On October 6, some users noticed Bitfinex was now banking with HSBC. The next day Bitfinex responded to the rumours about their financial situation and said things were largely fine. On October 10, The Block broke the news that Bitfinex had paused USD deposits (not withdrawals) but expected the situation to normalise within a week.

This news spooked the market. Tether started trading at a premium against Bitcoin and other stablecoins as more and more people tried to get rid of their USDT. Sellers temporarily accepted as little as $0.92, but the price quickly recovered and has since been trading at a relatively stable 3–4% discount. Finally, on October 16, Bitfinex announced a new “improved and increasingly resilient system for depositing fiat currencies” and Tether found a new home in the Bahamas.

Weaponized FUD and a lot of buybacks

Before we move into the theory, I want to establish some key observations that many people seem to have missed.

October has been great for competing stablecoins.

Paxos managed to sell $63m of their tokens, TUSD $55m, USDC $34M and GUSD $4m. PAX was listed on Binance, while TUSD was listed on Huobi, OKEX and Kucoin. OKEX even panic-listed four new stablecoins at once.

To put this into perspective, I wanna emphasize how large Tether’s network effects are and how difficult it is for a new stablecoin to make progress against that. In a previous piece, I argued that there are only two ways a competing stablecoin can replace Tether. Either they can offer a distinct value proposition or wait for Tether to suffer from an inside (insolvency) or outside (e.g. regulatory) shock.

While the competition is not as distinguished as it may first appear (they still rely on attestations or allow censorship), we saw instead a shock applied to Tether from the outside. The public confidence in Tether was shaken by strong rumours and negative press on social media. Travis Kling called it “weaponized Tether FUD”.

Tether has retired $600m in the last nine days.

Tether hasn’t burned tokens for a while now after they were redeemed. Instead, they remove them from circulation by sending them to their treasury address.

Over the past nine days, the Treasury has received five major deposits, meaning these tokens have been retired from circulation. $100M, $200M, $200M, $50M and $50M for a total of $600M.

So, why did this happen? To me, it’s a strong indicator that Tether themselves are arbitraging the current discount in USDT.

I know of several “non-Tether” arbitrageurs, so Tether is certainly not the only one at it. But it’s not conceivable to me that $600M would have been withdrawn from Bitfinex in such a short time frame. If my assumption is correct, Tether is buying up USDT on the market for a discount, retiring them and internally crediting itself $1. That is fine and there is nothing shady about it. It’s no different from public companies buying back their shares when they think the market undervalues them relative to their fair price.

Where did Tether go?

Here’s where it gets interesting. Naturally, these redemptions lead to a massive decline in Tether’s supply.

Coinmarketcap has correctly decredited the recent redemptions from the Tether market cap, but it still went largely unnoticed. Tether’s mcap is now $2B, down from $2.8B just two weeks ago — they redeemed almost 30% of their entire token supply. Even if we assume that $200M was withdrawn by non-Tether traders, that would mean Tether still managed to buy back $600M worth of tokens. With a 3–5% discount, this buyback made them between $18M and $30M. If they want, there’s $2B more to go and the discount has been relatively stable at 3–4% for the last few days.

By now we established several key observations.

• Stablecoin competitors have a strong interest in “weaponized FUD” against Tether to disrupt its massive network effects and liquidity
• The market currently considers Tether so risky that they demand a 3–4% risk premium for holding it
• Tether is incentivized by the discount to keep buying back their tokens, remove them from circulation and redeem them for fiat

The perfect time to go

So what if Bitfinex was tired of supporting Tether because the risk/reward ratio has turned bad? They would unwind it. Because it’s too much work. Because scrutiny on them is increasing or stable banking relationships are harder and harder to get. There might be subpoenas behind the scenes. Could be any or all of the above.

Bitfinex could think they no longer depend on Tether either. They acquired a new fiat banking system that they might deem stable enough. Most importantly, they are now able to pick from a whole bunch of new legal stablecoins to replace Tether on their exchange.

So what better time to gracefully unwind Tether than now? If my theory is correct, then Tether will continue buying up USDT from the market, slowly taking more and more of them out of circulation. I expect this process to go faster the longer the market offers them this discount. Traders will be happy because Tether’s retreat breaks up the clouds for regulated stablecoins to emerge and become adopted. And that, in turn, will make Tether’s competitors happy. A lot of parties could leave this situation feeling like winners, and that is exactly what makes it likely in my opinion.

The legendary trader Ed Seykota once said that “Win or lose, everybody gets what they want out of the market.” Everyone sure got what they wanted out of Tether. Some people wanted to make money, some wanted new stablecoins and some just enjoyed the FUD and drama. Maybe it’s time to move on.