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I struggle to avoid the knee jerk reaction to classify Tether as the Federal Reserve of BTC. Can someone please explain how this either right or wrong?

conception 6y ago
Tether has no actual money to back its valuation.
- ed25519FUUU 6y ago
  Or aircraft carrier.
- biot 6y ago
  So it's a bit like the realization of this insightful comment? https://news.ycombinator.com/item?id=16242224 https://news.ycombinator.com/item?id=16242224
- ineedasername 6y ago
  Well, they do seem to have reinvented fractional reserve banking. The "fraction" is unknown though, with unwillingness to provide details and a vague assertions from someone that it's "fully backed". But, you know, you have to take his word for it.
  - spiralx 6y ago
    They claimed 74% a while back IIRC, with the rest being in some unspecified combination of loans and other assets.
    - ineedasername 6y ago
      That's the problem, they make claims but fail to provide evidence. If I want to execute a currency arbitrage strategy, I want to know what is backing the currencies. In most fiat currencies, you can do this by 1) Assessing the current economic conditions & the country's history of monetary policy. 1) evaluating the currency supply against the GDP: This is really what a fiat currency is actually backed by. (Or at least one of the fundamental components) You can't do this with Tether. A country's own economic reports and extensive external analysis by others can validate the financial state of a country & its fiat currency. With Tether, you have to take their word for it. And loans? Doesn't that contradict their entire premise-- Mint 1 Tether and sell it for $1 so it's always fully backed. Loans shouldn't be necessary. Loans could be called in the second Tether shows weakness, which would further destabilize it. And lets face it: If it's not actually fully backed $1 for $USDT then there's zero guarantee that it can't start floating against other coins or currencies. It's only worth $1 if you can find someone willing to give you $1 for $1 USDT. People claim if it loses value then Tether will simply buy up enough to drive the price back to the $1 peg. Buy it with what though? Their assets, the money backing it! which means it's then backed by even less! The only way a strategy of Tether buying the price back up to the $ peg can work at all is if Tether has more assets backing it that strictly necessary. As for other assets backing it, they'll go up & down in value too. Even if it's currently fully backed, without transparency those other assets backing it can go down in value and then all of a sudden it's not fully backed. All of these concerns might be moot. Tether might be completely sound, rock solid & stable. But anyone who believes that is taking it on faith based on the word of people who are highly biased & highly interested in having $USDT owners believe it, true or not, and it is unfathomable to me at this point in crypto, where shitcoins & pump & dumps and ponzi schemes and all kinds of scams persist, that anyone would take something like this on faith.
DSingularity 6y ago
Last I checked, tether is created when USD is deposited in a bank in Hong Kong. That makes tether something very different than the federal reserve which can just conjure money and give it to the banks.
alexmingoia 6y ago
It’s an apt comparison for the US dollar before they abandoned fractional reserve banking in 1971. The US went bankrupt, having more foreign dollar holders requesting their gold than they had gold. But now the US dollar isn’t redeemable for anything, so they can’t go bankrupt.
- anonymouse008 6y ago
  So I guess Tether is ‘on that path’ — if it ever goes bankrupt it’s perfectly situated to knight itself crypto-inflation czar.
  - alexmingoia 6y ago
    Sure, Tether may become worthless but I doubt Bitcoin will. Bitcoin gained a lot of value before Tether existed. Tether could disappear and Bitcoin may still continue to strengthen.
    - mckirk 6y ago
      The problem is that, if the allegations are correct, Tether was used to inflate Bitcoin's price just in time for the miners to stay profitable after the 'halving' of the mining reward. Should Tether be revealed as a fraud and the price collapse below that level again as a result, I'm not sure if there'd still be enough miners to keep the show going.
      - alexmingoia 6y ago
        The cost to mine adjusts to ensure blocks are mined. Bitcoin does not depend on a specific dollar value to ensure nodes add blocks. Nodes that add new blocks earn both new Bitcoin rewards (until ~21 million bitcoins are created) and transaction fees. If hash power drops from miners going out of business, then difficulty adjusts and competition for fees is reduced, reducing the cost of mining until there are miners again. When all Bitcoins are mined, nodes that add blocks are still compensated from transaction fees. They compete for transactions by offering lower fees, and in this way the transaction fee is determined by the market for Bitcoin transactions.

conception 6y ago

Tether has no actual money to back its valuation.

ed25519FUUU 6y ago
Or aircraft carrier.
biot 6y ago
So it's a bit like the realization of this insightful comment? https://news.ycombinator.com/item?id=16242224 https://news.ycombinator.com/item?id=16242224
ineedasername 6y ago
Well, they do seem to have reinvented fractional reserve banking. The "fraction" is unknown though, with unwillingness to provide details and a vague assertions from someone that it's "fully backed". But, you know, you have to take his word for it.
- spiralx 6y ago
  They claimed 74% a while back IIRC, with the rest being in some unspecified combination of loans and other assets.
  - ineedasername 6y ago
    That's the problem, they make claims but fail to provide evidence. If I want to execute a currency arbitrage strategy, I want to know what is backing the currencies. In most fiat currencies, you can do this by 1) Assessing the current economic conditions & the country's history of monetary policy. 1) evaluating the currency supply against the GDP: This is really what a fiat currency is actually backed by. (Or at least one of the fundamental components) You can't do this with Tether. A country's own economic reports and extensive external analysis by others can validate the financial state of a country & its fiat currency. With Tether, you have to take their word for it. And loans? Doesn't that contradict their entire premise-- Mint 1 Tether and sell it for $1 so it's always fully backed. Loans shouldn't be necessary. Loans could be called in the second Tether shows weakness, which would further destabilize it. And lets face it: If it's not actually fully backed $1 for $USDT then there's zero guarantee that it can't start floating against other coins or currencies. It's only worth $1 if you can find someone willing to give you $1 for $1 USDT. People claim if it loses value then Tether will simply buy up enough to drive the price back to the $1 peg. Buy it with what though? Their assets, the money backing it! which means it's then backed by even less! The only way a strategy of Tether buying the price back up to the $ peg can work at all is if Tether has more assets backing it that strictly necessary. As for other assets backing it, they'll go up & down in value too. Even if it's currently fully backed, without transparency those other assets backing it can go down in value and then all of a sudden it's not fully backed. All of these concerns might be moot. Tether might be completely sound, rock solid & stable. But anyone who believes that is taking it on faith based on the word of people who are highly biased & highly interested in having $USDT owners believe it, true or not, and it is unfathomable to me at this point in crypto, where shitcoins & pump & dumps and ponzi schemes and all kinds of scams persist, that anyone would take something like this on faith.

DSingularity 6y ago

Last I checked, tether is created when USD is deposited in a bank in Hong Kong. That makes tether something very different than the federal reserve which can just conjure money and give it to the banks.

alexmingoia 6y ago

It’s an apt comparison for the US dollar before they abandoned fractional reserve banking in 1971. The US went bankrupt, having more foreign dollar holders requesting their gold than they had gold. But now the US dollar isn’t redeemable for anything, so they can’t go bankrupt.

anonymouse008 6y ago
So I guess Tether is ‘on that path’ — if it ever goes bankrupt it’s perfectly situated to knight itself crypto-inflation czar.
- alexmingoia 6y ago
  Sure, Tether may become worthless but I doubt Bitcoin will. Bitcoin gained a lot of value before Tether existed. Tether could disappear and Bitcoin may still continue to strengthen.
  - mckirk 6y ago
    The problem is that, if the allegations are correct, Tether was used to inflate Bitcoin's price just in time for the miners to stay profitable after the 'halving' of the mining reward. Should Tether be revealed as a fraud and the price collapse below that level again as a result, I'm not sure if there'd still be enough miners to keep the show going.
    - alexmingoia 6y ago
      The cost to mine adjusts to ensure blocks are mined. Bitcoin does not depend on a specific dollar value to ensure nodes add blocks. Nodes that add new blocks earn both new Bitcoin rewards (until ~21 million bitcoins are created) and transaction fees. If hash power drops from miners going out of business, then difficulty adjusts and competition for fees is reduced, reducing the cost of mining until there are miners again. When all Bitcoins are mined, nodes that add blocks are still compensated from transaction fees. They compete for transactions by offering lower fees, and in this way the transaction fee is determined by the market for Bitcoin transactions.