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This is a common misconception and is not at all how Tether works. Tether acts more like a central bank, they allow people to trade USD for USDT for exactly $1

This is a common misconception and is not at all how Tether works. Tether acts more like a central bank, they allow people to trade USD for USDT for exactly $1. Trading USD directly can be difficult because there are extensive KYC rules and not everyone has access to a USD bank account. On some exchanges, there is still a demand to trade in USD and it commands a premium due to the difficulty in trading it. This generates demand for USDT and slightly increase the price, suppose to $1.02 on this exchange. Arbitrage traders can now buy USDT for $1.00 and sell it on this other exchange for $1.02. The tether corporation simply holds the original $1 (of actual USD). They should have $1 USD for each USDT in circulation, and that's a lot of 'float' that they can invest in safe things like short-term US treasuries to make money off simply holding the cash. No need to speculate on Bitcoin or other risky investments, they are making plenty off just holding cash-equivalents.

jakelazaroff 4y ago
> They should have $1 USD for each USDT in circulation, and that's a lot of 'float' that they can invest in safe things like short-term US treasuries to make money off simply holding the cash. That's the issue — they don't have $1 USD for each USDT in circulation.
- aeternum 4y ago
  How do you know? Tether has seen over 10B in withdrawals over the last couple weeks. The total circulating supply is 73B so that was something like a 12% withdrawal over a very short time window. Consider that banks are only required to maintain a 5% leverage ratio. 12% is a pretty extreme test, it's enough to cause most banks to fail. It also does not make sense for Tether to take on additional risk. They can make a nice yield by investing the 70B+ in very safe highly liquid short-term US treasuries.
  - jakelazaroff 4y ago
    > How do you know? They've admitted to it in court. Multiple times. Patrick Mackenzie (patio11 on here) has a couple good articles about the fraud. [1][2] > 12% is a pretty extreme test, it's enough to cause most banks to fail. A bank can cover its customers' withdrawals by borrowing money from the Fed. If a run happens on Tether, who's going to rescue them? > It also does not make sense for Tether to take on additional risk. It might not make sense. That doesn't mean they didn't do it. [1] https://www.kalzumeus.com/2022/05/20/tether-required-recapitalization/ https://www.kalzumeus.com/2022/05/20/tether-required-recapit... [2] https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/ https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/ (2019)
    - aeternum 4y ago
      From your link: >The Consolidated Reserves Report alleges that Tether’s reserves included, as of March 2022, $4,959,634,446 of “Other Investments (including digital tokens).” A 3.27% decrease in the value of these investments wipes out all Tether equity and causes their tokens to be undercollateralized. First this is wrong, equity includes Enterprise Value which the article seems to ignore. The ability to control $70B of float is worth quite a lot enterprise value. They should be able to take out debt against that EV (or even sell shares/equity) if needed to re-collateralize. They can also handle another 73-5=68B worth of redemptions before they need to touch those "Other Investments".

jakelazaroff 4y ago

> They should have $1 USD for each USDT in circulation, and that's a lot of 'float' that they can invest in safe things like short-term US treasuries to make money off simply holding the cash. That's the issue — they don't have $1 USD for each USDT in circulation.

aeternum 4y ago
How do you know? Tether has seen over 10B in withdrawals over the last couple weeks. The total circulating supply is 73B so that was something like a 12% withdrawal over a very short time window. Consider that banks are only required to maintain a 5% leverage ratio. 12% is a pretty extreme test, it's enough to cause most banks to fail. It also does not make sense for Tether to take on additional risk. They can make a nice yield by investing the 70B+ in very safe highly liquid short-term US treasuries.
- jakelazaroff 4y ago
  > How do you know? They've admitted to it in court. Multiple times. Patrick Mackenzie (patio11 on here) has a couple good articles about the fraud. [1][2] > 12% is a pretty extreme test, it's enough to cause most banks to fail. A bank can cover its customers' withdrawals by borrowing money from the Fed. If a run happens on Tether, who's going to rescue them? > It also does not make sense for Tether to take on additional risk. It might not make sense. That doesn't mean they didn't do it. [1] https://www.kalzumeus.com/2022/05/20/tether-required-recapitalization/ https://www.kalzumeus.com/2022/05/20/tether-required-recapit... [2] https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/ https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/ (2019)
  - aeternum 4y ago
    From your link: >The Consolidated Reserves Report alleges that Tether’s reserves included, as of March 2022, $4,959,634,446 of “Other Investments (including digital tokens).” A 3.27% decrease in the value of these investments wipes out all Tether equity and causes their tokens to be undercollateralized. First this is wrong, equity includes Enterprise Value which the article seems to ignore. The ability to control $70B of float is worth quite a lot enterprise value. They should be able to take out debt against that EV (or even sell shares/equity) if needed to re-collateralize. They can also handle another 73-5=68B worth of redemptions before they need to touch those "Other Investments".