Authored by Frank Muci via Twitter.
Tether (USDT) has redeemed $15.3B in the past six weeks & is down 18% from the peak. Ongoing market jitters could trigger further unease & redemption requests which could snowball into a “rush to the exits”.
If Tether is fully backed, holders are fine, but if it isn’t, crypto is in for another wipeout, possibly as big as the last 3mo in percentage terms.
So is Tether fully backed? Nobody knows. It has lied and gotten caught about being fully backed in the past, repeatedly.
Have they cleaned up since? The attestations from their Cayman Islands auditor aren’t credible. So again, nobody knows. Precisely for this reason, a “rush to the exists” is a distinct possibility.
Analytically, we are in a classic “multiple equilibria” bank run game. Each investor has some perceived probability X that Tether is insolvent.
If some external event or PR screwup causes those Xs to rise enough, then it becomes rational for more investors (in expected value terms) to redeem USDT for fiat USD while reserves last (or sell for 99c before it potentially depegs)
Tether then has to fire sale assets to meet redemptions, assuming there are assets to sell in the first place.
This raises perceived insolvency probabilities across the board, which can quickly snowball into a “rush to the exits.”
If Tether is fully backed, everyone gets 98-100c, eventually, after Tether liquidates assets
If Tether isn’t fully backed, then its extremely serious. I’m not saying redemptions are going to snowball or that Tether will fail.
I’m just saying it’s a distinct possibility driven by (a) investor loss-minimizing incentives and (b) doubts about Tether’s solvency driven by opacity / past lies / bear market sentiment.