Previously, Tether was a stablecoin, but any fiat currency did not back it. Instead, it relied on complicated algorithms to keep its value stable. However, that model has now proven a failure, and the price of Bitcoin Market has crashed to unprecedented lows. So, what happened to the Tether reserves? Is Tether doomed?
The cryptocurrency market is already seeing some serious issues. The recent crash in TerraUSD is a reminder of the dangers of loosely regulated stablecoins. Some traders have even started putting their funds in other stablecoins, fearing the subsequent collapse could test the stability of Tether’s reserves. And some traders trade in cryptocurrencies through bitcoin trading software. Because it is the best way for them to track their cryptocurrency investments. The potential for a massive cryptocurrency crash is real and not far away. However, the coin’s future looks bleak.
It is unclear who controls Tether, and its founders have never disclosed where the company stores its assets. The company has 50 employees across Asia, Latin America, and Europe. The CEO is a Dutch businessman, although they declined to specify where he lives. Tether has also issued periodic statements disclosing the composition of its reserves, but these have done little to soothe the fears of sceptics.
The first thing to know about both currencies is their market cap. Tether is one of the top five cryptocurrencies by Market Cap, and many people hold it to prevent extreme volatility. In contrast, Terra USD is a fairly new coin and is gaining popularity thanks to its companion token, LUNA. Terraform Labs’ DeFi platform has also helped the coin gain popularity. TerraUSD is currently the fifth-largest stablecoin by market cap.
The most striking difference between these two currencies is the nature of the algorithms they use to link their supply to a non-stable coin. Unlike a traditional stablecoin, the algorithm used by Terra links the supply to the LUNA token. That means that if the price of a stable coin drops, its value will fall. This feature was initially unique in the stablecoin space, and it has since gained momentum and become a favourite among traders.
Issue Terra (USDT) Faced
Recently, a top U.S. banking official has called for tighter regulation of stablecoins like Tether. He argued that the recent TerraUSD crash showed the risk of relying on poorly-regulated crypto-pairs. Meanwhile, some traders have diverted their funds into alternate stablecoins to avoid being burned by Tether. But now Tether has been accused of dumping crypto. Some investors are looking to suck Tether out of its stablecoin investments.
The first issue Tether faced was that it was not backed by fiat currency. Stablecoin relied on complex algorithms to maintain its value. These algorithms skewed the market and made Tether an attractive investment. But the crypto market took a big hit last week, as the price of major cryptocurrencies dipped below $1 trillion. This isn’t necessarily a sign that the crypto market is heading to disaster, as it remains a viable option for investors, despite its high risk.
Tether’s reserves are a concern for some people. The cryptocurrency company isn’t transparent about the composition of its reserves. It doesn’t disclose how much of its reserves are in commercial paper or government bonds. It hid its asset base by saying it consists of investment-grade securities, including commercial paper.
But how does the currency perform against the U.S. dollar? There are many questions regarding the implosion of the cryptocurrency community. And the fate of the Celsius token is a cause for concern.
While the Celsius network promises to continue accruing customer rewards during this pause, it has lost more than half its value today. The company is currently under investigation by the SEC but will be able to defend itself if it is sued. The CEO of the Celsius network has been attacking critics for years.
In April, the cryptocurrency exchange Tether retracted claims that its USDT stablecoin was 1:1 backed by the U.S. dollar. During the first quarter of 2019, Tether’s reserves accounted for 74% of its total value, including cash equivalents. Of this, 65% was in the form of short-term unsecured loans. However, this year, the exchange has disclosed the breakdown of its reserves. At the same time, the remaining 22% is composed of commercial paper.