Tether’s USDT has quickly emerged as the asset of choice for cryptocurrency traders looking to hedge against bitcoin’s volatile price swings. According to new research from U.S. investment bank Morgan Stanley, the stablecoin making up a growing share of crypto trade volumes.
The Rise of Tether
Tether’s bubbling controversy has not deterred investors from using its USDT token to trade against bitcoin. Morgan Stanley estimates that 14.2% of bitcoin trades are paired against USDT, a dramatic increase from October when the ratio was less than 1%.
Analysts at Morgan compiled trade data from over 350 exchanges in arriving at their conclusion.
USDT, which aims to trade at $1 USD, traces its origin to a 2014 startup called Realcoin. Unlike most crypto assets, USDT functions as a stablecoin that allows traders to avoid volatility that usually accompanies crypto-to-crypto or fiat-to-crypto transactions.
“During the most recent bear market, USDT has been taking a larger share of trading volumes,” Morgan said in its analysis.
Tether’s trade volumes surpassed $2.4 billion on Tuesday, second only to bitcoin’s $6.2 billion, according to CoinMarketCap.
The cryptocurrency market soared to record highs in January but has since fallen 60% from its peak. Although volatility is part and parcel of cryptocurrency trading, the selloffs of the last two-and-a-half months are unlike anything the market has ever seen. Case in point: bitcoin is behaving a lot like the Nasdaq Composite during the dot-com bubble of the late 1990s.
Morgan Stanley told clients recently that bitcoin is unfolding at 15 times the speed of the dot-com crash. Morgan analyst Sheena Shah noted that bitcoin’s bearish waves have averaged losses of 45% to 50%.
“The Nasdaq’s bear market from 2000 had five price declines, averaging a surprisingly similar amount of 44 percent,” Shah said, adding that rising trade volumes aren’t always a good thing.
The follow-up rally for both bitcoin and the Nasdaq always saw falling trading volumes. Rising trade volumes are thus not an indication of more investor activity but instead a rush to get out.”
Tether’s Looming Controversy
Tether has been all over the crypto headlines recently amid speculation that is has not been forthright about its dollar-backed reserves. The company has vastly increased the supply of USDT despite offering no proof that it holds the same amount of U.S. dollars. The main value proposition of the USDT project is maintaining a 1:1 exchange ratio with the greenback.
In December, Tether and crypto exchange Bitfinex were handed subpoenas by the U.S. Commodity Futures Trading Commission. A spokesperson for Bitfinex later confirmed that the exchange was run by the same executive that heads the Tether project. Some have speculated that the spike in USDT circulation, especially on Bitfinex, was partly responsible for bitcoin’s meteoric rise through December.
As Hacked reported last month, the supply of Tether’s USDT units surged by a third between December and February. In a Jan. 24 article published anonymously on www.tetherreport.com, the author states that Tether printing was responsible for nearly 49% of bitcoin’s rise in 2017.
The Bitcoin Mercantile Exchange (BitMEX) recently reported that Puerto Rico’s Noble Bank was Tether’s primary reserve bank. The connection was apparently made after researchers analyzed bank deposits in the International Financial Entities (IFE) category. About $3.3 billion in deposits were made in this category in Puerto Rico last quarter, a gain of 248%. For the same quarter, Tether’s value rose 215% to $1.4 billion.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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