USDT: Tether’s stablecoin has not lost its peg

A number of news stories are circulating these days regarding the depeg of Tether’s stablecoin from the dollar. These are fundamentally fake news, probably put out there to try to create panic, or to get readers’ attention. 

Arbitrage on the stablecoin Tether 

USDT is a stablecoin issued by Tether that is fully collateralized in US dollars (USD). 

In theory, its market value should always remain around $1, because Tether is willing to return $1 to anyone who is willing to redeem $1 USDT. 

The reality, however, is slightly different, simply because the various markets on which USDT is traded are not connected to each other, and Tether has a firsthand presence only on the crypto exchange Bitfinex, which belongs to the same corporate group (iFinex). 

Therefore it may happen that on some isolated markets at a certain precise moment there is a sharp increase in selling pressure, without an equally sharp increase in buying pressure. However, when there are investors who are ready to sell USDT at a price below $1, there are usually others who take advantage of this to do arbitrage. 

Arbitrage involves buying an asset on one platform, then going to sell it on another platform that is not connected to the first one, and on which prices are higher. 

When those doing arbitrage are not fast enough, or do not have sufficient capital available, on some platforms the selling pressure can increase more than the buying pressure, causing the price of UDT to fall even below $1. 

Since maintaining the price of $1 is called a “peg” with the dollar, when the price deviates significantly from $1 it is called a depeg. 

The depeg of the stablecoin Tether (USDT)

For example, looking at yesterday’s data of USDT on CoinMarketCap and on CoinGecko, there is a discrepancy. 

On CoinMarketCap, the price of Tether dollar was found to be less than $1, albeit slightly, but on CoinGecko it was not. How is this possible? 

The two aggregators display an average price calculated by looking at data from different exchanges. However, the original source regarding USDT price data is Bitfinex, which is the exchange on which Tether itself gives $1 back to those who give USDT back. So this is the platform to keep an eye on to see whether Tether is really succeeding in holding the value of USDT at $1 or not. 

Comparing Bitfinex data with CoinMarketCap and CoinGecko data not only shows that yesterday the original price of USDT was always above $1, but also shows that the curve differs across both aggregators. 

Hence, the data reported by the aggregators in this case does not correspond to Tether’s data, but to the average data of the markets taken as reference. 

In other words, there was absolutely no depeg of USDT with the dollar yesterday. On the contrary, on the original source the price of USDT rose as high as 1.0019, deviating from the reference price by less than 0.2%. 

Those who claim that USDT lost its peg with the dollar yesterday are lying for two reasons. 

The first is that Tether yesterday had no problem paying $1 to anyone willing to return USDT. The second is that the original price deviation was minimal, in other words, insignificant. 

The FUD

Why did someone go to the trouble of spreading this useless and specious FUD which was easily debunked? 

Again, there are mainly two reasons. 

The first, more trivial, is that claiming that USDT has lost its peg with the dollar these days attracts a lot of attention. Moreover, for the vast majority of inexperienced crypto users it is not at all easy to go and check for themselves what the situation is really like, not least because many are unaware that it is on Bitfinex that Tether redeems USDT. 

It is worth adding that the current period is not particularly full of interesting news involving cryptocurrencies, and so there are those who try to attract attention even at the cost of making up fake news, such as that of Tether’s depeg. 

The second is that for many years now there have been people who persist in wanting to badmouth Tether. These are usually people who are convinced that the company has put in more tokens than it has funds, so much so that they go so far as to deny the validity of the audits. 

Tether did indeed have a problem in 2018, later resolved, probably due to a bank blocking some funds. But there is no evidence at all that it does not have enough funds to cover the full value of all USDT in the market. 

Quite the contrary, all the latest audits conducted and published state that the total value of assets available to Tether is greater than the market value of all USDT issued. Indeed, there is no indication that Tether has ever had any real problems returning $1 to anyone who gives back $1 USDT, except for a short time in 2018 and without causing any negative consequences on the market price. 

In other words, the assumption that Tether is unable to return dollars per USDT at a ratio of 1:1 is currently based only on assumptions, and is completely refuted by the facts. However, this does not detract from the fact that this is only the current situation, whereas for the future there are no absolute certainties. 

The stablecoins

The fears, however, are not only about USDT, which is doing quite well, but especially about other stablecoins. 

The problem exploded in May last year when the UST algorithmic stablecoin imploded. 

However, it is worth mentioning that algorithmic stablecoins are very different than fully collateralized stablecoins. 

A fully collateralized stablecoin, such as that of Tether, requires that the manager have funds on hand that are at least on par with the number of tokens in circulation, and that these funds consist of either the same asset to which the stablecoin is pegged, or assets comparable in characteristics and value to the one to which the stablecoin is pegged. 

Moreover, they should be redeemable on a par, thereby making the market value of the stablecoin match that of the underlying asset.

 Instead, algorithmic stablecoins have a value that depends on algorithms often based on loans and interest, and easily can decline if the assets pledged as collateral for those loans lose value. 

Indeed, in May a sharp drop in the value of LUNA, i.e., the largest asset used as collateral for UST, induced an inevitable sharp drop in the value of UST, which first lost its peg with the dollar and then imploded. 

Since then, many doubts have spread about stablecoins, particularly dollar-pegged stablecoins, but without a clear and sharp distinction between algorithmic and collateralized stablecoins. Over the ensuing months other algorithmic stablecoins lost the peg, albeit not all of them, whereas none of the major stablecoins collateralized in dollars lost the value of $1 significantly and for an extended period. 

Those who oversimplify this picture by going so far as to assert that the implosion of UST could be a warning sign for USDT are merely making a serious and inexcusable mistake, most likely due to either ignorance or malice.