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Comment by Animats | Hacker News Reader

Tether is starting to look like a Madoff-scale Ponzi scam. What maintains the $1 price of Tether is a continual net inflow of cash. Tether is known not to be backed with sufficient real assets.[1] If there's a period of net outflow from Tether, the whole house of cards comes crashing down.

[1] https://www.marketwatch.com/story/tether-reverses-claim-of-1...

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It's looked like a Madoff-scale Ponzi scam for a long time. Even in 2017, when the world was gaga over cryptocurrencies, people were saying that the Tether stuff is super sketchy.

There was a near-run on Tether this May, though, and ironically that's what pumped Bitcoin from $5300 to $8000. When folks want to dump Tether, they generally cannot dump it directly into dollars. They have to dump to Bitcoin, move it off-exchange, and then sell the dollars on an exchange with fiat currency. That means that every Tether dump creates a run on Bitcoin, which pushes the price higher. If the arbitrage trade is interrupted (as it was in May, when Binance and Bitfinex both shut down withdrawals just as the run was beginning), then the price of Bitcoin remains permanently high, and instead of selling Bitcoin on other exchanges to compensate, people buy them to match the new price, the public forgets about the panic when withdrawals open 2 weeks later, and the price remains permanently high.

I wonder also if at some point Bitfinex can just make up Tether's reserve shortfall out of their profits. (Actually, they claim that they made up the shortfall already with their Tokinex IEO, which was also super sketchy, but even if they hadn't...) Coinbase reportedly made $1B in profit in 2017 and about $400-500M in 2018; Bitfinex is of similar size, so a couple years like that and their profits could probably plug the hole, if they don't get sued/regulated out of existence first.

> When folks want to dump Tether, they generally cannot dump it directly into dollars. They have to dump to Bitcoin, move it off-exchange, and then sell the dollars on an exchange with fiat currency.

Not sure where you got that from, but that's not true whatsoever; USDT/USD is a thing in a bunch of exchanges with really healthy volume. Other than a few months ago (perhaps the run you mentioned in May) there's normally no premium and the peg is down or up by perhaps 0.5% or so.

Maybe you are saying that because Binance, the largest exchange doesn't have a USDT/USD pair (they don't have any USD pair afaik), but you can easily withdraw USDT and sell them for USD directly in other exchanges.

It's a thing on Kraken and Bittrex, with about $2M in daily volume on Kraken and $290K on Bittrex. That's a lot of trading days to absorb the $4.1B market cap of Tether or even the $800M that are reportedly unbacked.

Also volume != liquidity

The difference between Tether and Madoff is that people have been loudly yelling "scam", in public, for years about Tether.

When Madoff collapsed, his investors were shocked. If Tether collapses, precisely zero people will be surprised.

When it's common knowledge that it's a scam, is it still a scam?

Probably we can think of Tether as a type of lottery

If the dollar peg has staid for years, how risky lottery it is to do short term value transfers with it? It is obvious that it shouldnt be used for long term value storage. However since it has been called out as a ponzi scheme for years and still maintains the peg, these articles start to be more like advertisements for it.

Also: https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/

> Tether is known not to be backed with sufficient real assets.

You just gave a definition of fractional reserve banking.

No, fractional reserve banking does not work that way, despite what the cryptocurrency community thinks. Most of a bank's assets are in the form of loans to others, usually with real assets, like houses or cars, behind them. The risks are loans going bad, and owning long term loans while taking short term deposits.

illiquid != insolvent.

If I have a house, I can't turn it into cash immediately. I may have a fraction of my net worth in cash. That's not the same thing as only having the small amount of cash and nothing else.

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