Will Tether trigger a Bitcoin rally?
By Paul Reid
22 May 2023
In this article, we will cover Exness opinions alongside reporting from The Wall Street Journal, which is a commercial partner of Exness.
For three months, Bitcoin has been dancing around the 26K-28K range with no signs of a rally in sight, but that might be about to change. Big investors are already considering Bitcoin as an alternative to gold for parking wealth during a downturn, and now there’s news that Tether will move more holdings into Bitcoin in the coming weeks.
Tether to Buy More Bitcoin for Stablecoin Reserves
Crypto company is adding to $1.5 billion of bitcoin backing dollar-pegged token
By Vicky Ge Huang
Tether has faced scrutiny over a lack of transparency regarding the assets backing its reserves.
Crypto company Tether pledged to buy more bitcoin for its stablecoin reserves, adding to the $1.5 billion of bitcoin already backing its dollar-pegged token.
The company said starting this month it planned to use up to 15% of its net operating profits to purchase bitcoin. It didn’t indicate how long or consistently it planned to make the purchases. Rising interest rates boosted Tether’s profits to $1.48 billion in the first quarter.
Clara Medalie, director of research at Kaiko, said purchasing bitcoin isn’t appropriate for a stablecoin issuer whose mandate is to maintain stability and inspire marketwide trust in the composition of its reserves.
“Even though Tether claims it will make these purchases with net operating profits, rather than existing client deposits, there is still inherent risk in this action considering the company’s historical lack of transparency and the market’s frequent bouts of volatility,” Medalie said.
Tether said that each token is backed one for one with liquid investments—cash and cash equivalents such as Treasurys—to allow stablecoin users to redeem their tokens and maintain the coin’s dollar value. High yields on its holdings of Treasurys have been profitable for the company.
Over the years Tether has faced scrutiny from regulators and investors over the lack of transparency about the assets backing its reserves. It has been promising an audit since at least 2017.
Tether said it plans for its bitcoin investments to be part of the company’s “excess reserves,” which is what it calls additional reserves beyond the value of its liabilities—the market cap of the tether stablecoin. On May 16, Tether’s excess reserves amounted to over $2.4 billion, according to its website.
Bitcoin, the largest cryptocurrency, surged to a record high of nearly $69,000 in 2021. It has more than halved to trade at around $27,000.
Last week the stablecoin issuer reported that it held more than $69 billion in cash and cash equivalents at the end of March, including $53 billion invested in U.S. Treasury bills, $7.5 billion in overnight reverse-repurchase agreements and $7.5 billion in money-market funds. The crypto company had billions of dollars in precious metals, secured loans and other investments that include digital tokens.
Tether isn’t the first stablecoin company to buy bitcoin. Luna Foundation Guard, the nonprofit behind the failed TerraUSD stablecoin, bought about $3 billion in bitcoin and other cryptocurrency resources to bolster the so-called algorithmic stablecoin’s reserves. The reserves were largely depleted during an emergency effort to maintain the peg for TerraUSD, whose crash set off a chain reaction that wiped out some $40 billion of market value.
Paolo Ardoino, chief technology officer of Tether, said its approach is “100% different” from Luna Foundation Guard’s bitcoin-buying strategy because it is using its excess reserves—on top of the minimum 100% reserve assets required to back tether—to buy the bitcoin.
“Every single token in the market is and would remain fully backed even if the bitcoin price were to go down to zero tomorrow,” Ardoino said in an email. “Tether could distribute the entire amount invested in bitcoin to its shareholders, and the peg to USD will not be affected. In such a scenario, Tether would still have $1B of excess reserves.”
Tether has continued to extend its lead in the stablecoin market after Circle Internet Financial’s USD Coin broke from its one-to-one peg to the dollar in mid-March. Circle disclosed that it had $3.3 billion of the stablecoin’s reserves tied up in the collapsed Silicon Valley Bank.
Since then, tether’s market cap has gained about $10 billion to nearly $83 billion, nearing its record market cap, according to CCData. The market cap of USD Coin, its nearest rival, has shrunk by about $10 billion to just under $30 billion.
BTC, like gold, may become an attractive option for parking equity during an economic downturn. And with Tether pledging to buy another $1.5 billion of bitcoin for its stablecoin reserves, we may see significant BTC gains in the coming weeks if sentiment shifts.
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Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.
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