2. Faith in Tether
Money needs to be able to buy stuff. That's always been a problem with cryptocurrency. The number of merchants who accept bitcoin directly is small, and converting bitcoin to cash dollars is nontrivial.
Background: The biggest cryptocurrency-to-dollars exchange in the early years of bitcoin was Mt. Gox, which imploded spectacularly in February 2014. Since then, the conversion problem has remained a very hard nut to crack, which is one reason why bitcoin derivatives were invented: You can now buy exposure to bitcoin without having to buy the currency itself.
Tether is the popular workaround for smaller traders, or people who want to trade non-bitcoin cryptocurrencies. Trading between cryptocurrencies has always been much easier than converting crypto to dollars. So Tether was invented as a cryptocurrency that would always be worth $1. Traders could easily use Tether instead of trading in and out of dollars — which is exactly what they did. Volume in Tether often exceeds volume in bitcoin itself.
- Every Tether was ostensibly backed by a dollar in a bank account. Theoretically, all Tethers could be converted to an equal number of dollars. But the actual conversion was much harder, and it involved a payments processor in Panama named Crypto Capital Corp. According an explosive new lawsuit from the New York attorney general, Crypto Capital Corp looks very much like it was a fraud, and some $850 million seems to have disappeared.
The most interesting part of the story: In the wake of this week's revelations, the price of Tether basically didn't move. Even Tether itself no longer claims that all tokens are backed directly with dollars — but the price of one Tether is still $1.
The big picture: All currencies are ultimately based on faith — a largely unspoken and implicit agreement within a population that a certain token is a measure and store of value. Tether has clearly achieved that status within the crypto crowd. No one would ever convert their dollars into Tether for safekeeping. And yet, even after the latest revelations, Tether remains the terra firma of the crypto world, just because it's a highly liquid instrument and everybody agrees that it's worth $1.