The fidelity of Tether has been called into question on numerous occasions. Despite the famous crypto-asset leading the pecking order of stablecoins, the Hong-Kong-based company seems to be losing the trust of investors gradually.
Interestingly, the inflows and outflows of USDT have raised questions about the accuracy of the company’s balance sheets.
$14B worth of Tether Liquidated in the Past Month
Early last month, Tether had a market capitalization of $83 billion. Since then, the stablecoin has lost more than $14 billion to the market. Are investors converting their USDT to volatile crypto assets? That would have been good for the market if that was the case. However, several big swaps have been made from USDT to USDC since May 2022.
These big swaps happened after the stablecoin FUD that followed the UST crash, and further scrutiny of Tether’s balance sheet. USDT slightly deviated from its peg, and many investors converted their stablecoin to one they perceived was more stable at that time.
A report published by Tether last year revealed that just 2.94% of its reserves are in cash. This represents 2.4 billion dollars. Thus, a bulk of the $14 billion worth of USDT that was converted in the past month must have been paid out by converting a part of the company’s illiquid holdings. When this happens within a short timeframe, it usually results in slight losses for the company.
Further, the depletion in capitalization implies that Tether’s reserves are going down. A negative consequence of the depletion of its reserves is the bank run. This happens when multiple investors want to cash out or liquidate their assets at the same time, further drying the company’s reserves.
In the end, it leads to a collapse of the company, the asset loses its peg and another crypto chaos joins the long list of debacles in the crypto ecosystem. This can be avoided though if Tether identifies the problem on time, strengthens its cash reserves, and fixes the loopholes in its balance sheet.
