‘Other stable coins are not serious contenders at this stage:’ High speed traders don’t see an alternative to Tether

Quick Take

  • It is surprising that the ongoing Tether-NYAG dispute did not reflect significantly on the price of tether over the past week, two crypto trading firm executives told The Block
  • There are not many opportunities to short tethers at the moment, because a lot of institutional investors are unwilling to lend tethers out due to high risk
  • Given the popularity of tethers, no other stablecoins in the market can substitute tethers in the near future 

The Tether shake-up is bad, but investors really don’t have many other stablecoin options.

This is the consensus reached by two cryptocurrency trading firm executives, B2C2 Founder Max Boonen and DV Chain CFO Paul Bialobrzewski, in separate interviews with The Block.

To them, the price trend of tethers, the stablecoins issued by the company of the same name, is puzzling, to say the least. It dropped by almost 2% initially after news broke last week that the New York Attorney General (NYAG) was suing crypto exchange Bifinex and Tether. Then it quickly bounced back, surging above $1 earlier this week, only to witness a slump on Thursday morning. 

There is some speculation that the price dip this morning was due to some institutional investors taking a short position against tethers. However, Bialobrzewski told The Block that this is not likely since not many big institutional players are willing to lend out tethers to investors for shorting.

“There was demand [for tether lending] initially, that we saw, a significant demand for it. However, a lot of the institutional lenders, and us as well, are unwilling to lend it out, given that there was super high risk. And so there weren’t a lot of opportunities to short it. At least that we were seeing from our lending counterparties,” said Bialobrzewski.  

The price jump this morning is not the only thing that seems bizarre to Boonen and Bialobrzewski. Boonen pointed out that he was surprised to see the price of tethers made it back to $1 this week, especially after it was revealed on Tuesday that tethers are only 74% backed by its cash reserves.

As Bialobrzewski noted, if one tether is pegged to one dollar and only 74% of tethers are backed by cash reserves, then the stablecoins should be trading at a discount of around 74% on the dollar. However, the price of tethers did not even break $0.97 over the past week.

“Clearly the markets are indicating that [tethers price traded at a 74% discount] may not be the case,” said Bialobrzewski. “What is interesting is, you look at a lot of the other stablecoins that are regulated. They are trading at a slight premium. So it’s clear that the market is indicating that this thing is still worth close to parity. But there’s obviously a little bit of premium on the more regulated coins as well.

For high-frequency trading firms like B2C2 and DV Chain, the volatility of tethers is not an issue. What is really at stake is the “repercussions of actual enforcement action on the fungibility or transferability of Tether tokens, or jump-to-default risk,” said Boonen. In plain English, this means that if NYAG or other law enforcement entities decide to take action against Tether and as a result its stablecoins can no longer be traded into other cryptocurrencies, then tether holders would suffer a significant loss due to the issuer’s default.  

However, both Boonen and Bialobrzewski agreed that the eventual doomsday for tethers is far from certain. Tether was among the first stablecoin issuers, and its coins have been paired up with many other currencies in the market. Therefore it is very difficult, at least for the near term, to replace them with other stablecoins. 

“The other stable coins are not serious contenders at this stage,” said Boonen. “Given the past misguided attempts by some stable coins sponsors at spurring adoption by throwing money at market participants without regards to unwanted consequences (something b2c2 has avoided), I am not very confident that a substitute will emerge in the near future.”

However, this does not mean that the NYAG-Tether dispute has no backlash. According to Bialobrzewski, “as more and more things shake out, I assume that people are going to price in the risk of holding Tether. Maybe discount it even further, internally. Similar to what we’ve done, and go from there.”