The 11th Largest Bitcoin Holder and Its Potential Impact on the Crypto Market

On Aug 6, 2023

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Tether, a prominent issuer of stablecoins, recently ascended to an interesting position within the cryptocurrency world, securing its spot as the 11th largest holder of bitcoin worldwide. This development has ignited interest and incited conjecture regarding its potential to influence market dynamics. Despite its heightened profile, Tether has not publicly revealed its Bitcoin addresses. However, Tom Wan, an analyst at 21.co, has identified an address which could belong to Tether, and it is currently holding approximately 55,022 bitcoins, translating to a rough value of $1.6 billion.

What is Tether?

Tether is a stablecoin pegged to the value of the US dollar, so the Tether price is always approximately $1. Amid the high volatility of cryptocurrency prices, Tether gives investors a safe haven during times of market corrections. Tether (USDT) is ranked the fourth largest cryptocurrency in terms of its market cap.

The way Tether maintain price stability is through a process by which, whenever any new USDT tokens are issued by Tether, the company allocates the same amount of U.S. Dollars in its reserves. This ensures that these tokens are completely backed by cash and cash equivalents. If this is truly so, then it is commonly believed that this connection is the reason behind the stability of the coin.

Tether has been often criticized for its lack of visibility into its books. It has been asked many times to be completely transparent about its accounting and it has not fully done so. Despite this, it bears noting that while there are and have been other stablecoins in the crypto sphere, such as USDC, Tether is the longest standing stablecoin and it has stood the test of time.

Substantial Bitcoin Holdings: A Cause for Concern?

Interestingly, Tether’s substantial bitcoin holdings are not without their share of concern. Bitcoin, despite being one of the most profitable assets in the past decade, is known for its volatility. This volatility could pose risks if Tether’s exposure to the cryptocurrency becomes too significant, research analysts suggest. Wan from 21.co elaborated, explaining to The Block that Tether’s bitcoin holding contributes to the ‘Shareholder Capital Cushion’, a type of liquidity buffer over the current market cap of all Tether tokens. While Bitcoin’s high beta nature could generate higher returns for Tether, it also carries greater potential for downside.

This revelation regarding Tether’s Bitcoin holdings ties in with their recently published second-quarter reserves report. It noted that the company has been making strides towards a strategic goal first announced during the first quarter of the year, where it shared plans to invest up to 15% of its profits in Bitcoin. The aim is to gradually transition its reserves away from U.S. government debt and into the realm of cryptocurrencies. Tether reassured at the time that it anticipates its present and future bitcoin holdings will not surpass the Shareholder Capital Cushion, thereby enhancing and diversifying its reserves.

Tether: An Increased Risk to the Crypto Market Due to the Sheer Size of its Holdings

Mikołaj Zakrzowski, a research analyst at CryptoQuant, shared similar insights, saying that the expansion of Tether’s Bitcoin holdings doesn’t inherently present a major issue. This is because Tether also controls a significant amount of U.S. Treasuries and other dollar-denominated assets. However, Zakrzowski points out that it does contribute to increased risk, introducing additional volatility to the company’s total reserves backing the stablecoin. Moreover, due to Tether’s integral role in the crypto market, any unfavorable events that impact the company could cause significant disruptions to Bitcoin’s price and the overall cryptocurrency market.

Wan, on the other hand, suggested that a safer option for a liquidity buffer would be a less volatile asset, such as cash. Tether’s bitcoin holdings, which account for approximately $1.67 billion or half of the liquidity cushion, could be better balanced with less volatile assets. A less volatile liquidity cushion could favor Tether, especially if there is a price decline in their other reserve assets, given that just 85% of Tether’s reserve is held in Cash & Cash Equivalents & Other Short-Term Deposits.

A significant development occurred recently when Binance allied with Hong Kong-based First Digital Labs, listing its First Digital USD stablecoin. They even offered free trading for select FDUSD pairs, a perk not extended to Tether’s USDT pairs. This move appeared to draw veiled criticism from Ardoino, who questioned the organic nature of the stablecoin market dynamics in a recent tweet, seemingly in response to Binance’s new partnership.

Isn’t it interesting that USDt is being pressured down (slightly, within 10bps, just to push market makers to react), and USDc, the main competitor that you would expect being gaining from the situation, is redeemed heavily nevertheless, while suddenly a competitor born 2 days…
— Paolo Ardoino 🍐 (@paoloardoino) August 3, 2023

Tether has also faced criticism for its lack of transparency regarding its reserve audits. It has a practice of publishing attestation reports, but not full audits, which has led to allegations of opacity. During a recent AMA session, Changpeng Zhao, Binance’s co-founder and CEO, referred to Tether as a “black box” due to the company’s refusal to publish formal audit reports. In response, Tether CTO Paolo Ardoino reiterated that:

No stablecoin has a formal audit, only attestations.

In response to this criticism, released an attestation report from BDO, an independent accounting firm, that showed an $850 million rise in excess reserves, which now total $3.3 billion.

The firm said that:

Tether’s reserves remain extremely liquid, with 85% of its investments held in cash and cash equivalents.

Tether claims that its stablecoins are backed by U.S. Treasury notes worth around $72.5 billion. The company also reported operational profits of nearly $1 billion, a 30% increase over the previous quarter, and a $115 million share buyback.

CTO Paolo Ardoino said:

Transparency is not just a buzzword for us, it is the cornerstone of our philosophy. We believe that open communication and strong financials foster trust and reliability, and this is what the global community deserves especially in a year devastated by many failures across the banking and crypto industry.