Untethered? Bitcoin USDT Premium Hits 9-Month High as Investors Price in Tether Risks

Bitcoin Tether (BTC/USDT) Premium Chart

The price of Tether’s USDT stablecoin, which is supposedly backed 1:1 by US Dollars, has recently dropped on top cryptocurrency exchanges. Market analysts are debating if the price discrepancy is merely coincidence, a product of inefficient markets or traders factoring in risk - otherwise known as 'risk premia'.

According to CryptoCompare data, Tether’s price recently dropped to $0.955, and at press time is trading at $0.993, having seemingly lost its peg to the USD. Although the current difference may seem small, it means BTC/USDT is trading $55 higher than BTC/USD and this gap just reached a 9-month high, but is there real risk?

Controversy Surrounding Tether

Some critics argue that the company does not publish transparent or timely audits it is impossible to determine whether they have a 1:1 reserve of USD. Meanwhile, the circulating supply of USDT tokens has grown to 2.8 billion. As a result, Tether has been under scrutiny for months, as some critics even believe its USDT tokens have been printed out of thin air, and used to inflate bitcoin’s price, as a study conducted by University of Texas professor John Griffin suggested.

As CryptoGlobe covered, an analysis published by Bloomberg revealed what appeared to be unusual trading patterns in Kraken’s USDT/USD trading pair. The exchange fought back against the analysis’ findings. Tether was subpoenaed by the US Commodity Futures Trading Commission (CFTC) late last year, as the regulator decided to look into whether the stablecoin is indeed backed by USD.

Looking at Tether’s website itself, it’s clear redeeming USD for USDT is seemingly impossible for new investors, as “registrations are temporarily offline.” Critics claim those who do have accounts can’t redeem the tokens as they have to go through never-ending steps.

Topping all of this off Nobel Bank, a financial institution in Puerto Rico that was found providing Tether and Bitfinex banking services, is now looking to sell itself after losing both as clients.

Reports have suggested that, as an international financial entity, it would’ve had to report suspicious activity to help US government agencies prevent money laundering. Since Tether and Bitfinex are registered on the British Virgin Islands, their accounts were likely protected as “on-Americans can remain anonymous if the assets are held through offshore companies or trusts.”

Shortly after news of Nobel Bank’s plans started circulating, Bitfinex announced “infrastructure maintenance,” which some claimed was the exchange preparing to pull an exit scam. Investors reacted with fear, which led to the price decrease. However, the maintenance upgrade went smoothly which may reduce premiums in the coming days.

The lead image shows that while today it’s currently more expensive to buy BTC with USDT over USD (% Premium), the difference only reached 0.801% or roughly $55. When it was revealed Wells Fargo turned its back on Bitfinex, the premium surged to as much as 8%, as Crypto News Review points out. The premium briefly rose to 2% when Bloomberg revealed the CFTC had sent Bitfinex and Tether subpoenas on January 30th.

A Digital Fiat Currency

In an attempt to answer the controversy surrounding it, Tether released an analysis of its bank accounts made by the law firm of a former FBI director in June. While the report claimed there was a US dollar to back every USDT in circulation, it stopped short of being a proper public audit.

Although some have claimed the supply increase of USDT tokens seems to be unreasonable, Kraken revealed it believes it’s plausible after analyzing its own fiat deposits. In a blog post, the cryptocurrency exchange revealed:

While our cumulative deposits are several multiples of the amount of USDT issued, we found a positive correlation of 0.78x with R^2 of 61%. Given that USDT has been sold through several high volume exchanges during this time period, we have no reason to believe that the token supply is artificially inflated.

Competitors are Welcome

At the end of the day, Tether’s USDT seems to be the digital equivalent of a fiat currency on a whole new level. The company claims it’s pegged to the USD and as such deems it has a specific value, but it’s only there as long as investors believe that promise. As recent events have shown, as soon as investor confidence wanes, USDT’s price drops.

Recently, various USDT alternatives have started appearing. As CryptoGlobe recently covered, Circle launched a USDC stablecoin, and the Winklevoss Twins’ Gemini exchange launched the Gemini Dollar (GUSD), which along with the Paxos Standard (PAX) is regulated by the New York State Department of Financial Services (NYDFS).

Liquidators Take Charge of Cryptopia: Here Are Cryptopia’s Big Mistakes

Phil Carroll is a Blockchain researcher and enthusiast who has been following the market for over 5 years now. He has been working as a freelance chain analyzer and as a technological content writer for whitepapers etc. In his spare time, he likes to write about topics that involve Bitcoin, Blockchain and cryptocurrencies.

Although cryptocurrencies themselves are incredibly secure, the exchanges that facilitate their movement have been far more problematic.

2018 set a record for the most crypto exchange hacks in history, and the efforts of bad actors are becoming more expansive and more expensive with time. Now, another crypto exchange has been brought down by a hack.

The Slow Descent of Cryptopia

The New Zealand-based Cryptopia endured a hack on January 14 that cost the company $16 million worth of digital assets including Ether and ERC-20 tokens. In the immediate aftermath of the breach, Cryptopia took its site offline posting a message indicating that the website was under maintenance.

At the same time, Cryptopia contacted police authorities who worked to identify the perpetrators and to attempt recovery of the stolen assets. A few days later, the company acknowledged the data breach and admitted that they incurred “significant losses.”

Eventually, Cryptopia came back online, providing trading limited trading opportunities while continuing to experience banking issues. This reduced functionality prevented many users from cashing out their tokens.

For a while it seemed as if it is going to recover from the hack. However, after making efforts to reduce costs and develop a profitable business model, Cryptopia decided that it was in the best interest of all stakeholders to liquidate the exchange. In a statement, Grant Thornton, Cryptopia’s assigned liquidator, conveyed their intention “to find the solution that is in the best interests of customers and stakeholders.”

Take Note of the Mistakes

In some ways, Cryptopia made many correct moves in attempting to repair their exchange after such a significant breach. However, the mistakes made prior to it were ones that can’t be overlooked.

Mistake #1 – Exchange Security

Obviously, whenever a crypto exchange is hacked, there is well-deserved scrutiny of its cybersecurity practices.

In this case, it’s speculated that the exchange stored users’ private keys, the most prominent line of defense again an intrusion, on a single server that was vulnerable to a hack. In this scenario, hackers could easily access and record users’ private keys and then delete the information, making it inaccessible to users and to the exchange.

It’s estimated that hackers gained access to 76,000 different wallets, and, according to analysis , “none of which were smart contracts“. Without access to their accounts, Cryptopia was powerless to stop hackers from draining funds from the exchange.

“What surprises me the most is the negligence in relation to the security of the entire chain of work with the exchange's wallets.” noted Serge Vasylchuk, CEO of CODEX Exchange . “It was possible to prevent a hack for Cryptopia if they would take three must-have measures seriously. First, to ensure maximum isolation from external influences and from accidental internal interference. Second, to backup private keys on a regular basis, on a well-protected physical copy”.

CODEX has been effusive in their security efforts. After deploying multi-stage security audit to ensure the integrity of their users’ accounts and funds, it received a 10/10 security rating from Hacken security team, CoinMarketCap's data accountability and transparency partner. It may be expensive, but it’s necessary for protecting digital assets, something that is critical in crypto markets.

To put it simply, the Cryptopia hack was predicated on lax security standards, and it could have been avoided or greatly diminished if the company embraced industry best practices for guarding user and company accounts.

Mistake #2 – Poor Community Transparency

Of course, technological oversights, while frustrating, are bound to happen from time to time. However, crypto exchanges have full control over their response. They decide their level of transparency and community investment, and their decisions in this regard can have cascading consequences.

Most notably, the company began by issuing a false statement to users. The website was not undergoing “unscheduled maintenance,” a misleading statement that is becoming a code for more problematic events.

While Cryptopia rightly contacted authorities to report criminal activity, the company’s updates were few and far between, leaving their users and the greater internet to speculate about the event and the state of their holdings.

Finally, when the exchange eventually relaunched, it was mostly unusable, appearing in a “read-only” format that prevented users from actually accessing the platform’s functionality.

Communication is always a choice, and exchanges that choose not to fully inform their userbase are doing them and the greater crypto community a disservice. “Of course, after such negligence it is difficult to tell users about the funds lost,” added Vasylchuk. “but the lack of timely communication only worsens the situation when there are people waiting for explanation.”

Conclusion

Crypto exchanges are a crucial part of the digital currency ecosystem. Investors and traders need to be able to trust them and their ability to protect digital assets.

Cryptopia’s liquidation adds it to the list of exchanges that have misbehaved and have been punished for their actions.

Of course, it doesn’t have to be this way. Exchanges can learn from these mistakes. They can prioritize and enforce robust security standards while emphasizing transparency and communication throughout the process.

It’s the only way forward, and it’s one that exchanges need to learn now before they are the next ones making the news.