The risk of one of the worst-case scenarios in the crypto market is explored in this video by CryptoCasey. She revisits the issue of Tether, a stablecoin that’s been plagued with controversies. Tether is the largest and most pervasive stablecoin, accounting for more than 90% of all trading volume across the crypto market. However, 25% of its reserves consist of unsecured corporate debt, and there is no actual audit. If liquidations and tether redemptions continue, the stablecoin market could be impacted, and there is no FDIC insurance behind any stablecoins. The best-case scenario is for regulation and oversight to be imposed on all stablecoins.
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Exploring the Worst Case Scenario for Crypto Markets: A Tether Collapse
Introduction
In this video, we will explore one of the worst case scenarios that could potentially have a detrimental effect on the crypto markets and bleed over into traditional financial markets.
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A Look Back at the Trilogy
About a year ago, Crypto Casey released a video trilogy exploring the structure of the traditional financial system, the structure of the crypto space, and the relationship between the two. In the third and final video of the series, the potential collapse of the crypto market due to the coin tether was discussed.
Is Tether Too Big to Fail?
Tether’s history in the crypto space is notoriously plagued with sketchiness, and a potential tether collapse has been coined “TetherFUD” – fear, uncertainty, and doubt. Currently, tether is the largest and most pervasive stablecoin, propping up the crypto market as the bottom-based level.
Tether’s Recent Stress Tests
Recent events have caused severe stress tests for tether. The largest amount of liquidations it has ever seen has caused a collapse in its market cap by over $10 billion in just a few weeks. Crypto whales ditched tether for USDC after the stablecoin panic from the UST or Terra Luna failure, leading to a sudden swap of billions of tether for USDC.
The State of Tether’s Reserves
At the time of this video, about 25% of tether’s reserves consist of commercial paper, which is unsecured corporate debt. Only about 5% of their total reserves are cash and bank deposits. With no actual audit and a lack of transparency, there is cause for concern as to whether every single tether token is backed one-for-one with real dollars in the bank account.
Potential Outcomes for Tether
The best-case scenario would be tether’s slow and careful extraction from the market, while regulation and oversight are imposed, allowing more trustworthy stable coins to take its place. The worst-case scenario would be a Terra Luna event with tether, causing a crypto collapse and affecting global systemically important banks.
Conclusion
In the end, only time will tell which scenario is more likely. Until then, investors should be diligent and cautious, researching stable coins and diversifying their holdings to mitigate potential risks.
