Veteran trader and charting expert Peter Brandt blasted stablecoin Tether (USDT) in a recent tweet, but not for the reasons you might expect.
Brandt, who founded the Factor LLC trading company, wrote: âCircular reasoning – TETHER: the idea that we convert one fiat currency unit (USD, EUR, et al) into another fiat currency unit (tether) in order to to protect the store of wealth from the first fiat currency unit is nothing but a gigantic fart of mind. ”
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What does Brandt have against Tether?
Stablecoins are cryptocurrencies that attach their value to traditional commodities such as gold or a currency. In Tether’s case, it’s the US dollar. Tether is the largest stable coin by market cap, and Brandt isn’t the only one voicing doubts about the coin.
The problem for Brandt appears to be that some investors are using crypto – particularly Bitcoin (BTC) – as a store of wealth, a way to hedge against inflation or the dramatic devaluation of traditional currency. And he’s right – if you want to guard against devaluation, it doesn’t make sense to convert your dollars into something that’s tied to the very currency that you think might lose value.
However, this is not really how people tend to use Tether. This is generally an easy way for cryptocurrency traders to convert more volatile currencies like Bitcoin and Ethereum (ETH). It can be slower and more expensive to trade with traditional (fiat) currency, even on major cryptocurrency exchanges.
Investors also use Tether and other stablecoins to earn interest with Decentralized Finance (DeFi) applications (DeFi is an umbrella term for various applications that remove middlemen like banks from financial transactions). They carry more risk than traditional savings accounts, but often pay much higher interest rates.
Why Tether can indeed be a gigantic brain fart
The biggest problem with Tether is that it hasn’t always had enough cash reserves to support the outstanding USDT. At one point in 2019, he only had 74% of the money needed to support the coin.
Tether says the coin is now fully collateralized, but much of its reserves are held in what’s called commercial paper, a type of short-term loan. If there was a race on Tether tomorrow, there is no guarantee that the company will be able to pay. This is concerning for a coin with a market cap of $ 64 billion at the time of writing.
US officials are concerned about how stablecoins like Tether are handled and whether they pose a risk to the existing financial system. The concern is that these coins operate like banks, but without the same consumer protections.
Money held in the bank is protected by FDIC insurance up to $ 250,000 per qualifying account. On the other hand, if Tether fails, it’s hard to see how investors would get their money back, which could have a big ripple effect for the rest of the industry.
Is Brandt anti-crypto?
Brandt is not anti-crypto – he says he has owned Bitcoin for five years – but he is cautious. And if he’s bullish about Bitcoin, that’s another story. He tweeted in March: “I think there’s a 50% chance it will hit $ 1 million and a 50% chance it will hit zero.”
While he admits that Bitcoin’s long-term trend is clearly on the rise, he also says we need to give humanity credit – they might come up with a better solution in the future. Nonetheless, he told a recent Bullish on Bitcoin podcast which, “Bitcoin is definitely a store of value that far exceeds what any fiat currency can offer.”
He views his Bitcoin holdings as insurance against a huge drop in the value of the dollar. Which brings us back to why Tether doesn’t make sense to Brandt. Holding Tether will never protect you against any deterioration in the dollar.