The person who bought the Bitcoin and sold the USDT is the Tether organization itself.
Here’s the same example, stated more explicitly:
1. I buy 10 USDT from Tether in exchange for $10 worth of Bitcoin. Tether now has 1:1 reserves of Bitcoin backing USDT.
2. The price of Bitcoin decreases by 50%. Tether no longer has enough reserves to cover all the USDT in circulation.
3. I want to sell my 10 USDT back to Tether and get my $10 worth of Bitcoin. But Tether only has $5 worth of Bitcoin in its reserves! USDT will lose its peg.
This is a common misconception and is not at all how Tether works.
Tether acts more like a central bank, they allow people to trade USD for USDT for exactly $1. Trading USD directly can be difficult because there are extensive KYC rules and not everyone has access to a USD bank account.
On some exchanges, there is still a demand to trade in USD and it commands a premium due to the difficulty in trading it. This generates demand for USDT and slightly increase the price, suppose to $1.02 on this exchange.
Arbitrage traders can now buy USDT for $1.00 and sell it on this other exchange for $1.02. The tether corporation simply holds the original $1 (of actual USD). They should have $1 USD for each USDT in circulation, and that's a lot of 'float' that they can invest in safe things like short-term US treasuries to make money off simply holding the cash. No need to speculate on Bitcoin or other risky investments, they are making plenty off just holding cash-equivalents.
> They should have $1 USD for each USDT in circulation, and that's a lot of 'float' that they can invest in safe things like short-term US treasuries to make money off simply holding the cash.
That's the issue — they don't have $1 USD for each USDT in circulation.
Tether has seen over 10B in withdrawals over the last couple weeks. The total circulating supply is 73B so that was something like a 12% withdrawal over a very short time window.
Consider that banks are only required to maintain a 5% leverage ratio. 12% is a pretty extreme test, it's enough to cause most banks to fail. It also does not make sense for Tether to take on additional risk. They can make a nice yield by investing the 70B+ in very safe highly liquid short-term US treasuries.
>The Consolidated Reserves Report alleges that Tether’s reserves included, as of March 2022, $4,959,634,446 of “Other Investments (including digital tokens).” A 3.27% decrease in the value of these investments wipes out all Tether equity and causes their tokens to be undercollateralized.
First this is wrong, equity includes Enterprise Value which the article seems to ignore. The ability to control $70B of float is worth quite a lot enterprise value. They should be able to take out debt against that EV (or even sell shares/equity) if needed to re-collateralize.
They can also handle another 73-5=68B worth of redemptions before they need to touch those "Other Investments".
Why not have a step between #1 and #2? "Tether immediately sells the BTC for $10"
There's still some risk if the price is rapidly moving and they can only get $9.99 for the BTC you sent them, but that could be mitigated by ordering the transactions to keep the peg: you send $10 of BTC, they sell it (and "only" get $9.99), they give you 9.99 USDT and say, "tough, what you thought was $10/BTC was really $9.99/BTC"
> Why not have a step between #1 and #2? "Tether immediately sells the BTC for $10"
Yes, why indeed? That's a great question for Tether! If they were holding enough actual cash reserves to cover all the USDT in circulation, there wouldn't be an issue.
Here’s the same example, stated more explicitly:
1. I buy 10 USDT from Tether in exchange for $10 worth of Bitcoin. Tether now has 1:1 reserves of Bitcoin backing USDT.
2. The price of Bitcoin decreases by 50%. Tether no longer has enough reserves to cover all the USDT in circulation.
3. I want to sell my 10 USDT back to Tether and get my $10 worth of Bitcoin. But Tether only has $5 worth of Bitcoin in its reserves! USDT will lose its peg.