Bitcoin is crashing, but you probably already knew that. However, if you haven't spent the past few weeks desperately refreshing CoinMarketCap (or one of the other sites that tracks the value of cryptocurrencies) you may have missed a shocking drop that's erased much of the value built up over 2017.
It's still unclear exactly what's causing the price of Bitcoin to drop so rapidly (currently hovering at around $8000, down from $21,500 a month ago). Of course, it's no secret that the value of cryptocurrencies can be volatile, but recent reports suggest that one particular currency could be responsible for artificially driving up the price of Bitcoin, leading up to this plunge.
Tether was designed to create stability in the cryptocurrency market, but it could bring it crashing down instead. Here's what you need to know about the theoretically stable cryptocurrency that may not be stable at all.
What Is Tether?
Tether belongs to a family of digital currencies called "stablecoins", the idea being that they're pegged to something with real-world value. This helps keep the price stable compared to currencies like Bitcoin. In Tether's case, each token is worth exactly one one US dollar, and the company behind it (also called Tether) claims to have $US1 in the bank for every token in existence.
Tether was founded in 2015. The company also has close ties to Bitfinex, a popular digital currency exchange based in the British Virgin Islands that's been fined by US regulators in the past. Tether previously denied a direct connection to Bitfinex, but a New York Times report last November revealed a clear line between the two companies.
If you think all this is starting to sound a little fishy you aren't wrong, but it's about to get way worse.
Why People Think Tether Might Be a Scam
Questions about Tether's actual value have been floating around for months, but the issue came to a head last month thanks to anonymous report titled "Quantifying the Effect of Tether". The author argues pretty convincingly that Tether was used to prop up the value of Bitcoin. Basically, whenever Bitcoin's price started to drop, a bunch of Tether tokens were spent on Bitcoin to push it back up.
In 2017, Bitcoin's value soared from $1200 to around $25,000 before dropping down to around $16,000 at the end of the year. Since then, it's value has risen and dropped sporadically from day to day, dragging smaller cryptocurrencies such as Ether and Ripple along with it.
That wouldn't be an issue if each Tether token was actually backed by a dollar, but what if it's backed by nothing? Another report from cybersecurity expert Tony Arcieri suggests that Tether (the company) could be creating tokens out of thin air with nothing to support their value.
Meanwhile, Tether hasn't exactly done a great job of proving it has the money to back up its tokens. The company claims to have over $US2 billion ($2.5 billion) in assets, but plans for an official audit with an independent audit firm recently fell through.
Until Tether can prove it actually has that money in the bank, concerns over the currency's value (and its effect on the larger cryptocurrency market) will only get worse. That uncertainty could push Bitcoin's price even lower, but the truth might be even worse.
What This Could Mean for the Price of Bitcoin
If these reports are correct and Tether isn't actually worth what the company claims, we could see the price of Bitcoin drop even faster than it already has. According to that anonymous Tether analysis, Bitcoin's value would plummet by anywhere from 30-80 per cent, falling as low as $2500 per Bitcoin.
For now, this is just speculation, and Tether still maintains that it really does have one dollar in the bank to back up each token that exists. According to the company's website, "Tether Platform currencies are 100% backed by actual fiat currency assets in our reserve account."
But if that isn't true it could bring down Bitcoin - and the rest of the cryptocurrency market with it.