The third largest cryptocurrency in the world worries economists
The third largest cryptocurrency in the world worries economists

Tether, the world's third largest cryptocurrency by market capitalization, worries some economists, including the Federal Reserve official.

The Boston Fed chair warned the Tether last month, calling it a potential risk to financial stability.

Some investors believe that the loss of confidence in Tether could be detrimental to cryptocurrencies, which will seriously affect the market.

The problems surrounding Tether are having a huge impact on the emerging cryptocurrency world. There is growing concern among economists that this could also affect markets outside of cryptocurrency.

What is a cryptocurrency tether?

Tether is a cryptocurrency similar to Bitcoin. In terms of market capitalization, it is the third largest digital currency in the world. But it is different from Bitcoin and other virtual currencies.

Tether is called a stablecoin. They are digital currencies tied to real assets to maintain a stable value. This is different from most of the known unstable cryptocurrencies.

Bitcoin peaked at nearly $65,000 in April, and its value has roughly halved since then.

Tether is said to be pegged to the US dollar. Although the value of other cryptocurrencies fluctuates frequently, the price of Tether is usually equivalent to $1.

But fluctuations in the value of Tether have frightened investors in the past. Traders often use Tether to buy cryptocurrencies as an alternative to the US dollar.

This gives them a chance to find safety in the most stable assets when the cryptocurrency market is extremely volatile.

However, due to the risks associated with this, many banks avoid dealing with cryptocurrency platforms. This is where the stablecoin comes in.

Why is there such a big controversy?

Some investors and economists fear that the cable's source does not have enough dollar reserves to guarantee a dollar peg.

In May, Tether separated its reserves from stablecoins. It declared that a small portion of its holdings - 2.9% - was cash.

Tether has more than $60 billion in circulation and has more deposits than many US banks.

For a long time, people have wondered if Tether is being used to manipulate the price of Bitcoin. One study claimed that Tether was used to prop up Bitcoin during the sharp price drop in 2017.

Earlier this year, the New York attorney general reached an agreement with Tether and Bitfinex. She did so after being accused of embezzling hundreds of millions of dollars to make up for a loss of $850 million.

As a result, Tether and Bitfinex agreed to pay $18.5 million in severance payments. They are prohibited from working in New York State. But none of the companies admitted any wrongdoing.

market infection

Analysts previously warned that a sudden loss of confidence in Tether could trigger a severe liquidity shock in the broader cryptocurrency market.

But there are also concerns that a sudden surge in rope pullbacks could lead to a market contagion. This affects assets other than cryptocurrencies.

In addition, Tether and other stablecoins are seen as one of the many potential risks to financial stability.

These stablecoins are becoming increasingly popular. Unless the products sold to the public as stable currencies are regulated and ensured that they enjoy greater operational stability, a crisis may arise in the future.

Fitch, a rating agency, has warned that a sudden and massive withdrawal of rope tokens could destabilize the credit market in the short term.

According to reports, tether is not the only stablecoin. But it is the most important and popular currency. The other currencies are the US Dollars and the Binance Dollars.

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