Can Tether kill Bitcoin?

During every Bitcoin bull run there is always a small subset of naysayers spreading fear, uncertainty, and doubt (FUD) about the relation between the price of Bitcoin and the uncertainty of Tether. The naysayers say that Tether will destroy Bitcoin. 

Of course, Bitcoin existed long before Tether and will likely exist long after Tether is gone. Anyway, this article will cover why Tether will not kill Bitcoin by explaining what Tether does and grounding down some of the FUD surrounding Bitcoin’s relationship with Tether.

How Tether Works

First, we will explain how Tether works and what it’s used for because there’s a huge misunderstanding about how Tether works and its purpose.

Tether is a stablecoin backed by a central authority – in this case Tether LLC. Tether LLC allegedly holds an equal amount of USD to Tether tokens. And the Tether tokens can be redeemed for US Dollars at any point.

You can view Tether as US dollars in token form. 

This brings us to the purpose of Tether. Tether, contrary to popular belief, is mostly used as a replacement for US dollars. Why is Tether used as a replacement for US dollars?

There are so many regulations that surround a cryptocurrency exchange accepting US dollars, but there are no regulations about accepting Tether. 

This loophole makes Tether the perfect option for exchanges that want to accept USD without jumping through hoops. It also works great for crypto exchanges that want a stable trading pair on their exchange.

As you probably know, cryptocurrencies are extremely volatile. And that volatility has a tendency to scare off investors. Tether, of course, has a stable price due to its nature as a stablecoin. This makes it perfect for investors that do not want to lose value between purchasing Bitcoin and subsequently purchasing an altcoin with that Bitcoin because the price of Bitcoin dropped.

All in all, Tether is simply a stablecoin used for settling cryptocurrency trades on exchanges that do not have fiat currency. 

Claims Against Tether

Here are some of the most common claims against Tether. Some of the claims have some weight to them while others are grossly misunderstood by those with a limited understanding of cryptocurrency or with a bone to pick with cryptocurrency.

Tether Makes Up Too Much of Bitcoin’s Market Cap

A common claim against Tether is that it makes up too much of Bitcoin’s volume. First of all, this claim does not really make sense because, as mentioned previously, Tether is used as a tool for purchasing Bitcoin.

Again, it’s better to view Tether as a replacement for fiat currency than as a part of Bitcoin itself because, well, Tether is not part of Bitcoin. It’s an entirely separate entity. Additionally, Tether is not the only centrally backed stablecoin. USDC also exists and is used for the exact same purpose as Tether. 

In summary, Tether does not make up too much of Bitcoin’s market cap. However, even if it did, it does not matter because Tether is used to purchase Bitcoin and is not part of Bitcoin – it’s a moot point. Not to mention the Tether replacements that could be used in the event that Tether does go defunct. 

Tether Has Not Been Audited

The most common claim against Tether is that it has never been audited. This, in our opinion, is a fair claim against Tether.

Tether has never been audited, which is highly suspicious. Those in the cryptocurrency community cannot whine about the Federal Reserve never being audited and support Tether without being hypocritical. 

To add to this claim, Tether has even testified in court that they are not 1:1 backed by fiat currency and that the backing is not entirely USD. 

It’s a very bad look for Tether to never have been audited. 

But will the lack of an audit have any impact on the price of Bitcoin?

It very well could impact the price of Bitcoin in the short term if people lose faith in Tether. But Bitcoin is more than just Tether. 

Basically, it’s unlikely that a loss of faith in Tether would kill Bitcoin. The price would drop, as one would expect when a major cryptocurrency goes defunct, but believing that a defunct Tether would kill Bitcoin is absurd. 

Tether Is Used To Pump Bitcoin

Finally, another common claim against Tether is that it is used to pump Bitcoin. The claim goes along the lines that Tether prints Tether tokens that aren’t backed by anything and then uses them to purchase Bitcoin in order to drive up the price. The evidence for this claim?

The increasing price of Bitcoin is correlated with an increasing supply of new Tether.

Do you see the problem with that claim?

Tether is used as a replacement for the United States dollar, so of course the amount of Tether minted would increase as investment interest in Bitcoin increases. Investors purchase Tether in order to purchase Bitcoin!

It’s a chicken or the egg paradox. And it’s not evidence of any wrongdoing. The only thing this evidence proves is that there is a correlation between Tether’s supply and Bitcoin’s price, which is expected given the use of Tether.

That said, it is possible that Tether can be used to pump Bitcoin. But the evidence that it is used to pump the price of Bitcoin is simply not there. As the saying goes, correlation does not equal causation.

A Tether Collapse Destroys DeFi

Tether would not kill Bitcoin, but it could DeFi. 

The logic is simple. DeFi contracts rely heavily on stablecoins like DAI, Tether, and USDC being locked into them for liquidity. The problem is if those stablecoins become worthless or are locked by the centralized authority, then the entire DeFi ecosystem would collapse as it has no backing. 

Now, DeFi protocols would scramble to find a replacement, but the short-term and medium-term impact would be brutal to the DeFi ecosystem.

Again, Bitcoin does not have that problem because Tether is not locked in any smart contracts on Bitcoin. Tether is simply used as a means to purchase Bitcoin.

Bitcoin is Resilient

Finally, Bitcoin will not die even if, more likely when, Tether collapses because Bitcoin is resilient. It has survived different exchange shutdowns, exchange hacks, the shutdown of the Silk Road, a Chinese ban on Bitcoin, and a hard fork with BitcoinCash.

Did Bitcoin lose value from these incidents?

Of course, but Bitcoin still exists and has recently exceeded an all-time high. It’s here to stay and the shutdown of Tether would be just another minor blip on the radar of Bitcoin’s success.

Will Tether Shutdown?

Probably. It’s more likely than not that Tether will eventually shutter. Centralized stablecoins come and go, but Bitcoin is not a centralized stablecoin. There will be a replacement for Tether in the event that it does shutdown. And Bitcoin will continue chugging along as one of the best stores of value in modern history.

Summary

That covers it for the chances of Tether killing Bitcoin – it’s improbable at this point that anything short of a major hack of the blockchain can kill Bitcoin. Tether, while it does have some minor problems, will in all likelihood not kill Bitcoin. 

We do admit that Tether shutting down could impact the price of Bitcoin in the short term and medium, but it’s preposterous to think that a stablecoin used to facilitate cryptocurrency transactions could “kill” Bitcoin.

Bitcoin goes so much deeper than Tether. It really is not something to worry about.