There is no risk that the USDT loses its dollar peg in the near future. Here's why
There is no risk that the USDT loses its dollar peg in the near future.
Ⅰ. Regulatory risk:
The United States is a capitalist country, unlike China, the regulatory body never shut large companies down in history. Illegal violation can be handled by rectification, reform and penalty. Previously, Tether paid a fine of $18.5 million to the New York Attorney General (NYAG) and $42.5 million to the U.S. Commodity Futures Trading Commission (CFTC).
Tether might have recently been targeted by the SEC, but they had the history of reconciliation with cryptocurrency companies (like Ripple) by fining. So, this time it must also be a matter of reform and penalty.
Ⅱ.How to generates profit:
It’s hard to profit by USDT, but Tether, as an invisible central bank for crypto, not considering some illegal means (like manipulating the market), can make a handsome profit by the following reasonable methods:
a. The commission fees when converting USDT to US dollars and profits from buying USDT when it loses the dollar link.
b. Profits from interest-free USD deposits, such as bank deposits, interest from wealth management, lending and corporation bonds, etc.
c. When Tether or Binfinex lends out USDT against BTC and ETH as collateral, the interest generated in USDT and interests in BTC or ETH.
Ⅲ.The risk of the runs on:
Of the above-mentioned three ways to generate profits, the last one has a very low risk. Tether has excessive mortgage of BTC and ETH, and is even capable of taking lower-priced coins that are liquidated in the extreme markets. The biggest risk for Tether is that the corporate bonds(or commercial paper) it holds may be subject to rug pull, for example, it was previously rumoured that Tether bought Evergrande’s commercial paper.
But even if Tether sees a serious loss in corporate debt, its loss will not be significant enough to generate a run since the corporate debt represents a small percentage of its total investments. Assuming that Tether still has a bad debt up to 30% of its portfolio after paying off with years of profits, the problem will not be exposed until all USDT users have completed 70%-dollar redemption. In other words, it’s unlikely that a run of this magnitude of redemption will take place based on its $82 billion market cap.
USDT is different compared to UST, which shows its metric to the public and is not a widely used stable coin in the cryptocurrency world, once UST runs into a problem, the data like how many billions of UST are locked, is transparent to everyone, so panic emotions can be created easily.
While the USDT is a black box, when there is a run on the USDT, the market does not know whether USDT has a bad debt, how big the deficit is. Besides, it is not convenient to trade after dumping all the USDT, so it is good to have a single-digit percentage of USDT redemptions.
This is similar to banking, regulators require about 10% of the bank reserves rate, that is, in regular cases, there will only be a single-digit percentage of users requesting withdrawals, leaving 10% funds is enough.
IV. Risk of rug pull in the long-term:
Indeed, I said “USDT in the [near future] doesn’t have the risk to lose dollars link”, if USDT has bad debt, including the risk of commercial paper, or like the deadly operations as Mt. Gox did, then there would be a rug pull risk for USDT, but with one condition: the total market value of USDT has dropped significantly under the competition of other stable coins.
For example, currently, USDT has a market Cap of $82 billion, assuming there is a 30% = $25 billion debt, if USDT continues to follow the rapid growth of the cryptocurrency industry (even if its market share decreases), when its total market value increased to $164 billion, the debt ratio will be reduced from 30% to 15%, and its profits may pay back the debts in three or four years.
However, if USDT’s market cap drops significantly under the competition of other stable coins, for example, by 60% to $32.8 billion, then its debt ratio becomes 75%, and there would be a rug pull risk in play.
Thus, the conditions for USDT to go rug pull are high:
- USDT has a large bad debt ratio (30%+) + USDT Market cap drops significantly in market dominance.
- There is no risk that the USDT loses its dollar peg in the near future.
- When the shorting agencies find out that they can’t smash USDT, this round of panic is over.
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