The situation remains difficult, folks.
Looking specifically at crypto, the UST and Luna collapse sent unprecedented panic through the crypto markets. One of the most intriguing — and frankly terrifying — consequences of that meltdown was the partial de-pegging of Tether. I have delayed a thorough analysis of Tether for some time because it has become a topic so overplayed in crypto that it gives me a headache every time it resurfaces.
However, last week’s events, when Tether briefly lost its peg during a wave of market stress, convinced me it was time for a deeper look.
De-pegging
We know markets are under strain when spellcheck accepts “de-pegging” as a word. That said, Tether fell below $0.95 following the UST implosion on May 12, triggering a large wave of redemptions as investors worried Tether lacked the reserves to withstand significant withdrawals after Terra’s collapse.
Fortunately for the broader ecosystem, the market stabilized and the price recovered. Still, even as I write this eleven days later, the peg hasn’t been fully restored — USDT trades around $0.999, short of a clean $1.00.
A failure of Tether would undoubtedly trigger widespread contagion across the industry — it remains the single largest liquidity pair in the market and is essential to many crypto operations. Since early May, roughly $10 billion of USDT has been redeemed. Reviewing the historic growth of USDT market capitalization, it’s clear this episode has scared investors more than ever before.
If you ask me, Tether likely has reserves sufficient to support its $73 billion market cap. But the core issue isn’t whether they do or don’t — it’s why that question exists at all.
We’ve Seen This Before
I’m tired of revisiting Tether and its reserve situation, much like the endless coronavirus stats that dominated the news for years. The repeated doubts and debates over Tether are not only exhausting but harmful to the industry — and that’s coming from someone who has not been an automatic Tether skeptic.
How hard would it be to provide clearer, more frequent updates to the balance sheet? Currently, Tether publishes these once a quarter, which is insufficient for a $73 billion company.
The most recent statement, dated March 31, lists $82.425 billion in assets and $82.262 billion in liabilities, implying shareholder equity of $162 million — a surplus of $162 million. That sounds acceptable on the surface.
But let’s do the math. That $162 million equals 0.2% of assets. A 0.2% decline in asset value would render Tether technically undercapitalized. That’s not negligible — it’s unacceptable for a stablecoin. What happens if asset values move against them by such a small margin?
Reserve Composition
It’s tempting to assume Tether’s assets are all high-quality money market instruments and government bills, but that would be inaccurate. The March 31 report shows roughly $5 billion in “other investments (including digital tokens).” Tether’s $162 million capital surplus equals about 3.3% of that $5 billion slice. If a portion of these digital token investments were to fall by 3.3%, Tether could be underwater. For crypto investors, the volatility of digital tokens needs no introduction — a 3.3% move in that bucket is plausible.
One detailed review shows that Celsius tokens were part of Tether’s holdings, valued at $62.8 million. Celsius Network offers lending and yield products where depositors can receive rewards in CEL tokens. Looking at CEL since October 2021, when Tether invested over $50 million in its Series B, the token dropped roughly 87% — a dramatic fall.
That decline alone illustrates how quickly the “other investments” bucket can erode capital.
Note the asset and liability figures above are from March 31, 2022. Crypto markets have been deeply red since then, so current numbers could be worse. Given limited transparency and the accounting maneuvers sometimes used, it wouldn’t be hard for a future balance sheet update to present a rosier picture than reality.
Accounting Practices
Tether says it recognizes impairments but not unrealized gains on some holdings, which it frames as conservative accounting and a reason for the apparently small equity cushion. But without transparent reporting, these claims are difficult to verify. One could argue that recognizing losses but not gains suggests Tether may have invested significantly more than the $5 billion listed under “other investments,” and if some positions are underwater, questions arise about how those investments were funded and the company’s overall financial health.
My main point is this: the balance sheet raises legitimate questions that shouldn’t exist for a stablecoin critical to the crypto system. I’m forced to dig into months-old reports and patch together a puzzle. That’s unacceptable for a $73 billion instrument whose stability underpins large swaths of the market.
Remember Tether’s checkered history. The company once claimed its reserves were backed one-to-one by US dollars, a claim subsequently contradicted by a New York Attorney General investigation. Tether shifted its rhetoric from “fully backed by US dollars” to “backed by Tether reserves.” Those quarterly updates largely exist to satisfy regulatory pressures stemming from that probe. Without them, we’d be even more in the dark.
Benefits of Shrinking Tether
This brings me to why the $10 billion in redemptions over the past month might actually be a healthy development. The smaller Tether becomes, the less systemic influence it has and the lower the risk of widespread contagion in a worst-case collapse scenario. The faster the industry moves past the repetitive uncertainty about Tether’s reserves, the better.
I don’t believe we are on the brink of USDT collapsing. I’ve never been an automatic Tether pusher in the face of persistent criticism. Still, recent admissions from the company and poor reserve reporting have made me increasingly uneasy about USDT.
I avoid USDT where practical in favor of more reputable stablecoins. The question is simple: why wouldn’t I? There is no inherent advantage to holding Tether beyond its ubiquity, while alternatives with stronger reputations are gaining ground. The downside risk, however unlikely you might think it is, is substantial. This month’s de-pegging should be reason enough for cautious users to prefer a more stable alternative. Hopefully the industry follows suit, because this recurring negative narrative harms everyone involved.
Conclusion
Last month this was an $83 billion stablecoin. Today it’s roughly $73 billion. I hope its dominance continues to wane and that more transparent, reputable stablecoins gain market share organically. USDT has long been a problem for the industry, which is why I’m not sorry to see each USDT redeemed.
I’ll close with a quote from Tether CTO Paolo Ardoino about Tether’s recent record of honoring redemptions:
“This latest attestation further underscores that Tether is fully backed and that its reserve structure is strong, conservative, and liquid.”
But Paolo, doesn’t the very need to make this statement highlight the underlying problem? Tether was founded in 2014, has grown to roughly $73 billion, and powers much of the industry — yet the CTO still feels compelled to reassure the market that redeeming 15% of the asset base demonstrates its safety?
It’s like calling my mother to say, “Hey mom, be proud — I didn’t do heroin today.” That hardly seems like an extraordinary achievement.