You may not know it, but the proverbial canary in the coal mine may have already croaked when it comes to Tether. What was the sign? Coinbase is trading at historically low prices compared to other exchanges.
Why is this such a big deal?
Historically, Coinbase BTC and Ethereum trade higher. Now that has changed. The reason may be due to Tether:
People on exchanges with USDT are buying up BTC and ETH (which gets rid of the tether in their account). This increases BTC and ETH prices on these exchanges.
They send the BTC or ETH to Coinbase (for example) and sell it for real USD. This decreases BTC price on these exchanges, leading to what we're seeing on Coinbase with lower prices for BTC and Ethereum.
This process probably won't end well:
3a. At some point it becomes undesirable and risky to hold Tether. Whales with large stockpiles of Tether start getting rid of it. Tether slowly loses it's peg to the dollar as people pay a premium to get rid of it for BTC and Ethereum.
Would you pay 1% premium to get out of Tether into Bitcoin? Yes.
How about 5%? Maybe.
How about 10%? 15%? At some point it becomes easier to send USDT to Bitfinex for redemption. That's when the run on the bank begins. It will happen very quickly and unexpectedly.
Don't forget that in addition to 2.25 Billion fake USD, there are margin loans on top of the USDT. Any exchange that uses Tether and doesn't have enough crypto reserves to cover the withdrawals will collaspse.
Some might halt redemptions, which will panic the market even further. Some might have to sell BTC from their exchange held accounts in order to obtain real USD to reimburse customers. This would put even more sell pressure on the market.
3b. A government might step in and might tell exchanges to stop using tether. Leading to another run on the bank as described above.
3c. Exchanges with real USD might halt BTC deposits (due to subsequent cashing out into USD).
Ultimately, USDT is only 0.4% of the crypto market cap. So lets get this poison out of our system and move on! In the meantime use price stable assets like bitUSD and bitCNY to protect yourself, and be ready to buy the dip!
P.S. If you're looking for more confirmation - The Bitfinex USDT wallet is rising extremely fast now, meaning people are sending in Tether for redemption for major cryptocoins. http://omnichest.info/lookupadd.aspx?address=1KYiKJEfdJtap9QX2v9BXJMpz2SfU4pgZw Hat tip to Kevin Messerly.
