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Tether’s Bitcoin Buying Spree: The Pros & Cons for BTC

Stablecoin issuer Tether has announced plans to spend 15% of its net operating profits on buying bitcoin (BTC), as part of a strategy that will likely boost cryptocurrency prices over time. This means that each month Tether will buy around $74 million in BTC, although this quantity could rise with an increase in the USDT issuer’s profits, which currently stand at around $1.48 billion per quarter.

This is big news for the cryptocurrency market, with Tether’s announcement coming in plenty of time for the next Bitcoin halving, which in April or May 2024 will reduce the BTC supply even further. As such, Tether’s new strategy could help cause a supply squeeze that pushes bitcoin’s price to new heights.

On the other hand, critics have suggested that Tether has simply gone public with its allegedly long-running strategy of issuing USDT to buy — and prop up the price of — BTC. And perhaps more fundamentally, the strategy increases the exposure of the global financial system to bitcoin and cryptocurrency, given that Tether owns around $53 billion in US Treasury bills.

Bitcoin buying

Tether Commits to Buying Bitcoin

Given that Tether has long been a fixture in the cryptocurrency market and industry, its commitment to regularly buy bitcoin hasn’t had much of an impact on BTC prices, at least not yet. Yes, BTC rose from about $26,665 to $27,386 on May 17, the day Tether announced its plans. But it fell back again the day after, likely pulled down by a mix of negative investor sentiment regarding the US debt ceiling crisis and ongoing macroeconomic concerns.

Bitcoin price

Bitcoin’s price between May 15 and May 22; Tether’s announcement was responsible for the jump evident on May 17. Source: CoinGecko

Still, the continued bear market shouldn’t obscure what’s a potentially significant development as far as the bitcoin and cryptocurrency market is concerned. Tether has enjoyed rising profits over the past few quarters, helped largely by the fact that it purchases US Treasury bills, which have become more profitable in parallel with rising interest rates.

Tether now holds around $53 billion in US bonds, representing just over 64% of its total reserves, which support the 1:1 peg of its USDT stablecoin. This is where the bulk of its profit comes from, and it clarified in its announcement on May 17 that, in buying bitcoin, it will use only the “realized profits from its investment strategy” (i.e. from US treasuries), rather than “unrealized capital gains generated by price increases” in cryptocurrency markets.

And given that Tether has increased its holdings of US bonds since the last quarter, the market can also expect its quarterly profits to rise next time around. This means that it could go from spending around $222 million per quarter on bitcoin to something considerably higher. Such purchases are likely to have a noticeable impact on bitcoin and cryptocurrency prices, with numerous commentators already getting excited about how it could help instigate the next bull market.

Bitcoin Tweet

Source: Twitter

Indeed, the last cryptocurrency bull market was kicked off in large part by Tesla buying around $1.5 billion in bitcoin. While Tether won’t be buying this quantity of BTC at once, it will get close over the course of several quarters, something which can only send the cryptocurrency’s price up over the longer term.

Strategy Increases Systemic Risk in Cryptocurrency Market and Financial System

As bullish as Tether’s strategy may be for bitcoin prices (at least when the going is good), it certainly isn’t without its risks. To begin with, some experts have already come out and argued that if Tether is “collateralising with crypto, it’s not a stablecoin.” In other words, putting more bitcoin on its balance sheet exposes Tether to the risk of said bitcoin dropping substantially in price, thereby reducing its reserves and potentially making it under-collateralized.

Indeed, Tether already has around $1.5 billion in bitcoin on its balance sheet, so increasing its BTC holdings potentially increases its risk in this respect. Of course, some may counter by noting that most of Tether’s reserves are not in bitcoin, with the majority coming in the form of US Treasury bills, which have historically been seen as very safe. But with the US currently facing the prospect of a default on its debt, there’s a non-negligible chance that the price of US bonds could drop significantly. Needless to say, this would be catastrophic for Tether, making it less able to maintain USDT’s 1:1 peg.

And with a de-pegged USDT, the cryptocurrency market could end up witnessing big price falls. The point here is that Tether’s purchase of US Treasury bills and bitcoin increases the interconnectedness of the cryptocurrency market and wider financial system, exposing both to greater risk if the stablecoin issuer fails. Either a cryptocurrency crash and run on Tether could force the company to sell billions of US bonds at once (having an effect on bond markets), or a crash in the US bond market could have an impact on bitcoin and crypto prices.

Credit default tweet

Source: Twitter

And make no mistake, Tether is a big company now, if its recent financial statements are to be taken at face value (it still won’t undergo a full audit though). In fact, Tether’s Q1 attestations proudly declared that the company “reported higher Q1 profits than Blackrock by over $300 million dollars [… and] reported higher Q1 profits than Netflix, Starbucks, Cash App, Paypal and many other S&P 500 corporations.” On top of this, USDT continues to witness much higher 24-hour trading volume than every other cryptocurrency in the market, including bitcoin. It’s pretty much one of the main cornerstones of the market, meaning its demise could have very serious consequences.

Another way of putting this is that, the bigger Tether gets, the more exposed it (and crypto) becomes to a big blowup. With more bitcoin on its balance sheet, it becomes more exposed to crypto downturns, and with more US Treasury bills, it becomes more exposed to the vagaries of the US economy.

Then there’s the fact that numerous people have long suspected Tether of printing USDT “out of thin air” to buy bitcoin (claims supported by some academic research). Combined with recent allegations that Tether falsified documents and used shell companies to obtain bank accounts, such suspicions would indicate that the stablecoin issuer may not be the best entity to rely on to support bitcoin and cryptocurrency prices.

These misgivings aside, Tether is embarking on a strategy of monthly bitcoin purchases. And assuming that the US doesn’t default on its debt and the market doesn’t crash, there’s a very good chance that such a strategy will prove a vital ingredient in lifting crypto out of its current bear market.

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CryptoVantage Author Simon Chandler

About the Author

Simon Chandler

Simon Chandler is a journalist based in London. He writes about technology, markets and politics, and has bylines for Forbes, Digital Trends, CCN, Wired, TechCrunch, the Verge, the Sun, the New Internationalist, and TruthOut, among many others. His Twitter handle is @_simonchandler_

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