Expert Predictions: Will Tether Collapse?

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Two experts talk about how stable Tether actually is.

Key points

  • Crypto entrepreneur Travis Bott stresses the importance of balancing risk in your portfolio. He says a Tether collapse is possible but he doubts it will happen.
  • Crypto and tokenomics expert Eloisa Marchesoni warns that Tether could be next to experience a run on the bank, which she explains could impact the whole industry.

Stablecoins have been in the spotlight in recent weeks after the dramatic collapse of the Terra (LUNA) ecosystem and its Terra USD (UST). Stablecoins are cryptos that peg their value to another commodity, often the U.S. dollar. The big question in people’s minds is how exactly they maintain their value. 

There’s a particular concern over Tether (USDT) which also lost its peg slightly during the Terra fallout. We spoke to two experts to understand how likely a Tether collapse might be, and what consequences investors could face as a result.

Will Tether collapse?

Tether is the biggest stablecoin on the market. Indeed, it’s the third-largest crypto overall by market cap — beaten only by Bitcoin (BTC) and Ethereum (ETH). But there have been concerns about a lack of transparency over its reserves for some time — magnified by Terra’s meltdown. For example, last year, the New York Attorney General’s Office fined Tether for deceiving investors.

However, as Travis Bott, crypto entrepreneur and founder and CEO of Meta Labs Agency told us, Tether is a different type of stablecoin from Terra and as a result, it’s less likely to fail. “Could it collapse? Yes,” he said. “Will it collapse? I highly doubt it.” 

Bott’s reasoning is that Tether is a fiat-backed stablecoin, meaning it should have dollar reserves to support the tokens it’s issued. Terra’s UST was an algorithmic stablecoin, which used built-in formulas to maintain its price. “Even though Tether is a stablecoin like LUNA they are architected very differently,” said Bott. “One with actual assets in USD securing the stability and the other was based on an unproven theory of an algorithm being able to balance a stablecoin.” 

Eloisa Marchesoni, a self-made crypto-entrepreneur who’s advised over 35 startups and financed multiple tech patents, is concerned that Tether may not have enough accessible funds to support the tokens it’s issued. “Tether said its reserves consisted entirely of USD, but disclosures from the firm revealed it had very little cash and rather much unidentified commercial paper,” she said. Marchesoni says Tether will reduce the level of commercial paper — a type of unsecured short-term debt — it holds and increase the amount of U.S. Treasury bills in its reserves. 

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All the same, if a lot of investors all tried to withdraw their funds at once, it could lead to problems. “Tether could be next to experience a ‘run on the bank,'” she told us. If Tether were to fall, Marchesoni warns there’d be a knock on effect for the whole industry. “There is also a risk of an impact on the crypto economy, for example through negative effects on the centralized exchanges if crypto asset values fall steeply, with more and more investors wanting to withdraw all at once, thus causing a probable collapse of the exchanges too.”

What it means for investors

Right now, Tether is a cornerstone of the cryptocurrency industry. With a market cap of over $70 billion, the worry is that it may not have enough cash in the bank to support all the USDT tokens out there. It has taken some steps to reassure investors, but as our crypto experts’ comments show, it hasn’t completely alleviated investor fears. Bott said he’s not fully reassured by Tether’s efforts. “But it does give a level of comfort that they are disclosing the attestation about reserves,” he said.

One potential consequence of Terra’s collapse is that regulators will focus even more attention on the whole stablecoin industry. Marchesoni thinks this could be beneficial for crypto in the long run. “Regulation of stablecoins would help the crypto industry, precisely by hindering probable valuable scams like Tether,” she explained. “The fact that these stablecoin projects are now ‘too big to fail’ will not be enough anymore.”

More generally, Marchesoni said Terra’s demise highlighted the need for caution. “The UST case showed that it is necessary to invest in crypto only if not unaware of the questionable behavior and red flags associated with certain companies, and only engaging with those when the opportunity cost of avoiding them is higher than risk of being exposed to them,” she said. “Generally, my advice is to stay out of the crypto market and, if already in, to just HODL classic coins like BTC and ETH.”

Bott stressed the need to balance risks in your portfolio. “I always have the same advice,” he said. “Have sound investing principles.” He suggested investors take a 40, 40, 20 approach to their portfolios. “Identify the funds you have available to invest. Put 40% into boring stable things. 40% into moderate and 20% into high risk.” Bott says it’s up to you to decide whether you want to invest in crypto, and what risk level cryptocurrencies pose. But once you make those decisions, discipline is key. “Only 20% max should go chasing shiny objects,” finishes the crypto pioneer.

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