The Special Market Advantage Tether Provides Team Blue Over Team Red: Tethers Probably Have a Fluctuating Reserve Ratio

I have previously given my thoughts and insights about the Tether program in An Overview Of Cryptoexchangelandea. The basic idea is tether provides liquidity in regard to the software realm the cryptocurrency exchanges operate in. Tether especially allows for a type of protection for traders on exchanges that don’t have a gateway to the traditional fiat system.

These observations however have left me unsure about why there would be such an economically driven social media campaign against Tether. Moreover, Tether is only a $1.2 billion dollar economy, who would care or claim that in a $300 billion market a $1.2 billion dollar scam could prop up and eventually capitulate the international value of bitcoin?

These questions went unanswerable for me until now.

This social media campaign, which I will refer to as part of “team red” is highlighting an “unfair” (from team red’s perspective) advantage that the Tether program is giving “team blue”.

It was the observation of the implication of an “advantage” that Bitfinex’ed was insinuating that gave me the idea for this concept (trying to explain the irrational yet driven behavior with hidden variables).

For this writing we will make some assumptions that aren’t necessarily true, and more importantly do not intend to be slanderous. But they are necessary to make a certain observation. This explanation also assumes the reader is familiar with the certain insight on Gresham’s law described here (basically that the term “fiat” does NOT imply inflationary value). We assume the exchange Bitfinex is on “team blue”, and that Bitfinex also runs a sister Tether program (which is therefore part of team blue). Furthermore we assume there is a bank, perhaps in Liechtenstein, which funds and backs Bitfinex, and holds the reserves for the Tether program. We also assume this bank is not in financial or legal trouble, or perhaps that multiple banks back the Bitfinex exchange and that such decentralization makes the collective project stable from a legal sense. This is effectively steelmanning and simplifying the dispute as highlighted in different media articles and social media complaints.

Tether today was at about $1.05 and the markets have been very bearish and also quite volatile as american futures markets recently began to serve their investors with bitcoin options. We can think of why Tethers, which are supposed to be 1:1 backed digital US dollars, might have a market price above their underlying value.

It is obvious to point out that the demand for Tether could exceed their supply and so the Tethers, being dearer to the market participants on average, increase in price, more so than the price of an actual dollar.

Another less plausible option involves the possibility that the Tether reserve ratio, USD held in a bank account versus digital Tethers printed, is such that the reserves would include more US dollars than Tethers issued (even though this would seem absurd for the Tether program do to).

But there is another reason that is highlighted here when the Tether price is not perfectly $1 per Tether: market inefficiency. As a corollary we can suggest that in an efficient market Tethers should basically go for $1 per unit.

From this view Tethers are an effective signal to the efficiency of the market and the exchanges that operate within it. This efficiency metric would be very helpful, not for Tether, but for lending institutions offering leveraged positions for their traders.

But what is the big deal about such a signal?

Imagine team blue had a way to introduce noise, such that only they could read the signal. This would be incredibly advantageous for team blue investors and banks. This speaks to the reason a $1.2 billion market cap is such a hot topic, it’s because it represents a metric that provides a signal to the $150 billion that “blue team”, all things equal, would own in their market cap share.

How could they do this?

By the seemingly innocent strategy already alluded to above:

Another less palatable option involves the possibility that the Tether reserve ratio, USD held in a bank account versus digital Tethers printed, is such that the reserves would include more US dollars than Tethers issued (even though this would seem absurd for the Tether program do to).

By manipulating the supply of the USD held:Tether ratio we might imagine a scenario in which the markets ARE efficient and so an excessively backed Tether shows as having a dollar amount larger than 1. In this scenario only team blue would have the actual underlying reserve count being manipulated on a regular basis, and so only team blue could recognize $1.05 as the signal of an efficient and less risky market.

Thus the ability to “secretly” manipulate the Tether valuation creates a sort of “cipher key” which only team blue has.

If we consider this possibility then the Bitfinex’ed campaign makes sense. It is team red desperately wanting a continual transparent audit on the Tether program so they too could have the key and make use of the signals. Without it, their trader’s banks and exchanges are at an explicit disadvantage. Team red, desperately wanting information to level the playing ground, would also want to know which banks serve Bitfinex and which investors are putting up capital.

This is why team red makes the fatal tell mistake of calling for the regulation of otherwise free crypto exchange markets. It's a tell because it's absurd to suggest, especially in the crypto space, the markets could be made “freer” and more fair by external regulation.

Who is calling for the regulation of otherwise free markets?

Of course if you were team red you would cry foul. Furthermore, there is no such insight in free market theory that suggests banks MUST be transparent and auditable. In fact it is the very crux of the school of thought that it is SPECIFICALLY in a free market that the banks and currency suppliers become SELF regulating. Banks are to compete to ensure their quality and security, and they are only expected to function in this optimal manner if there is NO government intervention. To call for such intervention is to call for a destruction of the mechanism by which free banking theory allows honest banking to thrive.

Simply put Bitfinex has every right to guard and protect the interests of its investors and especially through the privacy of their accounts and the general held reserve. This obviously extends to the Tether program which is simply a clever invention and a fairly held advantage.

Whether team blue is moral or not is not a consideration of this writing. What is also certain is that there is no implication of legal wrongdoing by team blue. To adjust the Tether reserve ratio to gain an advantage is not a global threat to the stability of the space or bitcoin’s price. It is simply an advantage being well used in competitive environment. It would not and should not be considered illegal from a tradition legal and banking point of view.

It could however create a problem for investors on team red causing them to lose significant capital if they could not balance out the advantage.