TokenInsight Analysis: Tether (USDT) Placed On Watchlist
On October 15, 2018, one of the leading cryptocurrency exchanges Bitfinex encountered a panicked selling of USDT, which evolved into: USDT → being converted into BTC → then exit. During this time, Bitfinex’s 24-hour trading volume amounted to almost 560 million US dollars, an increase of 296.13% compared with figures just 24 hours before. While trying to keep up with demand, Bitfinex hot wallet [1] funds responsible for responding to the heavy user withdrawals of BTC quickly depleted to zero.
According to TokenInsight Inc, since September 6th 2018, Bitfinex’s hot wallet addresses not only saw balances of less than 1 BTC a total of 14 times, but also tracked cold wallet transfers of Bitcoin 30 times; ranging from at least several hundreds to at most 7000 BTC. The most recent transfer saw a capital injection of over 3000 BTC to cope with the shortage of funds.
We believe that there are two core issues to better understand this incident:
(1) Why did USDT experience such volatility due to panic selling and how did that lead to BTC funds being withdrawn from Bitfinex cold wallets?
Tether was established in 2014 (according to public information, Bitfinex and Tether’s senior management personnel share connections), and provided USDT as a stable certificate at a price of 1:1 anchored to the US dollar. So far, its main use has been for USD commodities futures trading.
Bitfinex’s past history has undergone investigations in the past from the U.S. Commodity Futures Trading Commission (CFTC) for past mismanagement of funds, thefts, and hacks. So far, Bitfinex has experienced two large-scale theft cases since its inception in 2012, and has recently been speculated by public opinion to become suspicious that it may not have the ability to repay its debts. Additionally, recent news of Noble Bank, known for reportedly opening accounts for USD-backed token Tether and crypto exchange Bitfinex, allegedly searching for a buyer caused initial doubt of USDT sell offs before this most recent incident. Since September, Bitfinex BTC cold wallet funds have begun to see an outflow, and the outbreak of USDT sell-offs has streamlined this behavior to become even quicker. These events and a number of additional past problems have caused doubts about the credibility of the company’s condition.
(2) What caused the rise in BTC price and how will this affect its future state?
The role of USDT as a stablecoin sought to protect capital funds through certificates as a stable storage value asset. However, this most recent incident shows the importance of Bitcoin as a standard certificate once again being echoed by the public, and in turn has triggered a significant purchase demand of large amounts of Bitcoin from the price. Through statistical analysis regarding the number of active addresses on the BTC blockchain, it can be speculated that its activity will have a short-term price fluctuation.
On October 11th, the number of active addresses [2] on the Bitcoin blockchain has dropped for 4 consecutive days and now shows a significant rebound on the day of this most recent incident. The daily transfer number of Bitcoin on the blockchain has reached a new high of nearly 20 days; and the storage address [3] regarding fluctuations in the amount of capital has increased since the evening of the 15th. In simply hours from the time of the incident, the flow of hundreds of Bitcoins changed dramatically to the flow of thousands of Bitcoins. Independent analyst James believes that the USDT sell-off has re-ablated BTC market trading and expects the price to rise steadily in the short term.
TokenInsight puts USDT on its pending watch list.
Due to the market’s continued negative response of Tether’s news, the USDT price issued by Tether fell to as low as USD $0.89 on October 15, 2018, a rare 11% decline.
Lack of auditing has always been a major criticism of Tether, and doubts of the stablecoin companies having US dollar reserves to support the 1:1 exchange ratio of USDT to USD. On October 2, 2018, Bloomberg reported that USDT’s custodian bank Noble Bank was on the verge of bankruptcy and was looking for buyers. On October 7, Proof of Research issued a warning that Bitfinex had lost its ability to repay the necessary capital, reminding users to retrieve assets. On October 11th, Bitfinex announced the suspension of the US dollar deposit and withdrawal for its exchange business. Thus, causing large fluctuations in the market through panic caused by the massive spread of negative news.
TokenInsight believes that, Bitfinex an established exchange operating since 2012, has been tested by several major events including the theft of a large number of digital tokens. The market value of USDT still occupies a lead position in regards to stable tokens, and with such a large user base, USDT is unlikely to be replaced in the short term. At present, the widespread negative news lacks substantial evidence and is majorly based on speculation. Be advised that the market is likely to overreact.
In conclusion, TokenInsight has added USDT to its watch list and will continue to observe the progress of its impact and developments in the cryptocurrency industry.
Bitfinex publicly stated on October 15, 2018 that the exchange suspended the legal deposits of some users due to the “upgrading of its fiat trading system,” and was reported that the Exchange would resume normal related business operations on October 16, 2018.
In view of the large fluctuations in the price, USDT has had a great influence on the consensus of stablecoins. At the same time, with the addition of competitors such as PAXOS, GUSD and TUSD, some investors attentions will be diverted. USDT will faced with enormous challenges moving forward. Due to this recent incident, TokenInsight, a global data and token rating agency, has added USDT’s rating to their pending watch list alert page. We will continue to observe the progress of additional news and developments both regulatory and assessment improvements to determine the results of the USDT’s rating adjustment (see appendix for details).
Note:
[1] In the blockchain world, wallets are tools for storing and trading digital assets, which can be divided into hot wallets and cold wallets. The difference between is two being the private key (similar to the bank’s U shield, which is essentially a long series of numbers). Whether it touches the network, specifically defined as the private key stored in a network computer or on a mobile phone. The private key that is connected with the network, the wallet that can be transferred at any time, called a hot wallet; the private key which is not held in the moment of generation (or even the network can also generate) can never contact the network, known as a cold wallet.
[2] The blockchain is essentially a de-mediated database. At the same time, as the underlying technology of the certificate, it is a string of data blocks generated by cryptography. Each block contains a pass-through network transaction. Information used to verify the validity of this information (anti-counterfeiting) and allows it to generate the next block. The number of daily active addresses on the blockchain is the number of addresses within the database in the last 24 hours. The daily transfer number on the blockchain is the total number of transactions recorded in the above database from the past 24 hours.
[3] Some of the BTC wallet addresses do not have a transfer record. As a storage tool for security, this is called a storage address.
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