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Are you also asking the question; ‘Why are economists worried about Tether?’ We will find out why in this article.
If we consider the market value, Tether is the third-biggest cryptocurrency in the world. And some economists, including an official at the United States Federal Reserve, are worried about it.
The concern economists have about Tether has significant implications on the cryptocurrency world. The increasing fear of economists about the cryptocurrency can also impact financial markets apart from cryptocurrencies.
What is Tether?
Just like Bitcoin, Tether is a cryptocurrency. It is the third-largest cryptocurrency in the world by market value. However, it is very different from Bitcoin and other digital currencies.
Tether is a stablecoin. A stable coin is a digital currency that is tied to a fiat currency, such as the U.S. Dollar, to maintain a stable value.
Tether was designed to be tied to the dollar. Unlike other cryptocurrencies that usually experience price swings, the price of Tether is usually equivalent to $1. Although this is not the case every time.
Cryptocurrency traders usually use Tether to buy digital currencies. This offers them safety in a more stable digital asset during periods of high volatility in the cryptocurrency market.
However, it should be noted that cryptocurrency is not regulated, and many banks do not do business with digital currency exchanges because of its risk. Here is where stablecoins come in.
Why is Tether Controversial?
Economists and some investors are worried that Tether’s issuer does not have enough dollar reserves to justify its ties to the dollar.
Tether broke down its reserves for its stablecoin in May. According to the firm, only 2.9% of its holding was in cash, while most of this was in commercial paper (an unsecured, short-term debt).
According to JPMorgan, this placed tether in the list of the top 10 holders of commercial paper in the world.
With over $60 billion tokens in circulation, Tether has more deposits than most of the banks in the United States.
Economists have been worried about if tether is used to manipulate the price of Bitcoin. A study claimed the token was used to drive up the price of Bitcoin during the major declines in its price in 2017.
Read Also: Is Litecoin A Good Investment?
Impact On The Market
Analysts at JPMorgan have earlier warned that a loss of confidence in tether could have a serious effect on the cryptocurrency market as a whole.
There are also concerns that a sharp increase in the rate at which tether is being withdrawn could cause a market contagion, thereby affecting financial assets beyond cryptocurrencies.
According to Rosengren, tether and other stablecoins are one of the numerous potential dangers to financial stability.
According to him, “These stablecoins are becoming more popular. A future crisis could easily be triggered as these become a more important sector of the financial market unless we start regulating them and making sure that there’s a lot more stable stability to what’s being marketed to the general public as a stablecoin.”
Tether is not the only stablecoin in the cryptocurrency market. However, it is the most popular. Other stablecoins include Binance USD and USD Coin.