When is a dollar not worth a dollar? When it’s been tokenized, as the events of the last few days have shown.

On Monday, the stablecoin tether (USDT) became, well, untethered from its U.S. dollar peg, falling to as low as 85 cents on some exchanges due to market forces. As of Wednesday evening, tether’s value remained below $1. Meanwhile, some of the growing number of rival dollar-pegged stablecoins saw their own values rise above the dollar mark.

Tether represents 87 percent of the total stablecoin market cap and more than 92 percent of its trading volume.

This isn’t a new phenomenon. Even though they are (at least in theory) backed by an equivalent amount of a fiat currency or other store of value, stablecoins’ value has long fluctuated. Backers have argued the resulting arbitrage opportunities provide yet another market mechanism to keep stablecoins’ value stable. The market pricing them lower than their reserve currency represents a nominal opportunity to invest.

At the same time, the fluctuations in value during a time of relative stability in overall cryptocurrency prices has some people wondering if tether’s travails will roil the entire stablecoin space.

“Stablecoins are only stable until they aren’t,” cryptocurrency commenter Marty Bent observed in his newsletter earlier this week.

Coming Undone

Questions about tether’s reserves and its relationship with the Bitfinex exchange have long dogged the stablecoin. For their part, Tether’s creators claim they hold sufficient dollars to fully back the cryptocurrency. So they continue to double down on the stability of its reserves and promised greater transparency.

“Recent reports have opened our eyes to the fundamental lack of understanding surrounding Tether, the issuance and redemption mechanisms, and the compliance procedures that we have built,” the company said on its website. “To mitigate this, we will be taking additional steps aimed at opening up Tether to the general public and clearing away any uncertainty that may exist.”

At the same time, a host of new dollar-pegged stablecoins have entered the market in recent months, including ones from Paxos Standard Token (PAX) and the Winklevoss-backed Gemini Dollar (GUSD), which reached a value of nearly $1.20 earlier in the week on some exchanges. Partially in response to tether’s challenges, several exchanges have begun listing additional dollar-backed stablecoins, including PAX, GUSD, TrustToken’s TrueUSD (TUSD) and Circle’s USDCoin (USDC).

At the same time, Binance briefly halted trading in tether twice earlier this week, sparking rumors of a future tether delisting. Considering Binance is the world’s largest crypto exchange, and the largest holder of USDT tokens with more than 768.5 million in its reserves, people take notice. CEO Changpeng Zhao took to Twitter to debunk those rumors. 

Despite the recent anxiety, Tether remains the 600-pound gorilla in the stablecoin space. An analysis on Wednesday by CoinShares Chief Strategy Officer Meltem Demirors found Tether represents 87 percent of the total stablecoin market cap and more than 92 percent of its trading volume.

“Tether has worked just fine for a long time,” Demirors said in a tweet. “It’s an easy target for FUD [fear, uncertainty and doubt] and conspiracy theories, but as other stablecoins grow in use and market size I’m sure they’ll have their own conspiracy theories too.”

A Silver (Dollar) Lining

Some observers have suggested a market-weighted basket of stablecoins would be one way for investors to ensure the tokens function as intended, as a stable store of value and a way to hedge cryptocurrency investments from market fluctuations without converting to a fiat currency.

At the same time, some crypto backers see a bright side to tether’s challenges, arguing the outflow of funds into other cryptocurrencies has helped contribute to the overall stability of the cryptocurrency market.

Or as one Twitter user put it,Bitcoin (BTC) at $6,550 is more of a stablecoin than actual stablecoins.” 

Mark Toner
Mark Toner is a Washington, D.C., writer and editor. He has covered business, technology, media, education, and healthcare for a wide range of trade and industry publications.