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Tether bombshell leads to 5% wipeout of bitcoin price

Tether bombshell leads to 5% wipeout of bitcoin price

On Apr. 25, the office of New York Attorney General Letitia James alleged iFinex, the company behind Bitfinex and Tether, of misusing $900 million of Tetherโ€™s cash reserves to hide an $850 million loss. Immediately thereafter, the bitcoin price plunged by seven percent against the U.S. dollar.

On Binance, the worldโ€™s largest cryptocurrency exchange, the bitcoin-to-tether (USDT) pair dropped from around $5,500 to $5,102 at the dayโ€™s lowest point, recording a 7.2 percent drop.

Bitcoin has since recovered to $5,233 and is en route to close the day with a 5 percent decline.

Can the Bitcoin and Crypto Markets Recover?

The Tether allegation by the New York Attorneyโ€™s office goes further than the short-term price movement of bitcoin and other major cryptocurrencies.

If Bitfinex did lose $850 million in a transaction the company sent to a company based in Panama called Crypto Capital Corp and granted itself access to $900 million worth of Tetherโ€™s cash reserves, it could have a long-lasting effect on the public image of the cryptocurrency market.

The case brought on by the Attorney Generalโ€™s office can be divided into two main parts:

  1. Bitfinex losing $850 million by sending the funds to a firm in Panama which the firm struggled to recoup
  2. Tether allowing Bitfinex access to its cash reserves

If proven to be accurate, the allegations could deteriorate the confidence of investors in the cryptocurrency market, both towards the cryptocurrency exchange market and the stablecoin market.

Tether accused of minting almost $400 million in uncollateralized USDT to prop up bitcoin
Related:ย Tether accused of minting almost $400 million in uncollateralized USDT to prop up bitcoin

While some analysts expected the Tether scandal to lead to a plunge in the bitcoin price, the dominant cryptocurrency and the rest of the market recovered fairly well in a short time frame.

The recovery suggests that the cryptocurrency marketโ€™s dependence on Tether has somewhat dropped in recent months with the introduction of Gemini Dollar and Circleโ€™s USDC.

The merit of stablecoins like GUSD and USDC is that they are fully regulated, audited, and based in the U.S. with reliable banking services.

On Binance, for instance, the most widely utilized crypto-to-crypto exchange, regulated stablecoins like PAX and USDC have started to account for a fairly large portion of the exchangeโ€™s daily bitcoin volume.

The noticeable decline in the marketโ€™s reliance on Tether and the increase in the usage of transparent stablecoins indicate the maturation of the market in the right direction.

Not as Bad as it Seems

Although the market has dropped and the bitcoin price sunk, some experts have suggested that the Tether scandal has revealed that Tether did, in fact, have a big cash reserve to support its 1:1 peg with the U.S. dollar.

Technically, Tether was backed by U.S. dollars but the troubles at Bitfinex may have hindered the ability of Tether to remain 100 percent backed purely with cash at all times.

As the official document released by the Attorney General’s office read:

“According to the filings, Bitfinex has already taken at least $700 million from Tetherโ€™s reserves. Those transactions โ€“ which also have not been disclosed to investors โ€“ treat Tetherโ€™s cash reserves as Bitfinexโ€™s corporate slush fund, and are being used to hide Bitfinexโ€™s massive, undisclosed losses and inability to handle customer withdrawals.”

Based on the swift recovery of bitcoin in the past hour, the market may be expected to rebound in the short-term, considering that the response of the investor community in crypto has been mixed; while some believe that it can be considered as evidence to prove Tether’s cash reserves, many remain skeptical about the practices of the company.

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