Bitcoin Price Jumped As Tether's Fell. Why?

Tether's losses are bitcoin's gains. 

In a dramatic reversal of sorts, bitcoin price and cryptocurrency markets, which had been in a swoon for most of this month, surged on Monday morning even as the price of Tether, a controversial stablecoin which trades at parity with the US dollar, declined. 

The price of bitcoin jumped by 10% within a couple of hours yesterday morning. Other cryptocurrencies were also caught in the tailwind of bitcoin’s rise. For example, valuations for ethereum’s ether and Ripple’s XRP rose by 13.5% and 15.4% respectively. On an overall basis., cryptocurrency markets added $21.5 billion in slightly less than two hours during this time period. 

Meanwhile, Tether’s price collapsed by as much as 15 percent on some exchanges as investors sold off their holdings of the coin for other cryptos. The decline in its price occurred after a series of news reports in the last week triggered investor fears about Tether’s stability. First, Bitfinex, the exchange that uses Tether as a stablecoin, changed its banking relationship to HSBC from Puerto-Rico based Noble Bank, which is said to be searching for a buyer. Then Bitfinex stopped fiat deposits on its exchange and published a blog post to allay fears that it was insolvent. Both events acted as catalysts for Tether’s price movement. 

As of this writing, Tether's price has stabilized. According to coinmarketcap.com, Tether is trading at $0.97 per pop. 

Why Are Tether’s Price Movements Important?   

Tether is among the most widely-traded coins in the crypto world and plays an important role in the cryptocurrency ecosystem. As a stablecoin, or a coin whose value is immune to the volatile price swings common to other coins, it acts as a bridge for investors and traders interested in coins that cannot be purchased with fiat currencies. 

To buy such coins, investors would first have to purchase Tether and, subsequently, use it to buy their desired coin. Tether’s relatively stable price is also a hedge for investors against the volatility of cryptocurrency markets. Bitfinex claims that Tether is backed by US dollar reserves equivalent to its trading volume. But the details of those reserves are not yet known because the exchange has refused to publicly discuss a previous audit’s findings or submit itself to a fresh one. Critics have also accused Tether of artificially propping up bitcoin prices. 

Opposite price movements for bitcoin and Tether do not bode well for cryptocurrencies since it calls the market’s stability into question. Bitfinex boasts among the highest trading volumes of cryptocurrencies. Instability in Tether’s price could affect trading operations at the exchange and significantly decline volumes. Some claim that a crash in Tether could also herald the beginning of a downfall for stablecoins, which have proliferated in recent times. 

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