As the leading stablecoin, USDT dominates nearly 87% of the stablecoin market share. Every development involving USDT, from the early 2018 concerns about over-issuance to the sell-off crisis in October of that year, has captured the attention of investors.
A recent announcement from Tether and Bitfinex regarding USDT conversions has drawn significant industry attention and even sparked a wave of interpretations.
What Actually Happened?
Bitfinex announced that starting November 27, it would offer fiat trading pairs for Tether, specifically USDT/USD and EURT/EUR. These new trading pairs would replace the platform’s previous 1:1 deposit and withdrawal strategy.
This update quickly became a hot topic in cryptocurrency circles. Shortly after the news broke, Bitcoin saw a nearly 8% price increase, breaking away from the recent bearish sentiment—seemingly reinforcing the idea that this was negative news for USDT.
Initial interpretations suggested that USDT would no longer maintain a strict 1:1 peg with the US dollar, which was perceived as a major bearish signal. However, this interpretation was not entirely accurate.
Cryptocurrency market analyst Lyu Linhua clarified, "That understanding is incorrect." To grasp the full picture, it’s important to examine the actual announcements from both Bitfinex and Tether.
The 1:1 Peg Explained
Bitfinex’s announcement stated that due to significant pressure from USDT-to-USD conversions, the exchange would adjust its policy. Instead of strictly adhering to a 1:1 conversion ratio, the exchange rate would now fluctuate based on market conditions.
On the other hand, Tether’s announcement confirmed that it would resume USDT-to-USD conversions at a fixed 1:1 ratio, unaffected by market fluctuations. It’s worth noting that Tether had temporarily suspended direct conversion services in November 2017 due to settlement issues, moving all conversions to over-the-counter (OTC) markets.
Understanding Tether’s Fee Structure
Tether’s announcement also detailed conversion fees, which attracted considerable attention:
For conversions between $100,000 and $999,999:
- Depositing fiat incurs a 0.1% fee.
- Withdrawing fiat incurs a fee of $1,000 or 0.4%, whichever is higher.
For conversions between $1,000,000 and $10,000,000:
- Depositing fiat incurs a 0.1% fee.
- Withdrawing fiat incurs a 1% fee.
For conversions of $10,000,000 or more:
- Depositing fiat incurs a 0.1% fee.
- Withdrawing fiat incurs a 3% fee.
This means users converting large amounts of USDT back to USD through Tether could face fees as high as 3%.
Bitfinex shareholder Zhao Dong offered his perspective, viewing the change as a "significant进步" (progress). He argued that not even national governments can guarantee absolute stability for their fiat currencies, so it’s unreasonable to expect an exchange to do so. In his view, Bitfinex and Tether have effectively separated their operations, with Bitfinex handling exchange services and Tether managing USDT.
How Tether Previously Handled USD Redemptions
Since its launch in 2015, Tether’s USDT has been listed on major exchanges like Bitfinex, Poloniex, Huobi, Binance, and OKEx. However, its journey hasn’t been without challenges.
In April 2017, Wells Fargo ceased providing correspondent banking services to Tether’s Taiwanese banks, restricting its deposit and withdrawal capabilities. Later that November, allegations surfaced on Twitter from a user named "Bitfinex’ed," accusing Bitfinex of manipulating Bitcoin prices using USDT and claiming Tether lacked proof of full USD backing.
These allegations triggered a crisis of confidence, leading to a panic sell-off of USDT. Around the same time, Tether suffered a hack resulting in the loss of $31 million worth of USDT. The following day, Bitfinex experienced a bank run, with 30,000 BTC withdrawn almost instantly.
In response, Tether halted direct redemption services, as promised in its whitepaper. From that point onward, users could only convert USDT to USD through OTC markets.
A user familiar with USDT OTC operations, Jianhua, explained, "After November, users wanting to convert USDT to USD had to go through various accounts distributed by Tether or via major traders. That’s why payments came from different accounts."
OTC conversions introduced middlemen, making the process more cumbersome and less secure due to the lack of regulation, leaving users vulnerable to hacking and other risks.
It’s also worth noting that OTC prices for USDT vary across exchanges. For example:
- On Huobi, 1 USDT was priced around ¥6.86 RMB (approx. $0.99 USD).
- On Coinyee, 1 USDT was around ¥6.87 RMB (approx. $0.99 USD).
- On OKEx, 1 USDT was around ¥6.93 RMB (approx. $1.00 USD).
Before Tether’s latest announcement, investors relied solely on OTC markets to cash out USDT. Now, institutional investors have the option to redeem directly through Tether’s platform.
New Arbitrage Opportunities Under the Updated Rules
Bitfinex’s decision to decouple USDT from a strict 1:1 USD peg appears to introduce new possibilities for arbitrage in the stablecoin market.
According to industry observers, since Tether still offers a 1:1 redemption on its official platform, a new arbitrage opportunity arises. If market fluctuations create a significant discrepancy between OTC USDT prices and Tether’s redemption rate (after accounting for fees), traders could buy discounted USDT on the open market and redeem it for USD through Tether.
A finance-savvy player noted, "In theory, this creates a new arbitrage opportunity. If the market price of USDT drops low enough, speculators can buy large volumes at a discount and redeem them for USD through Tether. The margin might be slim, but with large volumes, it can still be profitable."
He added, "Arbitrage isn’t unique to traditional finance or major cryptocurrencies like Bitcoin. Now that Bitfinex has removed the strict 1:1 peg, arbitrage opportunities naturally emerge. There’s no need to overreact."
Contrary to interpretations that view the new rules as potentially sparking market doubts, this perspective sees the change as a positive development. While redeeming USDT for USD through Tether still involves high minimums and fees (e.g., $100,000 minimum), having an official redemption channel is a step forward compared to the previous OTC-only setup.
Frequently Asked Questions
What is USDT?
USDT (Tether) is a stablecoin cryptocurrency designed to maintain a 1:1 value peg with the US dollar. It is widely used for trading and as a safe haven asset within the crypto market.
How does Tether ensure the 1:1 peg?
Tether claims to hold equivalent reserves in USD for every USDT in circulation. Users can theoretically redeem USDT for USD through Tether’s platform, subject to fees and minimums.
What changed with Bitfinex’s new policy?
Bitfinex no longer guarantees a strict 1:1 exchange rate for USDT/USD on its platform. Instead, the rate will float based on market supply and demand. However, Tether itself continues to offer 1:1 redemptions directly.
Are there new risks with USDT?
The primary risk remains whether Tether actually holds sufficient USD reserves to back all USDT in circulation. The new redemption options may alleviate some concerns but do not eliminate this fundamental uncertainty.
How can traders profit from USDT arbitrage?
If USDT trades below $1 on exchanges, traders can buy it at a discount and redeem it for $1 through Tether (after accounting for fees). This requires significant capital due to high minimum redemption amounts.
What is the minimum amount for direct redemption with Tether?
The minimum redemption amount is 100,000 USDT (equivalent to $100,000). Fees apply based on the redemption size, ranging from 0.4% to 3%.
Conclusion
According to data from CoinMarketCap, USDT’s price remained relatively stable following the announcement, even experiencing a slight increase. USDT continues to dominate the stablecoin market with an 87% share, significantly outpacing competitors like TUSD and GUSD.
Unless Tether faces a systemic risk, it is unlikely that other stablecoins will challenge its position in the near future. As the market leader, any news related to Tether or Bitfinex will inevitably sway investor sentiment. For now, however, the latest announcements haven’t substantially impacted USDT’s value, offering some reassurance to investors.
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