Bitcoin and the wider crypto market has tanked overnight. It was a sea of red across the board this morning for almost every coin. With the majority of the top 50 coins down by over 10%.
Two pieces of news were the reason for the price hit. First up was the ongoing saga of Tether. A crypto asset that is designed to be pegged to the US dollar. In other words, one tether is meant to be worth one US dollar.
Tether is designed to give crypto traders a unique way to ‘cash out’. Cryptos are notoriously volatile, which means people looking to day trade coins need to be quick. Timing is everything when it comes to trading. And crypto trading is no different.
By using tether, a trader can store capital on a crypto exchange with the knowledge that it will hold its value. This allows a trader to quickly enter and exit coins by using tether instantly. That’s the idea anyway.
When compared to fiat, tether is the clear winner for fast trading. Fiat transfers to exchanges aren’t always instant, sometimes it takes days for the money to clear. By then a trader may have missed their window of opportunity and possibly a nice bit of profit.
Doubts and fears
In theory it sounds like the perfect system. In practice though, it’s a little bit more complicated. The major stumbling block is that every tether is meant to be backed by one ‘real’ US dollar. The issue is that there are now 2.3 billion tether tokens in circulation. Which means the people behind tether need to have US$2.3 billion backing the crypto.
There has been a lot doubt that the people behind tether actually have the capital to back it up. And in December the US Commodity Futures Trading Commission finally stepped in. Sending out a subpoena for the tether team.
The reason this news is affecting the wider crypto markets though, is because of the exchange link. The people behind tether also operate Bitfinex, one of the largest crypto exchanges in the US. Meaning that if they go down, they could take a whole lot of people’s money with them.
Naturally, that would spook the markets. However, it wasn’t the only thing scaring investors.
Facebook halts crypto
Social media giant Facebook also helped fuel the crypto sell-off. In the second piece of news affecting the crypto market, Facebook declared all crypto related advertising to be banned on the platform. Part of the site’s agenda to put a stop to ads which are:
‘…frequently associated with misleading or deceptive promotional practices.’
In short, they’re banning all crypto ads in order to stop scams. News of the ban quickly hit the markets, sending prices down again. A double-whammy on the back of the tether uncertainty.
However, Facebook did clarify that the blanket ban is temporary, stating:
‘This policy is intentionally broad while we work to better detect deceptive and misleading advertising practices…
‘We will revisit this policy and how we enforce it as our signals improve.’
Meaning that it’s a band aid solution while they sort out how to weed out the scams. Long-term it will likely be great news for crypto, distancing itself from the shady practices that plague its reputation.
For now though the market is commiserating.
But for bitcoin bulls the downturn is inconsequential. Bitcoin is still up more than 1,000% since this time last year. So now may in fact be the best time to buy-in.
Find out the five most important things you must know about bitcoin right here.
Junior Analyst, Money Morning