Tether’s Bitcoin bet puts it in competition with MicroStrategy, has potential to cause market volatility

Tether, the company behind the world’s largest stablecoin, announced this week that it would begin regularly purchasing Bitcoin. The company plans on allocating up to 15% of its monthly net realized operating profits for Bitcoin purchases.

While Tether has previously purchased BTC and kept it separate from its excess reserves, this is the first time the company has announced a long-term strategy regarding Bitcoin. This is also the first time a large crypto company shared plans for recurring, monthly BTC investments.

Tether’s announcement came on the heels of its attestation report for the year’s first quarter, published on May 10. The assurance opinion, breaking down the assets held by Tether Holdings, was completed by BDO Italia, an independent public accounting firm. Unlike previous assurance opinions, the latest one provided more transparency into Tether’s reserves, adding separate categories for Bitcoin, physical gold, corporate bonds, and overnight repo.

This increased transparency into Tether’s reserves caused a stir in the crypto industry, with traders and analysts arguing over the implications of the company’s Bitcoin purchases and its exposure to U.S. Treasurys.

In this report, CryptoSlate dives deep into Tether’s Bitcoin bet and the implications it could have on the market.

Launched in 2014, Tether’s USDT was one of the first stablecoins to reach mainstream popularity. Between January 2017 and September 2018, USDT’s circulating supply grew from $10 million to $2.8 billion, representing a 27,900% increase. By January 2020, the circulating supply grew to $4.7 billion and began a parabolic rise culminating in May 2022 at $82.2 billion.

The collapse of Terra (LUNA) wiped out nearly $17 billion of outstanding USDT tokens, but the supply managed to regain its ATH and currently sits at $82.8 billion.

However, Tether’s rise to the top of the crypto ecosystem came with a slew of issues and controversies, the main ones surrounding the company’s lack of transparency.

The first issues began arising in 2017 when the first allegations about Tether manipulating the price of Bitcoin surfaced. And while several high-profile pieces of research later rebutted Tether’s involvement in propping up Bitcoin’s price, the company was subject to increased scrutiny.

This led to market-wide questioning of Tether’s reserves, with many accusing the company of failing to fully back USDT with U.S. dollars.

These accusations escalated further in 2019 when Tether’s and Bitfinex’s parent company iFinex was sued for commingling corporate and client deposits. As a result of the company’s partnership with a Panamanian payment processing firm, around $850 million worth of client funds were lost. The legal dispute was settled in 2021 for $18.5 million.

The same year, Tether paid a $41.6 million fine for inaccurately claiming USDT was “100% backed by fiat USD.” Since then, the company released yearly assurance reports attesting to the coin’s backing, showing it was backed by a combination of fiat USD and other assets, including commercial paper, reverse repo notes, and treasury bills.

None of the controversies surrounding Tether have had a long-term impact on its peg or its growth. The company’s stablecoin rose to become the third-largest cryptocurrency by market cap, surpassed only by Bitcoin and Ethereum. While USDT struggled to retain its peg during intense market volatility, it quickly regained stability.

While Tether has never published an independent third-party audit, it has released assurance reports from 2017 to 2022 attesting to the backing of USDT. The company’s latest assurance report, published on May 17, 2023, was the first time Tether offered a more detailed overview of its reserves, adding separate categories for all assets it holds.

According to the report, Tether held a total of $81.83 billion worth of consolidated assets on March 31. Out of the $81.8 billion, $79.3 billion are liabilities related to the amount of USDT tokens issued. This means that the company held an equivalent of $2.5 billion on top of the 100% reserves necessary to back USDT, a point Tether’s CTO Paolo Ardoino reiterated in a statement.

Ardoino noted that the excess reserves had been accrued through interest rates on the company’s “massive” U.S. Treasury bills portfolio and other investments, including gold.

“While these excess reserves are part of Tether’s own shareholder equity, Tether prefers to give priority to ensuring that its stablecoin products [are]as resilient as possible,” Ardoino said. “While banks can do fractional reserve, we believe that’s not a viable strategy for a stablecoin, so it’s crucial that Tether keeps an additional cushion to further protect its user base.”

The report showed Tether held over $53 billion in short-term U.S. Treasury bills and $7.5 billion in overnight repo agreements fully collateralized by Treasury bills. An additional $7.4 billion is held in money market funds, which include funds investing in highly liquid, short-term money market instruments such as deposits, Treasury bills, and reverse repo agreements. Including the indirect exposure through money market funds puts Tether’s dependence on Treasurys much higher than the reported $53 billion.

Aside from its massive position in cash equivalents and short-term notes, Tether revealed it held a substantial amount of gold and Bitcoin. The company has almost $3.4 billion worth of gold and $1.5 billion worth of BTC.

Tether’s new investment strategy focuses on reducing the company’s exposure to commercial paper and increasing its exposure to Bitcoin. Starting in May, Tether plans on “regularly” allocating up to 15% of its net realized operating profits towards purchasing BTC.

The company’s CTO Paolo Ardoino further clarified the strategy, saying on Twitter that it will use a portion of its monthly net operating profits, accounting for the realized dollarized profits from Treasury bills and similar short-term paper investments.

The new strategy will see Tether focus only on utilizing realized profits — the company said it would disregard unrealized capital gains generated by price increases.

“This means that Tether will consider only the tangible gains from its operations, which consist of the difference between the purchase price and net proceeds from the sale or, in case of a maturing investment, between the purchase price and the reimbursed amount (for example the notional amount for a zero coupon investment like with U.S. treasury bills),” the company said in a statement.

The total value of the Bitcoins Tether claims to hold is well below the company’s excess reserves used to prop up USDT. Ardoino said that the company plans to continue in the same direction, ensuring the value of the newly purchased BTC doesn’t exceed the reserves.

If Tether were to invest 15% of its Q1 profit of $1.48 billion into BTC, it would acquire around 8,245 BTC at current spot prices ($26,900). Allocating 10% of first-quarter profit would see the company acquire approximately 5,496 BTC, while using just 5% of its profits would leave it with 2,748 BTC. Given the size of Tether’s reported profit, it’s no wonder why the market reacted strongly to its Bitcoin strategy.

Acquisitions of this size would put Tether in line with MicroStrategy, the largest public company holding BTC. And while the market seems to have become accustomed to MicroStrategy’s BTC acquisition, its first several purchases caused quite a bit of volatility. CryptoSlate analysis found that since MicroStrategy’s first BTC acquisition in November 2020, almost every subsequent purchase led to positive price action for Bitcoin.

While MicroStrategy’s purchases often led to a price rally, they were, on average, much larger than any of Tether’s purchases could be.

Tether’s role in the crypto ecosystem makes it incomparable to MicroStrategy. Tether’s USDT is the third-largest cryptocurrency by market cap, accounting for a significant amount of trading volume both for BTC and ETH. It also serves as an essential fiat onramp for retail and institutional investors.

The first time Tether announces a Bitcoin purchase is bound to create volatility in the market and push its price up. However, these purchases could also increase scrutiny of Tether’s reserves, as they’ve been controversial. Having the eye of the public carefully watching Tether’s every move will put additional pressure on the company. The market’s reaction to Tether’s first BTC purchase will shape its acquisition strategy and affect how much of its profit is invested in Bitcoin.

Tether’s Bitcoin bet also can potentially hurt the price of Bitcoin. If the company sees additional controversies regarding its reserves’ transparency and ongoing litigation processes in the U.S., the market could react with a sell-off.