Should We Be Worried About Tether’s Bitcoin Buying Plans?

Like any good Bitcoin maximalist, Tether holds its own tokens. The issuer of the largest stablecoin, USDT, disclosed the information in a recent blog post , announcing that it would “regularly” buy Bitcoin with its surplus profits to build up a war chest. This comes after a surprisingly strong certification (aka an “assurance report” completed by top-five accounting firm BDO Italia , which is not the same as an audit) showed that Tether made $1.48 billion in net profits in the first quarter of this year. The company’s “excess reserves” roughly doubled to $2.4 billion, which I assume would be included in its $81.8 billion in “consolidated total assets” (most of which is cash, cash-like assets, and other investments that Tether holds to back its eponymous stablecoin).

With the new Bitcoin purchase plan announced about a week after certification, Tether joins the ranks of many institutional giants hoarding Bitcoin. Notably, MicroStrategy, a publicly traded tech company that now essentially trades as a backdoor Bitcoin exchange-traded fund (ETF) after nearly two years of dollar-cost averaging, holds nearly 1% of the Bitcoin supply. Tether already holds just over 52,000 Bitcoins , making it the largest Bitcoin vault among companies, and plans to use 15% of "tangible earnings from operations" to purchase more Bitcoin. The company's "conservative and prudent" investment strategy also includes a large investment in gold (not sure if this is also self-custodial).

Although Tether hasn’t said much, its Bitcoin purchase program can also be seen as an attempt to reduce the risk of its exposure to the U.S. dollar. It’s fashionable to talk about “de-dollarization,” the process by which countries (and, to a lesser extent, companies) become less dependent on the U.S. dollar as trust in U.S. fiscal and monetary policies declines. More specifically, the Federal Reserve (which manages monetary policy) is caught between curbing inflation and starting a recession, while the U.S. Congress (fiscal policy) is mired in a “debt ceiling” debate , which carries a real risk of the U.S. Treasury defaulting on its loans — leaving the world searching for alternatives.

This is not entirely without basis: Tether’s biggest competitor, Circle, is “diversifying” its holdings of US Treasuries (generally considered “risk-free” in portfolio construction) into the overnight “repo” market. Both stablecoin issuers have been vocal about reducing their reliance on “pure bank deposits” in light of the wave of US bank failures, while Tether’s CTO Paolo Ardoino was only willing to talk about Bitcoin’s advantages and the company’s attempts to “align with transformative technologies” in a press release, a move that was linked to a weaker dollar.

None of this is a problem, of course. Tether is a private company and can do what it wants with its money. As Austin Campbell, a former portfolio manager at Paxos who once ran the Binance-branded BUSD stablecoin, valued at about $22 billion, said: “If they’re buying bitcoin with their profits and adding it as a safety cushion, it’s just a way for them to speculate on the price of BTC and it’s not particularly harmful.”

As long as the company doesn’t exchange Bitcoin for its cash or cash-like reserve assets (such as those in the U.S. Treasury) to ensure that USDT can always be redeemed 1:1 for dollars, then that’s fine. Tether does say it only uses profits.

But the situation may still churn some stomachs. First, it’s worth noting that Tether has been issuing certifications after the New York Attorney General found that the company “at times” lied to its users and the investing public about the nature of its reserves. Tether was trading higher today, benefiting from a confluence of recent forces, including a small rise in the price of Bitcoin, general cryptocurrency volatility, and a bank run, which bolstered the case for alternative stores of value like stablecoins (while also, more or less, replacing Circle’s USDC as the most trusted option). But it’s unclear whether the sunny weather will last.

Even leaving aside the regulatory anvil that has yet to be lifted, Tether’s recent moves reek of the kind of hubris that seems to precede dodgy crypto companies hitting a wall. Perhaps my memory is tainted by Do Kwon, a proponent of the now-defunct algorithmic stablecoin UST, who said “besides Satoshi [Bitcoin’s creator], we will be the largest Bitcoin holders in the world,” but it seems like an unnecessary risk to use a highly volatile asset to build a rainy day fund. Kwon, if you don’t remember, had planned to buy $10 billion worth of Bitcoin as a security blanket, when his LUNA/UST Rube Goldberg machine was worth over $80 billion.

Of course, the business models and risks of Tether and Kwon are completely different — there is a world of difference between algorithmic and non-algorithmic stablecoins. UST is a decentralized Ponzi scheme because it is prone to a "death spiral" because it uses fake coins to print representations of real money, while Tether is only a decentralized Ponzi scheme because it operates a bit like a bank. Tether takes capital and mints an equal amount of stablecoins, then invests that capital and earns a profit. As long as it has at least as much in reserves as there are USDT left to redeem, it is a golden goose.

Some in the world might say that the Bitcoin purchase plan is exactly why stablecoin issuers need to be regulated . For example, the European Union just passed rules requiring issuers to maintain strict reserves. Meanwhile, the U.S. Congress seems divided on how to address this issue — essentially leaving issuers to regulate themselves. Is it strange that we just discovered that Tether holds BTC and gold, and chose to “improve transparency” by adding these “additional categories” to its reporting? Given USDT’s structural importance to the crypto market, crypto stakeholders may need not only greater insight into the company’s investment decisions, but also control over them.

But, in reality, buying Bitcoin with surplus cash probably won’t affect USDT users (though it might even benefit BTC holders). There are a lot of other issues to keep the trade sideways. I never really understood when Do Kwon bashed the dollar, claiming that his “decentralized currency” (pegged to fiat!) would outperform the world’s reserve currency. Likewise, Tether’s support for Bitcoin as a hedge is an implicit admission of the risks of its own main product. If the dollar depreciates, there really isn’t any amount of Bitcoin that can save the company. But until then, Tether just needs to take in funds and pay out withdrawals — it can invest the difference wherever it wants.