Meta Title: Know Your Crypto — Tether (USDT) Edition

What if certain crypto assets weren’t volatile? That’s exactly what Tether is — pegged to Dollars. Keep reading to learn the basics of this amazing crypto.

Cryptocurrencies are indeed inherently volatile. But certain crypto assets retain their designated value over time — also known as stablecoins. Stable coins are the ‘stable’ versions of their wild crypto counterparts. They are pegged to state-backed fiat currencies and sometimes to commodities like gold or oil. Tether (USDT) is a fiat-collateralized stable coin. It is said to be 100 percent backed by the US Dollar in a 1:1 ratio and is quite popular amongst crypto investors. But, USDT’s path to popularity has been quite an adventurous one. So, let’s dive in and try to understand.

Let’s First Dive Deep In The History Of Tether

In the beginning, there was no Tether, but Realcoin, the brainchild of Brock Pierce, entrepreneur Reeve Collins, and software developer Steve Collins. The company set up shop in Hong Kong and the Isle of Man. Realcoin rebranded to Tether in the very same year and became associated with cryptocurrency exchange Bitfinex (also based in Hong Kong). Bitfinex opened trading for USDT in January 2015 and since then the stablecoin has not looked back. In 2017 Tether rose to prominence as the total USDT supply grew from $7 million to $320 million in less than seven months.

The exponential growth in Tether’s supply continued throughout the 2017 bull market as traders leveraged USDT to enter crypto markets in large numbers. USDT reported a 5X growth in circulation from $440 million to $2.3 billion in November 2017 to January 2018. Six years later, Tether boasts of leading the crypto market with high daily trading volumes. Also, the USDT supply figure has appreciated to the $10 billion mark. Marc LoPresti, managing director of The Strategic Funds — who believes that the only stablecoin with comparable collateral quality is USD Coin — says,

“As an asset-backed stablecoin, with holdings primarily in US Treasurys, [Tether] stands a far better chance of weathering the current tsunami rocking the digital asset world!”

Currently, the Tether (USDT) token can be issued on several cryptocurrency networks: Bitcoin, Ethereum, EOS, Tron, Algorand, and OMG Network. Since the smart contracts and tokens are hosted on these blockchain networks, the base security is also handled by the nodes and miners who keep these networks secure using Proof-of-Work or Proof-of-Stake. These platforms conduct regular audits to ensure that the code is up-to-date, secure, and compliant with the current framework and Tether also ensures that Tether remains compliant with each and every network.

With more than $60 billion worth of tokens in circulation, Tether has more deposits than that of many U.S. banks. There have long been concerns about whether tether is being used to manipulate bitcoin prices, with one study claiming the token was used to prop up bitcoin during key price declines in its monster 2017 rally. Earlier this year, the New York attorney general’s office reached a settlement with Tether and Bitfinex, an affiliated digital currency exchange. Kavita Gupta, founder and general partner of Delta Blockchain — a product-driven global fund — added,

“It is difficult for Tether because if they decide to take out even 30% — 50% of collateral, that will shake up not only the crypto market but also the broader financial markets!”

Some investors and economists are worried tether’s issuer doesn’t have enough dollar reserves to justify its dollar peg. In May, Tether broke down the reserves for its stablecoin. The firm revealed that only a fraction of its holdings — 2.9%, to be exact — were in cash, while the vast majority was in commercial paper, a form of unsecured, short-term debt. That would place Tether in the top 10 biggest holders of commercial paper in the world, according to JPMorgan, Tether has been compared to traditional money-market funds — but without any specified regulation.

If you have a debit card or credit card in your wallet, the issuing bank or company is the centralized authority. For USDT, the Tether tokens are issued by Hong-Kong-based Tether Limited, which is controlled by Bitfinex/iFinex Inc. Most cryptos are decentralized, meaning they don’t rely on a government, bank, or business. Instead, they use an interwoven system of users and their devices to manage the coins. The decentralized nature of these tokens means that users don’t need a third party or a bank to transfer wealth or ownership — they can do it right on the blockchain.

Sounds Really Stable! How Does It Remain So?

Tether exists as a 1:1 currency peg for the Dollar, Euro, and the Offshore Chinese Yuan. These fiat currency-backed stablecoins are essentially digital tokens that represent the value of their underlying assets. They function just like their other cryptocurrency counterparts and move value on their respective blockchains. Speaking of blockchains, Tether tokens operate on Bitcoin, Ethereum, and Tron blockchains. Tethers existing on these blockchains are much like applications that leverage the open-source software of these networks for supply and issuance of currencies.

Tether initially came up as a fiat-currency tokenization application idea on the Bitcoin network through the Omni protocol. But in recent times, Tether has found more success using Ethereum as it’s ‘transport protocol’. One can now access smart contracts and decentralized applications on Ethereum using USDT. According to Tether’s website in 2019, the site claimed the stablecoin was backed by reserves in traditional currency and cash equivalents (and sometimes other assets from affiliated entities). Adam Carlton, CEO of a popular crypto wallet Pink Panda, says,

“It has a very questionable past, and to this day, its actual reserves are still quite opaque and believed to be substantially composed of unknown sources of commercial paper!”

Other crypto experts say it’s somewhat accepted that Tether isn’t “fully” collateralized in the crypto marketplace. And that it was an issue of controversy more than a year ago. Markets have worked through that concept of how comfortable they are — it’s very clear Tether is not backed by dollars, says James Putra, vice president of product strategy at TradeStation Crypto. Tether, most importantly USDT provides digital asset market participants with the best of both worlds — USD exposure and security of crypto. Also, USDT makes BTC and crypto trading super simple.

And that’s why it is the most popular USD stable coin (yes, there are more) and the 4th most popular cryptocurrency in the world. Tether can serve as the perfect medium of monetary exchange between individuals and institutions without the interference of third-party organizations. Recently, Tether announced the launch of Tether Gold (XAUT). Owning a XAUT stable coin translates to owning one ounce of physical gold, from the yellow metal stash located in a vault in Switzerland. Currently, XAUT functions as a smart contract token on the Ethereum and Tron blockchains.

The Differences Between Tether And TerraUSD

Tether and TerraUSD (UST) are both stablecoins pegged to the U.S. dollar, but the two cryptos maintain their value using completely different methods. Tether is a collateralized stablecoin, backed by the company’s assets and reserves. When those reserves are equal to or less than the number of tokens in circulation, the Tether is said to be “fully reserved.” You can see Tether’s current balances on its transparency page. Terra is an algorithmic stablecoin. Instead of cash reserves in a bank account, Terra relies on programmatic language and the parameters its sets for another token on the Terra protocol to support the 1-to-1 U.S. dollar parity. Gupta adds,

“The current version of the programmatic coins is definitely over. But there will always be a space for innovation in a much better stablecoin — which can ever outweigh USDT!”

The TerraUSD stablecoin relies on supply and demand market forces and LUNA’s ability to absorb price volatility to maintain its price peg. Binance, the world’s largest crypto exchange in trade volume, suspended spot trading for LUNA and UST temporarily against its own stablecoin BUSD on May 13 because of its volatility, with LUNA’s value going down to near zero at $0.00012, at the time of this writing. Tether’s price slipped below its peg to $0.9485 in market moves related to the collapse of TerraUSD on May 12 but has since rebounded close to 1-to-1 dollar parity.

So Which Crypto Is Better? — Tether or Bitcoin?

The key difference between Tether and Bitcoin is that Tether is a stablecoin. Tether is a centralized crypto, whereas Bitcoin is decentralized by not being linked to any real-world currencies. For that reason, in theory, Tether’s value should remain more stable than Bitcoin’s. Cryptocurrencies that are not pegged to a real-world asset or currency are subject to market volatility. Most traditional cryptocurrencies like Ethereum, Bitcoin, and Litecoin (LTC) will see — or has already — extreme fluctuations and volatility with the market, inflation and interest rates. Rodriguez says,

“Tether seems to be a little more stable because it stays close to the value of one USD. Tether isn’t designed to necessarily make money but rather be a stable store of value!”

Tether has outpaced Bitcoin in the past. In December 2020, Tether came to the forefront when it overtook Bitcoin as the most traded crypto coin in the world. Bitcoin still remains the largest player due to its market capitalisation. But Bitcoin and Ether cannot beat Tether when it comes to stability. Tether’s fiat currency support ensures many takers a sense of security. We won’t be surprised if it overtook Bitcoin once again. However, being pegged to USD, Tether does benefit from not being volatile, but it also eliminates in chance of growing tremendously in short time.

Safe So Far! But Should I Really Invest In Tether?

Stablecoins like Tether don’t make much sense as an investment because they aren’t meant to increase in value. They only operate as a store of value, since one USDT should always equal one dollar. Besides being a useful store of value, the benefit of Tether is as a tool for conducting business in a far simpler manner than using Bitcoin. One good reason to own a stablecoin such as USDT, Bumbera says, is if you want to keep your money in crypto but want to avoid volatility. But even staked to the U.S. dollar, Terra is far from a safe investment. In his statement, he adds,

“One Bitcoin today will not be the same price of Bitcoin tomorrow, making it incredibly difficult to create dependable pricing schemas for companies based solely on Bitcoin!”

The risk would be Tether losing its value or the staking platform chosen is not legit. While the company purports that it never once failed to honour a redemption request from any of verified customers to date, nothing in investing or cryptos is guaranteed. Crypto users also need to be aware of the changing regulatory landscape around assets. The future of Tether depends on transparency, sufficiency of collateral and liquidity. These features will be the focus of regulators, who will focus their efforts on this sector of the digital asset economy due to the collapse of TerraUSD.

Non-Financial Advice: The data, resources, and statistics in this article have been consolidated from multiple sources and neither the author nor the site is responsible for any financial profit/loss incurred from the data and opinions present in this article. Readers understand that all risks associated with cryptocurrency are taken on by themselves.