Tether (USDT) is a popular stablecoin that crypto enthusiasts have used for years to leverage their cryptocurrency trades.
As USDT is tied to the US dollar, it should be immune to market volatility, which can have a significant impact on the pricing of other cryptocurrencies such as Bitcoin.
Tether Is a Stablecoin
Tether’s goal is to produce a “safe” digital asset with a constant valuation. That is what distinguishes USDC as a stablecoin, whose value is linked to the value of the US dollar. The idea is for Tether to always have the same value as its peg.
“The idea is that 1 Tether can always be traded for $1, regardless of market conditions,” Steve Bumbera, chief operating officer of Many Worlds Token, explains.
USD Coin (USDC), Dai (DAI), and Pax Dollar (USDP) are among Tether’s stablecoin competitors.
Tether is used by cryptocurrency traders to provide consistent, dependable liquidity for entering and exiting other cryptocurrency deals without risking unforeseen losses (or gains) due to wild price changes.
At the time of writing, Tether had a 24-hour trading volume of $89 billion. Tether is thus the most liquid cryptocurrency, surpassing even crypto market heavyweights Bitcoin (BTC) and Ethereum (ETH). It is also one of the top three largest cryptos in terms of market capitalization.
How Does Tether Work?
When a user deposits fiat currency into Tether’s reserve, Tether subsequently issues the corresponding digital amount in tokens. After then, the USDT can be transmitted, saved, or swapped.
If a user puts $100 in the Tether reserve, they will receive 100 Tether tokens in accordance with a one-to-one dollar parity. When users redeem Tether tokens for fiat currency, the coins are destroyed and removed from circulation.
Tether, like many other digital currencies, flows across blockchains. Tether tokens are available on a variety of blockchains, including the original one with Omni on the Bitcoin platform, as well as Liquid, as well as Ethereum (ETH) and TRON (TRX), among others.
A Brief History of Tether
Tether’s origins may be traced back a decade, to when J.R. Willet was attempting to create new cryptocurrencies based on the Bitcoin technology. Willet executed this concept with Mastercoin, and one of its initial members went on to co-found Tether in 2014.
Tether was first used for liquidity when it was added to the BitFinex exchange in January 2015.
Recent market volatility, which saw the price of TerraUSD, another stablecoin tethered to the US dollar, fall to less than $0.23, has caused Tether to lose its $1 value, according to crypto experts.
Investors’ fears that if one stablecoin can break its peg, others may follow suit drove the fall.
“As an asset-backed stablecoin with primary holdings in US Treasurys, [Tether] has a far better chance of weathering the current digital asset tsunami,” argues Marc LoPresti, managing director of The Strategic Funds. According to him, USD Coin is the only stablecoin with equivalent collateral quality.
“It is difficult for Tether to completely follow Terra’s path because if they decide to take out even 30% to 50% of their collateral, that will shake up not only the crypto market but also the broader financial markets,” says Kavita Gupta, founder and managing partner of Delta Blockchain Fund.
How Is Tether Backed?
Despite the fact that stablecoins are a popular choice among crypto traders, Tether is mired in controversy over liquidity difficulties and whether its reserves are sufficient to cover the quantity of USDT tokens in circulation.
Tether’s website claimed in 2019 that the stablecoin was backed by reserves in traditional currency and cash equivalents (as well as other assets from connected organisations).
That’s a little more information than what was given today. According to Tether’s website, “all Tether tokens are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether’s reserves.”
Tether’s history of being honest about how the coin is supported, according to Adam Carlton, CEO of crypto wallet Pink Panda, hasn’t always been obvious or consistent.
“It has a very questionable legal past, and to this day, its actual reserves are still quite opaque, believed to be substantially composed of unknown sources of commercial paper,” Carlton adds.
Other crypto specialists agree that Tether is not “fully” collateralized in the crypto industry. And that it was a contentious subject 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,” explains TradeStation Crypto vice president of product strategy James Putra.
Tether vs. TerraUSD
Tether (USDT) and TerraUSD (UST) are both stablecoins linked to the US dollar, but they maintain their value in quite different ways.
Tether is a stablecoin that is collateralized by the company’s assets and reserves. When those reserves equal or fall below the amount of tokens in circulation, the Tether is said to be “fully reserved.” Tether’s current balances are available on its transparency page.
Terra is a stablecoin based on an algorithm. To enable the 1-to-1 US dollar parity, Terra relies on programmatic language and the parameters it sets for another token on the Terra protocol, rather than cash reserves in a bank account.
The TerraUSD stablecoin is based on supply and demand market dynamics, as well as LUNA’s ability to absorb price volatility, to maintain its price peg.
TerraUSD’s price peg was lost due to reliance on an algorithm rather than cash reserves during recent market volatility. “Owning 1 UST, you would expect to be able to cash out for $1 at any time,” Bumbera explains.
This has raised questions about the future of algorithmic stablecoins.
Binance, the world’s largest crypto exchange by trade volume, briefly banned spot trading for LUNA and UST against its own stablecoin BUSD on May 13 due to volatility, with LUNA’s value falling to near zero at $0.0001208, as of this writing.
“The current version of programmatic coins is definitely over,” added Gupta. “However, there will always be room for innovation in a far better stablecoin.”
Tether’s price fell below its peg to $0.9485 on May 12 as a result of market movements due to the collapse of TerraUSD, but it has subsequently recovered close to its 1-to-1 dollar parity.
Tether vs. Bitcoin
“Tether is a stablecoin… tied to a real-life commodity, the USD, whereas Bitcoin is not tied to any real-world commodity,” explains Daniel Rodriguez, chief operating officer at Hill Wealth Strategies, a wealth management firm in Richmond, Virginia.
Tether is a centralised cryptocurrency, whereas Bitcoin is decentralised in the sense that it is not connected to any real-world currencies. As a result, Tether’s value should be more stable than Bitcoin’s.
Cryptocurrencies that are not tied to a physical asset or currency are vulnerable to market volatility. Most traditional cryptocurrencies, such as Ethereum, Bitcoin, and Litecoin (LTC), will experience severe changes and volatility in response to market, inflation, and interest rate fluctuations.
“Tether seems a little more stable because it stays close to the value of one USD, give or take a few cents,” Rodriguez adds.
Another distinction is that “Tether isn’t necessarily designed to make money, but rather to be a stable store of value,” he says.
Is Tether a Good Investment?
Tether and other stablecoins make little sense as investments because their value is not expected to rise. Because one USDT should always equal one dollar, they only function as a store of value.
Tether, in addition to being a great store of wealth, serves as a tool for conducting business in a far simpler manner than Bitcoin.
“One Bitcoin today will not be the same price of Bitcoin tomorrow, making it incredibly difficult to create pricing schemas for companies based solely on BTC,” Bumbera explains.
According to Bumbera, one solid reason to buy a stablecoin like USDT is if you want to maintain your money in crypto but avoid volatility. Even when pegged to the US dollar, Terra is far from a secure investment.
“The risk would be Tether losing its value or the staking platform chosen not being legitimate,” Bumbera warns.
While the organisation claims to have “never once failed to honour a redemption request from any of its verified customers” up to this point, nothing in investing or cryptocurrency is guaranteed.
Users of cryptocurrencies should also be aware of the evolving regulatory landscape surrounding digital assets.
“The future of Tether and other stablecoins is dependent on transparency, (as well as) collateral and liquidity sufficiency,” LoPresti explains. “These features will undoubtedly be the focus of regulators, who will undoubtedly focus their efforts on this sector of the digital asset economy due to the collapse of TerraUSD.”