There’s been a lot of media coverage about a notable cryptocurrency known as Tether.
This controversial token may play an important role in the digital assets sector.
Understanding what Tether is and how it impacts the rest of the industry is essential for investors and traders of cryptocurrencies.
Here’s a closer look at this obscure instrument.
What is Tether (USDT)?
Tether is the most popular stablecoin in the digital assets sector.
Stablecoins are a class of cryptocurrencies that are designed to be less volatile because they’re backed by traditional reserve assets such as fiat currencies.
In the case of Tether, each USDT token is backed 1-to-1 by a US dollar.
Effectively, Tether tries to represent the world’s most powerful fiat currency on blockchain networks.
Since the value of each USDT token is stable and predictable, it can be used by investors and traders to park cash between their trades without converting their cryptocurrencies into fiat.
USDT has also played a role in adding liquidity to the ecosystem.
Traders can lend or borrow this stablecoin more cheaply to finance their trades and amplify returns.
All these factors have made Tether one of the most popular stablecoins on the market.
At the time of writing, the combined value of all USDT in circulation is $83.13 billion, while the 24-hour trading volume is $37.5 billion.
Tether’s scale is significantly larger than other stablecoins like USDC, Binance, and Dai.
How Does Tether Work?
Tether tokens work like traditional pegged currencies.
The company, Tether Operations Limited, collects fiat deposits from individuals and corporations via its Tether.to website.
Depositors are given an equivalent amount of newly minted USDT tokens.
Holders have the right to redeem each unit of USDT for precisely $1 USD from the Tether company.
When a token is redeemed, the company burns or eliminates the USDT deposited by the redeemer.
In this way, the company manages the supply and demand for USDT tokens to sustain the 1-to-1 peg with the US dollar.
Pros of Tether
Crypto assets are notoriously volatile.
Stablecoins like Tether serve as less volatile cryptocurrency for investors, traders, and merchants.
This attracts more capital into the crypto ecosystem, adding liquidity and value for all.
On-ramps and off-ramps for fiat-to-crypto transactions are time-consuming and costly.
The conversion rates are often significant enough to make specific trades unviable.
Stablecoins like Tether solve this issue by representing fiat currencies on the blockchain.
Traders and investors don’t need to jump through the conversion hoop to lock in profits or store wealth.
Tether USDT is compatible with numerous blockchain platforms including Algorand, Ethereum, EOS, Liquid Network, Omni, Tron, Bitcoin Cash’s Standard Ledger Protocol, and Solana.
This adds optionality for frequent traders and sophisticated investors.
Cons of Tether
Critics have often argued that Tether lacks transparency.
Specifically, there has been some doubt about the reserves the company claims to hold against its USDT tokens.
Recently, the US Department of Justice initiated an investigation into the company’s finances.
Since then, the team has provided a breakdown of its reserves.
As the chart below demonstrates, USDT tokens seem to be backed by a combination of financial instruments rather than straightforward cash.
Cryptocurrencies are lightly regulated but this seems to be changing.
Legislators have recently singled out stablecoins for more scrutiny and tighter rules.
Investors, traders and merchants with exposure to USDT and other stablecoins should be aware of upcoming regulations in this sector.
What Can Tether Be Used For?
The Tether stablecoin can be used for a wide range of applications.
Perhaps the most popular is as a safe haven asset for crypto traders.
During market volatility, locking in profits or losses in USDT is more convenient and reliable than converting one cryptocurrency into another.
However, USDT can be used for more than just trading.
Individuals can use the token to complete remittances and merchants can use it to accept cross-border payments.
Sophisticated investors and institutions could use the asset to lend or borrow, which generates a passive yield or amplifies trading profits.
Is Tether a Good Investment?
Tether isn’t designed to be an investment.
The token doesn’t offer passive income or capital appreciation.
Instead, each USDT has been worth more or less $1 USD since its inception in 2014.
Deviations are often too small to be profitable.
Instead, Tether could be used as a store of value or medium of exchange.
It has a high amount of liquidity, so it could be an ideal fit for frequent traders.
However, other stable coins on the market, such as USDC, Dai, and TerraUSD, could meet this need.
Frequently Asked Questions
- What is the purpose of Tether?
Tether USDT is a stablecoin that tries to represents the US dollar on a blockchain network. It combines the stability of the world’s strongest fiat currency with the low-transaction fees and speed of cryptocurrencies. Tether is used as a store of value and medium of exchange within the digital assets sector. As such, it’s an important tool for crypto investors, traders, developers and merchants.
- How does Tether stay at $1?
The Tether Corporation balances the supply of digital tokens (USDT) and fiat currency reserves (US dollar) to sustain the peg. Every time someone deposits a dollar with the Tether Corporation a new USDT token is minted and put into circulation. Every time a user redeems a USDT by handing it back to the corporation, a dollar is returned to the user and the digital token is eliminated. This maintains the 1-to-1 peg and keeps the market value of USDT stable.
- Can you make money investing in stablecoins?
Stablecoins are not designed to be “investments.” Their value is actively sustained at a fixed rate, which means you can’t generate capital appreciation. However, you could lend stablecoins to generate a yield or borrow these tokens to add leverage to your crypto trades. You could also buy and sell USDT when the value fluctuates from the desired $1 peg as an arbitrage trade.