Tether: The Coin That Could Wreck or Make Cryptocurrency
Published July 4, 2022
A stablecoin backed one-to-one with the U.S. dollar – Tether – could be a boon or a bust for the entire crypto space. At its heart, Tether stabilises the volatile crypto economy. But to what extent can the coin keep giving?
Overview
- Tether is a currency that has a 1-to-1 exchange rate with the US dollar
- The coin operates through a series of controversies, speculation, and scrutiny
- Crypto’s volatility has made Tether an almost unavoidable safety net
Introduction
Considered to be at the heart of the crypto economy, Tether has emerged as a force to reckon with in the world of cryptocurrency. As cryptocurrencies like Bitcoin took over the wave of modern financial services, Tether maintains a subtle yet central status in this enormous venture.
Known to be a unique coin, Tether packs a punch in the crypto industry. While Bitcoin and Ethereum take the first and second, respectively, the USDT stablecoin is the third biggest cryptocurrency in the world, judging by its market value.
The monetary value of Tether is what makes it unique; it’s pegged to the US dollar. This means that while the crypto volatility affects leading coins like Bitcoin (BTC) and Ethereum (ETH), Tether retains its value. It has, over time, become the choice for cryptocurrency investors who seek safety from the volatility of the crypto market.
What is Tether (USDT)?
Tether is a stablecoin designed to be pegged to the US dollar. It is the world’s first most significant stablecoin, which means that it has some of the features of a cryptocurrency while being backed by traditional money.
The idea behind Tether is simple: It’s an easy way for people who don’t want to risk fluctuating prices to buy other cryptocurrencies, like Bitcoin or Ethereum, at stable prices (1 USDT = 1 USD). This can be helpful when you’re just getting started in crypto or worried about losing money if your chosen coin drops in value.
Tether was initially issued as a white paper proposal by Brock Pierce, Reeve Collins, and Craig Sellers in 2014 under Realcoin. It was later rebranded as Tether to open its service for private beta. According to the owners, Tether would serve as a token tied to dollars to express its true function as a crypto 2.0 project.
Tether as a Stablecoin
Stablecoins refer to cryptocurrencies backed 1:1 by a real-world asset such as fiat currency or gold. However, they are not always fiat-backed; algorithms and cryptocurrencies can also back them.
Tether belongs to fiat-backed stablecoins, and this is because of its tethering to the USD. By nature, it eases the liquidation of digital assets, serving as a safety net to sidestep a correction or crypto crash.
How Tether Works
Tether works by having all its tokens issued exclusively through its contract system using Omni Layer Protocols. This protocol proposed by J.R Willett allows for seamless transfer between blockchains without extra work.
Thus, anyone can create new Tethers or redeem some they already own at any time. However, only authorised parties can access this process because there needs to be one person with such access. Even then, they will have to ensure supply is controlled.
How Tether Stays on $1
Unlike Bitcoin and the likes, Tether isn’t mined. Instead, new Tethers are printed when someone wants to buy one using dollars on an exchange called Bitfinex.
That means there’s no fixed supply of the stuff like there is with more traditional cryptocurrencies (which could be good or bad depending on your perspective). Each unit is claimed to have been backed up by a dollar sitting in some bank account.
Why Tether Matters
Tether is hybrid, and that’s what makes it significant. It bridges the gap between digital and traditional currencies. Whereas digital currencies have failed to fulfil all monetary functions, Tether’s hybridity allows it to cover up the lapses easily.
The functions of money are consistently three: Store of value, unit of account, and medium of exchange. These three monetary functions spread into the Keynesian motive for holding money, which is transactional, precautionary, and speculative.
Not all cryptocurrencies theoretically and practically tick all three monetary functions. Most economists believe none can authoritatively serve as a unit of account due to their limited supply and wild fluctuations.
Indeed, of the top five cryptocurrencies, research shows only Bitcoin has the potential to serve as a store of value due to its commitment to low supply growth. But even Bitcoin’s supply is not stable. Thus, investors turn to Tether to serve as a stablecoin.
How Tether Compares With Other Crypto
Being one of the most popular coins, Tether has been compared with other stablecoins and cryptocurrencies. The USDT has largely been mistaken for the UST and USDC by crypto enthusiasts. While there are similarities, there are also distinctions. Below are some of the differences between them.
Tether (USDT) Vs. TerraUSD (UST)
Tether is known for its USD collateralisation. TerraUSD also aims to be 100% collateralised by US dollars and has a similar goal of being a stable cryptocurrency. However, TerraUSD is more decentralised than Tether.
While Tether’s management system is centralised, with one company in charge of issuing new Tethers and keeping track of them, TerraUSD uses an algorithm with no central authority involved in its issuance or monitoring process.
Tether (USDT) Vs. Bitcoin (BTC)
Tether is a stablecoin, whereas Bitcoin is a volatile coin. Tether has maintained its value over time, whereas Bitcoin has seen wild fluctuations in its price (like every traditional cryptocurrency).
The reason why Tether enjoys such stability is that it is backed by fiat currency (USD). In contrast, Bitcoin does not have this backing and can therefore be subject to more significant price fluctuations than Tether. Finally, Bitcoin is open-source and therefore boasts more reliable exchanges than Tether.
Tether (USDT) Vs. USD Coin (USDC)
Tether and USD Coins are stablecoins—that is, they’re backed by fiat currencies (the dollar in this case). In other words, they’re supposed to have a value that doesn’t change much compared with other cryptocurrencies or assets.
Because both are pegged to the dollar through a 1:1 ratio, their prices are highly correlated to those of traditional fiat currencies such as dollars or euros.
Now for the differences: Tether is more heavily traded than USD Coin. It’s one of the top three most-traded cryptocurrencies today. However, many people question whether USD Coin will ever catch up in terms of popularity.
Is Tether a Good Investment?
Investing in Tether is a serious matter and should be treated as such. It’s important to consider all aspects of the coin before making any investments, and there are many things you should keep in mind when doing so.
Volatility Rate
Volatility is the amount by which an asset’s price fluctuates over time. It can be a good thing for investors, allowing them to make money through trading. But there are also risks associated with high volatility, which means that your investment could drop significantly in value if you don’t sell quickly enough. The volatility rate of the crypto market, in general, should inform your investment decision in Tether.
Market Cap
You can find Tether’s market cap by looking at the numbers listed in its market ticker. The ‘market cap’ is essentially an indicator of the size of Tether and its potential for future growth. It can also be used as an indicator of how much you may be able to make by investing.
Deviation from the Dollar Spot Rate
Before you buy Tether, it’s essential to understand that the price of a token can be different at various exchanges. The spot rate is simply the price at which an asset can be exchanged for USD, while the market rate is the price at which a cryptocurrency (in this case, Tether) trades on an exchange. The difference between these two rates can be significant—sometimes 10% or more.
Market Liquidity
Liquidity measures how easily an asset can be bought or sold without affecting the price. The more liquid an asset, the more easily it can be converted into cash.
In general, when considering an investment opportunity with Tether (USDT), you should consider:
- How liquid is USDT? How easily could you sell your USDT if you needed to?
- How much of your savings would you need to invest in USDT at any time?
In short, a highly liquid coin will have a high daily volume, so you could get out cheaply if there was a rush for liquidity.
Controversies Surrounding Tether USDT
Tether has been controversial since its inception. This controversy is primarily due to scepticism about whether it truly holds enough USD in reserve to back all of its issued tokens (called USDT). While some believe USDT isn’t indeed backed by fiat currency at all, others believe it’s fully backed by real U.S. dollars held in reserve.
Here’s a look at some of the controversies surrounding Tether:
Alleged Price Manipulation
Tether USDT pricing has been manipulated on the Kraken exchange, according to a research paper published in June 2018. The researchers, Texas Finance Professor John Griffin and Ami Shams (his co-author), claimed a correlation between USDT price movements and purchases of newly issued Tethers on Kraken’s platform.
The researchers also alleged that arbitrage trading strategies might involve keeping large amounts of Tethers in certain countries and then manipulating prices by buying or selling Tethers at different exchanges, including the possibility of bot trading.
Bitfinex, one of the largest cryptocurrency exchanges in the world, was also implicated. The platform is a major dealer in USDT and controls substantial Bitcoin transactions worldwide. The influence probably gives them ample opportunity for price manipulation through wash trading (buying and selling coins among themselves).
Questions About Dollars Resources
Tether has not yet presented independent evidence that dollars fully back its USDT. The company has said it will provide an audit, but information about what led up to the delay was sparse and told in a somewhat contradictory manner.
Some say that because of this lack of transparency, there may be less ‘real’ money backing Tether than people think. Others claim such transparency can cause more harm than good, opening up the stability of USDT to government control.
Security and Liquidity
Security and liquidity are the two main issues surrounding Tether. The company has issued millions of dollars worth of USDT tokens since its inception in 2014; any fiat currency or gold reserves do not back these tokens. This has led to speculation that Tether may be insolvent or have problems with its security systems.
In 2017, an attacker stole $31 million from a Bitfinex wallet that held a significant amount of Tether. To prevent further attacks on its users’ funds, Bitfinex suspended trading on all digital assets except Bitcoin until it could implement more robust security measures for its platform.
In addition to security concerns around holding USDT tokens, there is concern over whether they can be redeemed for cash at any time without issue (given their lack of transparency). In 2017, many people attempted withdrawals from their accounts with little success; some waited months before their requests were fulfilled.
For Better or Worse, Crypto Depends on Tether
In May 2022, crypto prices melted down in a storm of fear and panic. Bitcoin plunged to its lowest since 2020, tanking several crypto companies in value. Amid the crisis, one coin kept going; it was Tether.
The number of times Tether has bailed out the cryptocurrency from wreaking more significant havoc on itself is profound. During the 2018 crisis, Tether was at the heart of the recovery. Currently, Tether pays out over $10bn in withdrawals to salvage the crisis. But to what extent can it keep giving?
The critics of Tether, who see it as a way of booming the price of Bitcoin, got a bit of validity when Tether was banned from doing any business in New York state, the capital of the US financial world. The then-Attorney General of New York State said, ‘Tether’s claims that U.S. dollars fully backed its virtual currency at all times was a lie.’
According to the Attorney General’s inquiry, Tether had no access to banking beginning no later than mid-2017 and, in contrast to its claims, had no reserves to back the Tethers in circulation at a rate of one dollar for every Tether for periods.
Recently, Tether has been the subject of criticisms that have rendered it doubtful in the crypto market. The coin, which has claimed stability before, has been thoroughly tested.
Still, it’s inalienable that the cryptocurrency world depends on Tether to thrive due to its massive accumulation of assets in billions of dollars. Because while major coins crash in value, the crypto market holds on to Tether.
Last Word: What Happens to Crypto if Tether Collapses?
The criticisms surrounding Tether could lead to a massive break away from it. However, since the significant coins in the crypto world are plummeting in value now and Tether looks like a pillar to rest on, it will be a disaster if investors or depositors decide to, out of fear, withdraw massively from Tether.
The concern now lies in the prediction that when these withdrawals start to come, Tether will be unable to make them all happen, and this could take a toll on the rest of the coins in the crypto market. For coins presently plummeting in value, a further crash in the market, which Tether could instigate, could lead to a massive downturn that will affect both crypto and non-crypto markets.