What Is Tether? Everything You Need to Know
05 Jul, 2022
What Is Tether?
Tether is a stable coin that maintains a 1:1 peg. It is one of the most famous cryptocurrencies and has a high market capitalization. It is the world's first and most used stable coin at the moment despite its controversies. A coin is said to be stable when its value is tied to an outside asset or commodity, which helps stabilize the price and lowers the volatility. Tether being linked to the US dollar very much secures that reputation. This means the value of one Tether can be approximated to one USD.
The existing cryptocurrencies had two significant issues: their high volatility and convertibility. Tether was introduced as a stable valuation coin to resolve this issue. As we can trade one Tether for one USD irrespective of the market conditions, the pressing volatility issues are solved, attracting more investors.
Today, financial institutions are keen on adding cryptocurrencies to their balance sheet. Owing to its low-risk profile, Tether is one of the most popular and widely used cryptocurrencies. As per November 2021 Sensex, around 61% of the stable coin market comprises Tether USDT.
How Does Tether Work?
The operations of Tether begin when a user deposits a Fiat currency in Tether's reserve. Hence, when such a thing occurs, the requested amount of tokens is minted and sufficient dollars held as reserves are transferred to the USDT reserve vault.
Once this transaction is completed, the user will be issued digital tokens of Tether, which can be either stored, sent, or exchanged. Since Tether is a digital currency, it can be redeemed anytime. For every Tether USDT, an equivalent amount of one US Dollar will be stored in the Tether reserve.
For example, a user will be issued 1000 Tether tokens when he deposits 1000 USD in the Tether reserve. The user can redeem these 1000 tokens against the fiat currency at any time.
Is USDT Safe?
The notion of "safety" is subjective and varies depending on the level of risk an investor is willing to take.
USDT Tether is one of the safest means of storing money in the form of crypto. Holding a market capitalization of almost $74 billion, it holds the position as the top stable coin in the crypto market. USDT is the most traded stable coin with high liquidity, making it one of the safest stable coins.
Tether reports that since 2015 it has never failed to process a redemption request of $1 per USD token. In terms of market capitalization, USDT is the sole winner.
During the bear market in 2018, Tether was one of the safest havens for investors as those investors holding unstable currencies suffered huge losses.
Tether only issues tokens to investors who have completed their KYC procedure. Tether is the most actively traded crypto asset in a 24-hour period.
A Brief History of Tether
We can date back the origin of Tether to July 2014. Brock Pierce, Craig Sellars, and Reeve Collins, the founders of Tether, initially named it a 'Real coin'. Bitfinex, a cryptocurrency exchange based out of Hong Kong owns Tether Operations Limited.
As it was difficult for the exchanges and companies to hold sovereign currency, commonly known as Fiat money, the need for Tether came into existence.
The exchanges must have a license to hold Fiat money. The users also demanded a platform where they could quickly move between Fiat and Crypto money, which resulted in the invention of Tether tokens.
The actual coin is a dollar-backed digital currency that enables the smooth transfer of Fiat currencies in the blockchain network. The first six tokens were issued on the Bitcoin Blockchain on 6th October 2014 using the Omni layer protocol. The coin was rebranded as Tether (USDT) on 20th November 2014. During this time, the company entered into private beta to support Tether for three currencies: Dollars, Euros, and Japanese Yen. There was also an announcement indicating that Tether can be redeemed at any time and that they are not exposed to exchange risk.
When its first token was distributed in 2015, Tether revolutionized the market and proved hugely successful.
Since then, Tether has gained popularity and launched many tokens. Today, looking at market capitalization, Tether is the third-largest cryptocurrency in the world, owing to its expansion in numerous blockchains. During the 2018 Sensex, conducted in the summer, we can note that Tether accounted for 80% of the Bitcoin Volume.
Tether Has Had Legal Troubles
In New York, BitFinex, the parent company of Tether, was fined 18.5 million USD for breach of regulation and was subsequently banned from the operations.
Tether fails to share information about the commercial papers that back up the currency.
A class action was filed against Tether in June 2020, where Tether was accused of manipulating markets, but the case has not yet been heard in court.
There is no legal proof of an audit being conducted to ensure that US Dollars are issued against Tether.
How Is Tether Backed?
Paolo Ardoino, Tether's chief technology officer, stated that Tether is fully backed up by strong, conservative, and liquid reserves. All the USDTs are backed by a real, lively dollar, safely deposited in a bank account.
The report on 31st December 2021 noted that out of the 78.6 billion dollars in tether reserves, 44% is placed in short-term US Government bills, most commonly called treasury bills. 9% of the reserves are held in bank and money market funds. 31% of the reserves are held in short-term corporate bonds. These include commercial papers with a very high-reliability rating. The balance of 16% of the reserves is loaned to undisclosed firms and vague investments.
Tether vs Bitcoin
Although both Bitcoin and Tether are digital currencies, they have notable differences. Understanding the unique features of both currencies is essential to trade and effectively gain the maximum from the crypto market.
Tether is a stable coin tied to a real-life commodity, while Bitcoin is not linked to any real-world commodity.
Bitcoins are highly volatile, but Tether has low volatility, which helps them preserve their value during downtrends.
It is advisable to use Tether only for short-term trade objectives, whereas we can invest in Bitcoin even for high-risk interest rates.
While Tethers have a decentralized technology, Bitcoins have a centralized network that pegs them against dollars.
The price of Tether always equals one dollar, while the price of a Bitcoin is affected by multiple factors and is unstable.
Bitcoins have an unprecedented level of transparency which is not found in Tethers.
Bitcoin can drive the prices of other cryptocurrencies during the uptrends, which is impossible with a stable currency like Tether.
Bitcoin has huge trading pairs as they are the pivotal point through which all the cryptocurrencies are traded; while Tether only has a few trading pairs. We can trade Bitcoin against more than 100 coins, while Tether allows us to trade only with 18 to 24 different pairs.
People have high trust in Bitcoin owing to their decentralization, irrespective of the increased risk compared to a centralized Tether.
While Bitcoin is not suitable for day-to-day transactions, Tether is a perfect option do so.
Tether has a lower transaction fee when compared to Bitcoin.
In the peer-to-peer lending platforms, Tether can earn a higher interest rate than Bitcoin.
Is Tether a Good Investment?
As Tether mitigates the risk of volatility, it creates more value. Many investors who hold back fearing risky investments can use Tether as a store of value. In a highly volatile crypto market, Tether ensures liquidity. Tether also helps in the easy swapping of cryptocurrencies.
Tether has a high remittance power. Even if the crypto market crashes one day, Tether can easily be encashed as it is pegged to a real-life commodity, safeguarding the interest of the investors.
Tether can be exchanged anywhere in the world quickly and with a lower transfer cost compared to banks and other financial institutions. Tether provides stability and flexibility to its investor's portfolios.
Although Tether is not suitable for an investor looking for long-term investment and earning yields from capital appreciation, today, several lending platforms, exchanges, and wallets pay a high-interest rate to store Tether USDT on their platforms.
Cryptocurrencies are rapidly gaining popularity. The Government formulates many new regulations to regulate the crypto markets. Compared to Bitcoin and Ethereum, Tether is the most traded cryptocurrency today. Due to its stability, Tether changed how people view cryptocurrencies. Tether is the sole reason many investors started entering the crypto market. Since one USDT always equals one US Dollar, Tether can only be used as a store of value and is ideal for investors looking for capital appreciation. However, if an investor is looking for a short-term investment with minimal risk, Tether is the most effective option. We can buy Tether on major cryptocurrency exchanges and leading platforms. Tether tokens allow the customers to transact across different blockchains without any of the complexities usually associated with digital tokens. For these reasons, it is worthwhile to consider investing in Tether.