What is Tether (USDT) and How Does It Work?
What is Tether (USDT)? How does it work and why is it one of the most popular cryptocurrencies on the market?
Most cryptocurrencies are volatile and some will appreciate in value, which makes cryptocurrencies a great asset class for trading or investment for the long term. Tether (USDT) is a cryptocurrency with a twist – 1 USDT is always exactly equal to $1 US dollar.
Why is tether always equivalent in value to the US dollar? What is the use case of tether, and is it a good investment, in a traditional sense of the word? Find out more in this article.
New to crypto: Start with our cryptocurrency 101 guide.
What is Tether (USDT)?
Unlike bitcoin and ether, tether is a stablecoin, meaning that its price is pegged to the value of the US dollar. Other versions of tether also exist for the Euro and Japanese Yen (euro tether and yen tether, respectively).
However, this article will solely focus on US dollar-tether, or USDT, as it is what most people refer to when they mention tether.
Tether maintains its peg to the US dollar because the private company that issues the cryptocurrency, Tether Limited, will always redeem tether for US dollars at a 1:1 ratio. Customers who were to buy tether will be expected to deposit US dollars into Tether’s reserves at a 1:1 ratio.
This means that tether is resistant to market speculation. Anyone who wishes to sell tethers at a price that deviates too much from this 1:1 ratio will fail to sell simply because naturally almost no buyer will accept it, whether in a P2P transaction or through an exchange.
It is important to note that Bitfinex is the only place where tethers can be redeemed for US dollars. Bitfinex has been the primary liquidity provider for many exchanges around the world, for cases where retail investors want to ‘cash out’ their USDT for US dollars.
What are stablecoins? Read our guide on stablecoins.
Why would anyone need to use Tether?
Most people invest in cryptocurrencies to see its value rise against the US dollar and other fiat currencies. Tether, worth $57.7 billion in market capitalisation, is just behind Cardano as being the top most popular crypto asset trading in the market.
Tether came into circulation for the first time in January 2015 through the crypto exchange Bitfinex. Before then, most traders were trading cryptocurrencies in bitcoin terms. For example, a crypto trader may first convert US dollars into bitcoin before trading crypto pairs like LTC/BTC and XRP/BTC.
Of course, bitcoin itself was (and still is) volatile, and keeping track of earnings or loss in bitcoin terms won’t directly translate to the realised earnings or loss in US dollars. After all, we mostly quote the prices of cryptocurrencies in US dollars, don’t we?
So, why should traders convert US dollars into bitcoin in the first place? Was there a way to buy or sell cryptocurrencies with US dollars? Technically, it is possible, but it is not practical. Bank transfers will impose additional cost for each time a trader ‘buys in’ or ‘cashes out’ in US dollars.
A crypto trader could be more profitable if they trade using another cryptocurrency, and with USDT, they are able to gauge their profitability in US dollar terms without having to touch fiat currencies unnecessarily.
Invest in USDT: Click here to buy Tether (USDT).
What maintains the price of Tether?
Technically, Tether Ltd. backs up the minted tokens with real dollar cash and securities. However, it is the market’s good faith in tether that ultimately keeps the price of Tether around 1 US dollar.
This faith in tether has not always been consistent throughout the stablecoin’s history. When tethers were first circulated, people believed in the whitepaper’s essential promise that tethers, based on regular audit, will be fully backed 1:1 by the US dollar cash and equivalent, and that the website has claimed that tethers could be redeemed for the US dollar at any time.
However, in 2017, faith in tether was shaken when the company wasn’t able to fulfill withdrawal requests. The transparency of Tether Ltd. was beginning to be questioned, when Tether ended the relationship between the company and its auditing firm, Friedman LLP, in 2018.
This raised concerns over how exactly the tether tokens are backed by US dollars. For a brief time, the price of tether fell below the 1 US dollar peg and even reached as far as 93 cents at one point.
However, a “positive” market correction was due as stablecoin arbitrageurs took the opportunity to buy the tether at a low price to sell it at its ‘fundamental price’, keeping the $1 : 1 USDT ratio intact.
In 2019, the New York Attorney General Letitia James filed a lawsuit against Tether Ltd. and Bitfinex for allegedly covering up $850 million losses using deposited real US dollars.
Long story short — being unable to fulfill withdrawal requests, not hiring an auditing partner since Friedman LLP, and not being transparent about the exact details on what were backing up the USDT, has led to the conclusion that Tether’s claim — that each tether is 100% backed by the US dollar — is misleading.
A closer look at Tether works
Tether’s claim that the stablecoin is backed is technically true, but there were many misconceptions about how this is done. Many people think that Tether Ltd. and Bitfinex backs the stablecoins entirely with ready-to-withdraw cash or equivalent.
However, the exact solvency of the tether suppliers is open to debate. What we have now is data about the breakdown of Tether’s US dollar reserve as of 31 March 2021, after the company settled the lawsuit with a fine.
As you can see, only 3.87% of Tether’s reserves are stored in cash. However, this should not be alarming. Tether’s general counsel Stuart Hoegner explains why cash makes up a tiny portion of the reserve. “Readers should not confuse items not in ‘actual cash’ with a lack of liquidity,” he said.
Focusing exclusively on cash could be misleading. Fiduciary deposits are technically still in cash form, even if the money is stored by a third-party bank or agent. It matters not how the deposited money is used; the fiduciary gives Tether Ltd. the right to liquidate.
Short-term debt such as commercial paper as a cash equivalent has medium-level liquidity as it is backed by the issuing bank or company, and requires less than one year to be completely solvent. It is actually common practice for companies to hold short-term credits given to other companies (such as receivables).
Retail traders currently holding the USD Tether shouldn’t be too worried about the solvency of Tether Ltd., because crypto exchanges are by default responsible for finding liquidity providers in order to operate effectively.
Tether Ltd. and Bitfinex being multi-million dollar companies would certainly try to secure their business, ensuring that the circulated tethers are backed by assets that are equal to their dollar value.
In fact, in terms of the company balance sheet, Tether Ltd. is doing more than enough to back USDT. You can find their Transparency page and see exactly how much tether is being circulated across various blockchains.
Tether on Polkadot, to increase market confidence
Fiat-backed stablecoins, like other kinds of stablecoins, are quite new phenomena that need time to gain the trust of their users. Earlier I mentioned that the market faith in the stablecoin is as important as the data presented from auditing, to keep it from losing its value.
From Tether’s balance sheet, retail investors and exchanges can gain confidence through quantitative data. However, there are other ways that the market can gain even more confidence for Tether, and that is network effects.
You may like or dislike tether, but it is likely to be used in many MORE exchanges, centralised or decentralised, and adopted In an increasing number of blockchain networks.
USDT has been circulating on newer blockchains as well — Tron, EOS, Algorand, and Solana, to name some of them. The latest blockchain to accommodate the free movement of USDT for various applications will be Polkadot.
This is big news for the entire crypto community because Polkadot has the ability to connect up to 100 other blockchains, which opens up more opportunities to use the USDT to trade, store, and convert assets easily and securely with blockchain technology.
How to buy Tether (USDT)
Tether may not increase in value like other cryptocurrencies, but its use across blockchain ecosystems cannot be understated. It has made investing easier than ever, because its value is pegged to a fiat currency.
Since tether is equivalent to the fiat US dollar, most traders and investors would hold onto it for a short period of time anyway, which means even if the stablecoin is not 100% backed by cash, it shouldn’t be a problem for most people.
The balance sheet of Tether Ltd. may be a solid proof that the stablecoin is fundamentally backed by real-world assets, but it is the strong network effect of various blockchain ecosystems which uses USDT that ultimately determines the stability of tether.
Seeing that it is the most widely adopted stablecoin, the USD Tether won’t deviate too far from its dollar peg any time in the future.
And with all that said, you can buy and add Tether (USDT) to your crypto wallet easily with Easy Crypto. All you need is to sign up for an account with us, open a buy order, and we’ll have your USDT sent to your wallet in minutes!
Additionally, you can also checkout the video guide on our YouTube channel below:
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated November 29, 2022