You might have heard of cryptocurrencies. You know, those coins with pictures of Japanese dogs that exist only in a virtual form and whose prices go up and down like crazy. But have you heard of stablecoins? Or more specifically, have you heard about Tether? If the answer is no, then you are in the right place because here we are going to discuss Tether (USDT) in detail and explain the meaning of stablecoins.
Well, stablecoins are also a type of cryptocurrency. Except that they are backed by some assets. In other words, a digital coin that is pegged either to another currency like US Dollar or a commodity like gold is called a stablecoin.
Tether(USDT) is one of the original stablecoins. It is pegged on a one-to-one basis to the US Dollar. This means that 1 USDT will always be equal to 1 USD. But who issues this Tether coin? Can it be mined like Bitcoin? Has it ever deviated from the $1 value? Read on to find the answers to these questions.
Tether, named initially “Realcoin” was launched in 2014 by Reeve Collins, Craig Sellers, and Brock Pierce. The foundation for it, however, was laid by a 2012 whitepaper published by J.R. Willet. The whitepaper described how new currency layers with new rules could be built on the existing bitcoin network.
These new protocol layers were expected to be a solution for the biggest barriers to larger cryptocurrency adoption- instability and insecurity. The cryptocurrency Mastercoin was created by the Omni Foundation as the new second layer. Later, Tether was founded in 2014 using the Omni Layer Protocol.
The Tether tokens are built on several leading open-source blockchains such as Algorand, Avalanche, Ethereum, Tezos, Bitcoin Cash’s Simple Ledger Protocol(SLP), EOS, Omni, Polygon, Liquidity Network, Tron, Solana, and Statemine.
In 2019, Bloomberg reported that Tether had beaten Bitcoin to become the token with the highest daily and monthly trading volume. It maintained this position well into 2022.
Before talking about Tether, we need to understand the meaning of Stablecoins. Stablecoins are cryptocurrencies whose value is pegged to another asset- whether another currency or a commodity or a financial instrument. These coins are meant to address the most concerning aspect of Bitcoin and other cryptocurrencies i.e. extreme price volatility.
Stablecoins maintain reserve assets for achieving price stability. This makes them a much better medium of exchange than cryptocurrencies like Bitcoin or Ethereum which often experience sharp changes in their prices. They have, therefore, started gaining popularity as collateral on DeFi platforms.
Tether(USDT) is one of the oldest stablecoins out there. Tether is issued by Tether Limited which is owned by iFinex Inc., the same company which also owns the cryptocurrency exchange Bitfinex. This means that new Tether tokens can be issued only by this company.
Tether claims that each USDT token is backed by $1 in reserves but it has often come under the scanner for not maintaining adequate reserves. The New York Attorney General who filed a case against Tether also said that it often did not have enough reserves to maintain its $1 value.
Uses of Tether
Medium of Exchange
Tether USDT, due to its stability by virtue of being pegged to USD, makes more sense as a medium of exchange. It does not experience extreme fluctuations like conventional cryptocurrencies and in this sense, works in a similar manner as fiat money.
Rather than transferring money from your bank account to a crypto exchange, you can keep Tether in your crypto account. This way, you can easily buy other cryptocurrencies with Tether without waiting for a bank transfer to go through. It is especially handy since some crypto exchanges only allow crypto-to-crypto purchases.
You can use Tether to transfer money between exchanges and crypto wallets as well as send it to another person. While Tether itself does not charge any transfer fee between Tether wallets, you may have to pay standard blockchain transaction fees.
Lending and Earning Interest
Many cryptocurrency exchanges pay good interest for lending your crypto. Tether is a great option for lending because its stable value means that you would not lose any money due to wide and unexpected price changes.
How to Buy Tether
Tether is the leading and one of the most popular stablecoins. You can easily buy it from any exchange that offers Tether to its customers.
Select an exchange that hosts Tether(USDT). This shouldn’t be a problem since Tether is one of the most well-known cryptocurrencies. Register on the exchange of your choice by going to its website or downloading the app.
In the next step, you need to deposit funds in your account. You can transfer funds either from your bank account or use your debit or credit card. Remember that you may be charged a higher transaction fee for some payment methods.
Now, you are all ready to purchase your Tether USDT token. All you have to do is specify the amount you’re buying, make the payment, and confirm the transaction. You can store your USDT either in a hot wallet or a cold wallet. It is better to use a hot wallet that is connected to the internet if you’re planning on using your USDT to buy other cryptocurrencies.
Can I Mine Tether USDT?
No, you cannot mine or stake Tether. The creation of USDT is backed by real asset reserves and its creator company Tether Limited is the only one that can mint new USDT tokens. The idea of a digital coin that is minted or burned by a single entity and cannot be freely mined can seem contrary to the principle of cryptocurrency. But Tether straddles the line between traditional currency and cryptocurrency and acts as a bridge between them.
Tether Price History
Tether which is the world’s largest stablecoin is meant to maintain a stable value of $1, give or take some minor deviations. It has stayed at that level most of the time but there have been times when Tether has zoomed or slipped past the par value due to certain factors.
As per Coindesk, Tether’s all-time high was in July 2018 when it reached $1.32. The all-time low of $0.57 was in March 2015. The thing to remember here is that the demand for stablecoins like USDT is typically low when the crypto market is in bullish mode.
Though in the case of Tether(USDT), the numerous controversies and lawsuits it has been embroiled in are also a major reason for the fall in its value. For example, Tether lost nearly 3% of its value when the New York Attorney General first initiated action against it.
In May 2022, USDT fell off its peg and came down to 95 cents on some crypto exchanges after another stablecoin, TerraUSD plummeted below 30 cents. Though it managed to recover its value in a few months, Tether faced another problem as crypto exchange FTX’s implosion in November 2022 sent shockwaves across the crypto industry. Tether also fell down to $0.98 before recovering its value.
As of January 2023, Tether(USDT) is trading at $1 with a total supply of over 70 billion USDT tokens.
Tether and the Price Manipulation Accusations
In 2018, a paper published by University of Texas researchers stated that the rise in prices of Bitcoin the previous year could’ve been due to market manipulation. They found that Tether’s parent company was issuing new tokens for the purchase of Bitcoin which created an artificial demand for BTC, thus pushing up prices.
Tether refuted the findings by pointing out that the research paper was based on incomplete and cherry-picked data. Subsequent academic research also supported Tether’s position as no evidence of market manipulation was found.
In the same year, Bloomberg News reported irregularities on the cryptocurrency exchange Kraken. They reviewed the exchange’s public order book and found that huge trades move prices about the same as small ones. Kraken offered its rebuttal in a blog post stating that the publication did not understand the concept of stablecoins and there was no point in wash trading Tether.
In November 2018, Bloomberg reported that the U.S. Department of Justice had initiated investigations over whether Tether was used to manipulate the price of Bitcoin.
Controversy over Reserve Claims
Tether is supposed to be backed 1-to-1 by traditional currency i.e. US Dollar. But there have always been doubts about whether Tether has enough reserves or not. In the 2019 case against Tether and Bitfinex initiated by the New York Attorney General, Tether admitted that only about 74% of USDT was backed by cash and cash equivalents.
In the quarterly public attestation published by Tether in November 2022 after FTX’s collapse, it revealed that 82% of its reserves were backed by extremely liquid assets. These 82% reserves were in the form of cash, cash equivalents, and other short-term assets as of 30th September 2022. Further, Tether’s exposure to commercial papers had also fallen to just 0.07% of its holdings.
Tether and the Bitfinex Saga
The whole Tether revealing in court that liquid assets backed only 74% of USDT brings us to the question- how did it all start? Why was Tether taken to court, to begin with? To understand this, we need to understand the relationship between Tether the company issuing USDT, and the cryptocurrency exchange Bitfinex.
The most important thing to know here is that Tether Limited is owned by iFinex Inc., the same company that also owns Bitfinex. In fact, the Paradise Papers leaks show that two Bitfinex officials Philip Potter and Giancarlo Devasini were responsible for setting up Tether Holdings Limited.
It has also been confirmed that the two companies have the same CEO- Jan Ludovicus van der Velde. Since 2017, critics have been questioning the relationship between Tether and Bitfinex.
The whole controversy turned into legal trouble for Tether and Bitfinex in 2019. The New York Attorney General’s office alleged that Bitfinex had used Tether to move millions of dollars to cover up its $850 million loss to the payment processor Crypto Capital Corp.
It also accused Bitfinex of misleading clients about its liquidity, and of having no access to banking since mid-2017 and also alleged that Tether often did not have reserves to maintain its dollar peg.
Two years later, the case was settled in 2021 after Tether and Bitfinex agreed to pay an $18.5 million fine.
Tether vs. Bitcoin
At this point, the ultimate question that comes up is- what is the difference between Tether and Bitcoin? While both are cryptocurrencies, Bitcoin(BTC) is the cryptocurrency, the original token that started it all. Tether belongs to a newer class of cryptocurrencies called stablecoins.
Tether is a centralized cryptocurrency which sounds like an oxymoron but is an actual thing. Bitcoin meanwhile, is a cryptocurrency that strictly adheres to the decentralization principle of crypto. New BTC is added to circulation through the process of mining and anyone can join the network to mine BTC.
USDT, however, cannot be mined or staked like other cryptocurrencies. It is issued by a single entity and tokens are minted or burned as per demand.
Interestingly, while Bitcoin was created with the aim of being an alternate medium of exchange, it is actually Tether that is succeeding on that front. Bitcoin is not backed by any real-world asset which causes it to experience extreme price volatility.
Tether’s value remains relatively stable because it is backed by dollar assets. This makes its structure similar to traditional money which is probably why it has gained so much popularity on crypto exchanges and DeFi platforms.
Bitcoin however has become a great investment option for traders that seek to take advantage of the fluctuations in its price to reap maximum profit. Tether, on the other hand, is more of a stable source of value, and holding it as a long-term investment does not make sense since it sees little change in its value.
Is Tether USDT a good investment?
Using Tether(USDT) as an investment instrument is not a very good idea because Tether is a stablecoin. Its value is meant to be stable without any large fluctuations. It is pegged to the dollar and maintains 1:1 parity with USD. Therefore, you cannot make much profit if you buy Tether with the hopes of its value rising dramatically in the future.
Though there have been times when Tether has deviated from the dollar peg, such as during the collapse of Terra UST in 2022 when the price of Tether dropped to $0.94. However, it did manage to get back to exact dollar parity in a few months.
Hence, if you are looking to invest long-term into cryptocurrencies, consider options other than Tether.
Tether USDT is a stablecoin that acts as a middle ground between the crypto world and the world of traditional finance. It is a useful store of value and traders can use it to gain familiarity with the cryptocurrency ecosystem without worrying about the price volatility associated with cryptocurrencies.
However, it is true that while USDT is supposed to maintain a value of $1, it has experienced fluctuations in the past. Tether’s parent company’s suspicious activities and questionable ties with the cryptocurrency exchange Bitfinex are also concerning. But it’s a fact that Tether is one of the oldest stablecoins and it is not going anywhere for a long time.
But, at the end of the day, it is still a cryptocurrency and it is important to do due diligence before investing money in them. A general rule of thumb is to only invest money that you can afford to lose.