What Is Tether? (2024)

In the volatile world of cryptocurrency, stablecoins like Tether offer up the potential for stability among the chaos. These digital assets are designed to maintain a steady valuation, shielding investors from the wild price swings commonly associated with cryptocurrencies like Bitcoin or Ethereum.

Stablecoins are pegged to a stable asset such as gold, the US dollar, or another fiat currency. This means they attempt to maintain the same value as the asset they’re tied to. For instance, one Tether USDT aims to be equivalent to one US dollar, offering a predictable and consistent value irrespective of market conditions.

Being one of the first stablecoins to enter the market, Tether has gathered significant traction in terms of adoption. It now sits as the third largest cryptocurrency and the number one stablecoin, with a market capitalisation of over $US90 billion as of December 28, 2023.

Tether is one of many stablecoins in the market, however. Some other notable stablecoins include USD Coin (USDC) and Dai (DAI), which have market caps of $US24.8 billion and $US5 billion, respectively.

Crypto traders leverage these digital assets as a safe harbour, using them to move in and out of cryptocurrency trades without fearing unpredictable losses due to price volatility. This makes stablecoins like Tether an essential tool for managing risk and planning investment strategies in the crypto space.

The utility of stablecoins extends beyond just providing a stable value. Stablecoins are also utilised in many other ways, from instant cross-border payments to paying for a morning coffee.

For the Australian investor, understanding the role and function of stablecoins is crucial in navigating the complex landscape of cryptocurrency. With their promise of stability and predictability, stablecoins like Tether offer a valuable tool for anyone looking to mitigate risk and maintain a steady position in a market known for its fluctuations.

Tether, the leading stablecoin, operates on a simple yet sophisticated premise: maintaining a one-to-one peg with the US dollar. This stability isn’t achieved through mere aspiration but is backed by a robust system of reserves. The company behind Tether, Tether Limited, asserts that every Tether USDT token in circulation holds an equivalent or greater value in its reserves. These reserves are not just piles of cash sitting idly; they are a blend of liquid assets, including cash, short-term bonds, and term deposits.

Tether publishes daily reports detailing the total number of USDT tokens in circulation compared to the reserves it holds to ensure transparency and build trust with users. This practice is crucial, especially given the scrutiny and controversies the company has faced. High-profile investigations by regulatory bodies like the Commodity Futures Trading Commission (CFTC) and the New York Attorney General have delved into the adequacy and truthfulness of Tether’s reserve claims, highlighting the importance of transparency in the stablecoin market.

Acquiring Tether is straightforward and accessible to most investors through major cryptocurrency exchanges. When an everyday investor buys Tether from an exchange, the amount of USDT does not change. However, if a large institution wanted to convert a large amount of money directly into Tether, they would go to the company directly and provide the money in return for newly issued USDT.

For example, if an institution wanted to convert $US100 million in USD to USDT, they would provide the USD to Tether directly and receive 100 million USDT in return. The USD is kept in Tether’s reserves to provide backing to the newly issued USDT and maintain the stablecoin’s peg.

Conversely, when an institution decides to redeem USDT tokens for fiat currency, the USDT is destroyed or “burned,” effectively removing them from circulation. This mechanism ensures that the supply of Tether directly reflects the amount of reserve assets, maintaining the peg and the stability of the token.

Unlike some cryptocurrencies, Tether does not operate on its own blockchain. Instead, it leverages the infrastructure of other established blockchains to host its tokens. This approach allows Tether to benefit from these third-party platforms’ security, speed, and features.

Currently, USDT tokens are available across many blockchains, including Ethereum, Solana and Polygon. Each blockchain offers unique transaction speed, costs, and ecosystem advantages, giving users various options to manage and transact their USDT.

Tether was originally launched in 2014 but only gained significant traction in January 2015 when it was added to the BitFinex exchange. At this point, it began to showcase its potential as a stable asset amid the volatility of cryptocurrencies.

However, Tether’s stability has been tested several times during its history. In 2022, USDT briefly lost its $1 peg twice, dropping 2-3% below its backing each time.

The first time was due to the collapse of TerraUSD (UST), another dollar-pegged stablecoin. Unlike Tether, which claims to be backed by reserves of cash and equivalents, TerraUSD relied on an algorithmic system linked to a sister token, “LUNA”, and Bitcoin reserves. TerraUSD plummeted below its $1 peg when this system faltered and instigated widespread panic, briefly affecting Tether’s stability.

The second time was due to the FTX exchange bankruptcy, which shocked the entire crypto industry. This event occurred due to the poor management of user funds held in the exchange, which, when discovered, led to a bank run that promptly caused the company to go insolvent.

In both instances, extreme selling pressure was to blame for the de-peg. However, USDT quickly regained the peg to US$1 following the catastrophes.

The TerraUSD collapse underscored the risks of algorithmic stablecoins and the broader cryptocurrency market. It highlighted the importance of maintaining robust, transparent reserves to uphold a stablecoin’s value. For Tether and the entire stablecoin sector, the event was a stark reminder of the need for resilience and trust in the mechanisms that underpin these digital assets.

Tether’s trustworthiness is a topic of much debate within the cryptocurrency community. As a prominent stablecoin, it remains a popular choice among traders seeking stability in the volatile crypto market. However, controversies and questions about the liquidity and adequacy of its reserves have cast a shadow over its reputation.

In the past, Tether’s communications regarding its reserves could have been more specific and, at times, more transparent. The company’s assertion on its website that “All Tether tokens are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether’s reserves” has been met with skepticism.

Tether’s history of transparency about USDT’s reserve backing has not always been clear or consistent. For a while, the exact makeup of Tether’s reserves was largely unknown, which caused widespread distrust of the stablecoin for a significant period.

The broader crypto community has also expressed concerns with a feeling of resigned acceptance that Tether may not be fully collateralised. This sentiment reflects a larger issue of trust and transparency in the stablecoin market, where the assurance of a 1-to-1 peg is crucial for user confidence.

Despite these concerns, Tether continues to be widely used and has managed to maintain its position as a leading stablecoin. This ongoing usage suggests that while there are reservations about its complete collateralisation, the crypto trading community continues to rely on it for its stability and liquidity.

Nonetheless, the discussions around Tether’s trustworthiness highlight the importance for investors to conduct thorough research and understand the potential risks of any digital asset, especially when transparency and legal history are in question.

​​Tether’s USDT serves multiple purposes in the cryptocurrency ecosystem, catering to the various needs of traders, investors, and everyday users.

Here’s how you can utilise Tether:

Trading and Investing: Tether is a favourite tool for traders who wish to move in and out of different cryptocurrencies quickly and efficiently. Its stable value provides a safe haven during periods of high volatility, allowing traders to park their funds temporarily without exiting the crypto market entirely.

Transferring Money: Sending money across borders can be expensive and time-consuming. Tether offers a solution by allowing users to send USDT quickly and often with lower fees than traditional bank transfers. The recipient can convert USDT to their local currency or use it directly.

Earning Interest: Some crypto platforms and wallets offer interest-bearing accounts for stablecoins like Tether. Users can make a return on their holdings, often at rates higher than traditional savings accounts, while still maintaining the liquidity and stability of USDT.

Payment for Goods and Services: An increasing number of merchants and service providers are accepting cryptocurrencies, including Tether, as payment. This can be particularly useful for international transactions where traditional banking may be costly or inconvenient.

Participating in DeFi: Tether is widely used in the decentralised finance (DeFi) space for lending, borrowing, and earning through various protocols. Its stability makes it an attractive asset for engaging in DeFi activities while mitigating the risks of more volatile tokens.

While Tether offers these versatile uses, users must remain aware of the controversies and discussions surrounding its reserves and trustworthiness. Like any financial decision, due diligence, understanding the associated risks, and keeping up-to-date with the latest developments are crucial when using Tether or any other cryptocurrency.

Understanding whether Tether’s USDT is a good investment requires a shift in perspective from traditional cryptocurrency assets. Unlike speculative cryptocurrencies that can surge in value, Tether is a stablecoin designed to maintain a consistent 1-to-1 peg with the US dollar. For investors looking to invest in an asset that has the potential to gain value, Tether isn’t a great choice.

However, while it won’t provide the same growth potential as other cryptocurrencies, it serves different purposes.

Store of Value: Tether is primarily a store of value rather than an investment vehicle. Its stability is its most significant feature, making it an attractive option for those looking to preserve capital in the crypto space without exposure to extreme volatility.

Business and Trading Utility: Tether is beneficial for conducting business and trading within the cryptocurrency market. The price of more volatile cryptocurrencies like Bitcoin can fluctuate wildly, making it challenging to set prices or budget effectively. Tether offers a solution by providing a stable medium of exchange, which can be particularly useful for companies and individuals engaging in frequent transactions.

Hedging Against Volatility: For those involved in the cryptocurrency market, Tether offers a way to avoid volatility while keeping funds within the crypto market. Holding USDT can be a strategic move during market downturns or periods of uncertainty, allowing investors to sidestep volatility without completely exiting the market.

Forex Trading: For Australian investors who believe the USD will appreciate against the AUD, it can also be used as a method to trade foreign exchange markets or maintain the value of savings in USD terms. Of course, if the AUD appreciates against the USD, then the opposite could occur.

However, it’s essential to be aware of the risks. The stability of Tether depends on the company’s ability to maintain its peg to the dollar, which is reliant on the sufficiency and transparency of its reserves. Any doubts or issues regarding the backing of Tether could impact its value and stability. Additionally, the regulatory landscape for cryptocurrencies and stablecoins is evolving, and future regulations could affect Tether’s operations and trustworthiness.

Investing in Tether should be seen more as a strategic move within the broader context of a cryptocurrency portfolio rather than a traditional investment aimed at growth. Potential users must consider their objectives and risk tolerance, keep abreast of regulatory developments, and remain aware of the ongoing discussions about the transparency and reliability of Tether’s reserves.

As with any financial decision, thorough research and a clear understanding of the potential risks and rewards are crucial. Speaking with a financial advisor is always recommended if you are unsure if an investment is right for you.

This article is not an endorsem*nt of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency or CFDs as an investment class.

Cryptocurrency is unregulated in Australia and your capital is at risk. Trading in contracts for difference (CFDs) is riskier than conventional share trading, not suitable for the majority of investors, and includes the potential for partial or total loss of capital. You should always consider whether you can afford to lose your money before deciding to trade in CFDs or cryptocurrency, and seek advice from an authorised financial advisor.