What is Tether?

In the rapidly growing world of cryptocurrencies, amidst the potential for significant gains and losses, one asset stands out for its promise of stability: Tether (USDT). As Australia's interest in cryptocurrency expands, grasping the various types of digital assets and their functions becomes more vital. But what exactly is Tether, purporting to provide a safe haven in the unpredictable crypto sphere? Whether you're an experienced trader or new to crypto, comprehending Tether and its applications can offer a significant edge in investment.

What is a Stablecoin?

In the unpredictable realm of cryptocurrency, stablecoins such as Tether emerge as a beacon of stability amid the turbulence. Engineered to uphold a consistent valuation, these digital assets shield investors from the erratic price fluctuations typical of cryptocurrencies like Bitcoin or Ethereum.

Stablecoins are tethered to a stable asset like gold, the US dollar, or another fiat currency, endeavoring to retain parity with the asset they're linked to. For instance, one Tether USDT aims to equal one US dollar, furnishing a foreseeable and unwavering value regardless of market dynamics.

As one of the earliest stablecoins in circulation, Tether has garnered substantial traction in terms of adoption. Presently ranking as the third largest cryptocurrency and the leading stablecoin, Tether boasts a market capitalization exceeding $US90 billion as of December 28, 2023.

Nevertheless, Tether is just one among numerous stablecoins available. Other prominent stablecoins include USD Coin (USDC) and Dai (DAI), with market caps of $US24.8 billion and $US5 billion, respectively.

Crypto traders leverage these digital assets as a haven, utilizing them to navigate cryptocurrency trades without the fear of unpredictable losses arising from price volatility. Consequently, stablecoins like Tether serve as indispensable instruments for managing risk and devising investment strategies within the crypto realm.

However, the utility of stablecoins extends beyond merely providing a steadfast value. They find application in various domains, from facilitating instantaneous cross-border transactions to facilitating everyday purchases such as a morning coffee.

For Australian investors, comprehending the role and significance of stablecoins is imperative for navigating the intricate landscape of cryptocurrency. With their assurance of stability and predictability, stablecoins like Tether furnish a valuable resource for individuals seeking to mitigate risk and uphold a steadfast position in a market renowned for its oscillations.

How does Tether work?

Tether, the primary stablecoin, operates on a straightforward yet sophisticated principle: maintaining a one-to-one peg with the US dollar. This stability isn't merely theoretical; it's supported by a robust reserve system. Tether Limited, the entity behind Tether, asserts that every Tether USDT token in circulation is backed by an equal or greater value in reserves. These reserves aren't idle cash; they consist of a mix of liquid assets, such as cash, short-term bonds, and term deposits.

To ensure transparency and foster trust with users, Tether publishes daily reports detailing the total number of USDT tokens in circulation compared to its reserves. This practice is crucial, particularly given the scrutiny and controversies surrounding the company. Investigations by regulatory bodies like the Commodity Futures Trading Commission (CFTC) and the New York Attorney General have scrutinized the adequacy and accuracy of Tether's reserve claims, underscoring the importance of transparency in the stablecoin market.

Acquiring Tether is simple and accessible for most investors through major cryptocurrency exchanges. When an individual buys Tether from an exchange, the amount of USDT remains unchanged. However, if a large institution wishes to convert a substantial sum of money directly into Tether, they would transact with the company directly, providing the funds in exchange for newly minted USDT.

For instance, if an institution sought to convert $100 million USD to USDT, they would furnish the USD to Tether directly and receive 100 million USDT in return. The USD is held in Tether's reserves to provide backing for the newly issued USDT and uphold the stablecoin's peg.

Conversely, when an institution opts to redeem USDT tokens for fiat currency, the USDT is destroyed or "burned," effectively reducing their circulation. This mechanism ensures that the supply of Tether accurately reflects the amount of reserve assets, thereby maintaining the peg and the token's stability.

Unlike certain cryptocurrencies, Tether doesn't operate on its own blockchain. Instead, it utilizes the infrastructure of established blockchains to host its tokens. This strategy allows Tether to benefit from the security, speed, and features of these third-party platforms.

Currently, USDT tokens are available on various blockchains, including Ethereum, Solana, and Polygon. Each blockchain offers distinct transaction speeds, costs, and ecosystem advantages, providing users with diverse options for managing and transacting their USDT.

Tether's history

Tether made its debut in 2014 but only gained substantial traction in January 2015 upon its listing on the BitFinex exchange. This marked the beginning of its role as a stable asset amidst the crypto market's volatility.

However, Tether's stability has faced challenges throughout its history. In 2022, USDT briefly deviated from its $1 peg on two occasions, dropping 2-3% below its backing each time.

The first instance occurred due to the collapse of TerraUSD (UST), another dollar-pegged stablecoin. Unlike Tether, which claims cash and equivalent reserves, TerraUSD relied on an algorithmic system tied to a sister token, "LUNA," and Bitcoin reserves. When this system faltered, causing TerraUSD to fall below its $1 peg, it sparked widespread panic, briefly affecting Tether's stability.

The second incident resulted from the bankruptcy of the FTX exchange, sending shockwaves across the crypto industry. Mismanagement of user funds held by the exchange triggered a bank run, leading to the company's insolvency.

In both cases, intense selling pressure caused the de-pegging. However, USDT quickly returned to its $1 peg following these crises.

The collapse of TerraUSD highlighted the risks associated with algorithmic stablecoins and the broader cryptocurrency market. It emphasized the importance of maintaining robust, transparent reserves to uphold a stablecoin's value. For Tether and the stablecoin sector as a whole, these events served as a sobering reminder of the necessity for resilience and trust in the mechanisms underpinning these digital assets.

Can Tether be relied upon?

The credibility of Tether remains a subject of contention in the cryptocurrency sphere. Despite being a popular choice for traders seeking stability in the volatile crypto market, doubts persist regarding its liquidity and the sufficiency of its reserves.

Tether's communication regarding its reserves has faced criticism for lacking specificity and transparency. While the company claims a 1-to-1 peg and full backing by reserves, this assertion has been met with skepticism due to historical inconsistencies in transparency.

The lack of clarity surrounding Tether's reserve composition has fueled widespread distrust among users. Despite these concerns, Tether remains widely utilized, indicating that traders still value its stability and liquidity.

However, discussions about Tether's trustworthiness underscore the importance of conducting thorough research and understanding the potential risks associated with any digital asset, particularly when issues of transparency and legal scrutiny are at play.

What are the applications of Tether?

Paraphrase Tether's USDT serves multiple functions within the cryptocurrency ecosystem, meeting the diverse needs of traders, investors, and regular users.

Here's how you can utilize Tether:

Trading and investing: Tether is a popular choice among traders for swiftly transitioning between different cryptocurrencies while maintaining stability during market volatility.

Money transfers: Tether facilitates quick and cost-effective cross-border money transfers, offering an alternative to traditional banking methods.

Interest earning: Some crypto platforms provide interest-bearing accounts for stablecoins like Tether, enabling users to earn returns on their holdings.

Payment for goods and services: An increasing number of merchants accept Tether and other cryptocurrencies as payment, especially for international transactions.

Participation in DeFi: Tether is widely utilized in the decentralized finance (DeFi) space for lending, borrowing, and earning through various protocols, leveraging its stability to mitigate risks.

Despite its versatility, users should stay informed about the ongoing discussions regarding Tether's reserves and trustworthiness and conduct thorough research before utilizing it or any other cryptocurrency.

Is Tether a sound investment option?

Determining whether Tether's USDT is a wise investment necessitates a departure from the conventional perspective on cryptocurrency assets. Unlike speculative cryptocurrencies prone to value surges, Tether functions as a stablecoin, aiming to uphold a consistent 1-to-1 peg with the US dollar. Consequently, for investors seeking assets with growth potential, Tether may not be the most suitable choice.

However, despite its limited growth prospects, Tether serves various functions:

Preservation of value: Tether predominantly functions as a store of value rather than an investment instrument. Its primary appeal lies in stability, making it an appealing option for individuals aiming to safeguard capital within the cryptocurrency realm without exposure to extreme market fluctuations.

Utility in business and trading: Tether offers utility in business transactions and trading activities within the cryptocurrency sphere. Given the erratic price swings of volatile cryptocurrencies like Bitcoin, setting prices or budgeting effectively can be challenging. Tether resolves this issue by providing a stable medium of exchange, particularly beneficial for entities engaging in frequent transactions.

Mitigation of volatility risks: For cryptocurrency market participants, Tether provides a means to mitigate volatility while retaining exposure to the crypto market. Holding USDT strategically during market downturns or uncertain periods enables investors to navigate volatility without exiting the market entirely.

Forex trading: Australian investors can utilize Tether as a tool for trading foreign exchange markets or preserving savings in USD terms, particularly if they anticipate USD appreciation against the AUD. However, it's important to note that if the AUD strengthens against the USD, the opposite effect could occur.

Nonetheless, it's crucial to acknowledge associated risks. Tether's stability hinges on the company's ability to uphold its peg to the dollar, contingent on the adequacy and transparency of its reserves. Any uncertainties or issues regarding Tether's backing could impact its stability and value. Moreover, the regulatory landscape for cryptocurrencies and stablecoins is evolving, potentially influencing Tether's operations and reliability.

Investing in Tether should be viewed as a strategic component within a broader cryptocurrency portfolio, rather than a conventional investment aimed at capital growth. Prospective users should assess their objectives, risk tolerance, monitor regulatory developments, and stay informed about ongoing discussions concerning Tether's reserve transparency and reliability.

As with any financial decision, conducting thorough research and understanding potential risks and rewards are paramount. Seeking guidance from a financial advisor is advisable if uncertainty persists regarding the suitability of an investment.

This article neither endorses any specific cryptocurrency, broker, or exchange, nor does it constitute an investment recommendation for cryptocurrency or CFDs as an asset class.