Tether: All You Need to Know
As a crypto trader, Tether (USDT) has been my go-to cryptocurrency whenever the market decides to be funny. In the last few days, the cryptocurrency market has recorded some massive losses as a result of the SEC rejecting applications for ETFs. Bitcoin, for example, is down by close to 9% in the last 24 hours, while Ripple (XRP) and Litecoin (LTC) are at all-time lows in 2018.
This goes to show how volatile the crypto space is. Going by how cumbersome and slow it may become to exchange cryptocurrencies with fiat in the event of an upward or downward trend, Tether offers a more stable alternative.
At first, I thought Tether was US Dollars, but upon further reading, I figured it is a cryptocurrency. This article is a comprehensive review of Tether.
What is Tether?
Tether is a hybrid cryptocurrency. This means that it is somewhat of a combination of crypto and fiat to form a “stablecoin”. Its value is linked to the value of a fiat currency, in this case, the US Dollars; the world’s official reserve currency. Put differently, 1 USDT is expected to remain equivalent to $1 – nothing more, nothing less. Although this is not entirely true, the value of 1 USDT has always been approximately equal to $1.
It is also worth noting that USD is not the only fiat that paired with Tether. The hybrid coin also uses Euro, in the form of EURT. There are plans to tether the coin with the Japanese Yen.
Tether acts as a form of safeguard against the volatile nature of cryptocurrencies. But then, they are still subject to the price fluctuations of the fiat currency they are linked with. That is to say if something happens and the value of dollar crashes by say 50% overnight, this means that your USDT would have lost 50% in value too.
How Does It Work?
Cryptocurrencies have been touted to be void of centralized systems and were promoted as the innovation that would un-sit traditional financial systems. For this reason, it may become quite confusing why a cryptocurrency should be linked to fiat.
It will be false for Tether to come out and claim that the value of 1 USDT is equivalent to 1 USD since the central government is the only entity that can create assets that hold value. With that said, if Tether claims to have some value with reference to fiat currencies, then it must be backed by real reserves. This means that for $1 USDT to be worth $1 USD, both currencies must be equal and you can exchange your USDT for an equivalent value of USD at any point in time. This gives a hint to the possibility that crypto exchanges have to keep a reserve of dollars to back every USDT in existence.
The structure described above suggests that Tether is centralized. Tether is saddled with the responsibility of maintaining the currency peg (a ratio of 1:1 in the case of USDT-USD). To explain this, let’s assume Kraken exchange runs out of USD that has been earmarked for customers who wish to sell their USDT and cash out. If this happens, Tether must be willing to supply the exchange some USD within a reasonable timeframe to settle customers. If they don’t, then the peg will slip.
As earlier stated, Tether is meant to be a stablecoin – no pumps, no dumps, no bubbles. This is a good thing considering how volatile the crypto market is. Think of Tether like depositing your cash in a bank that pays 0% interest. Tether is not an investment, just like storing cash in your wallet or bank is not an investment.
Since Tether is subject to fluctuations of fiat currency and it is not an investment in any form, it is definitely riskier than regular cryptos. However, what the crypto lacks in price variations, it gains in being an easier alternative to fiat. USD deposits and withdrawals take anywhere from 1 to 4 business days to complete. This is a long time if you ask me. Tether transactions, on the other hand, can be completed in minutes. Traders often need to make rapid decisions and this is currently the best option there is.
We can’t also deny the high costs of fiat-to-crypto conversions and vice versa. SWIFT transfers attract $20 and above in fees. Interestingly, Tether charges zero transaction fees between Tether wallets.
Reservations About Tether
Tether has been a lifesaver (at least, I get to profit from price actions without bothering about pulling out entirely from the market). There are however some questionable areas on the mode of operation of the stable coin.
One of the questions that rocked Tether’s transparency is the cryptocurrency’s link with Bitfinex. Tether is headed by the owners of Bitfinex, Philip Potter and Giancarlo Devasini. New registrations of Tether flow mostly to Bitfinex and the news didn’t come as a surprise.
In April 2017, both companies ran into some challenges when their banking partners Wells Fargo and the US Bank froze their fiat operations. Because of this, Bitfinex is closed to US customers and is dominated by USDT markets. To add salt to injury, several news sites like Fortune, The New York Times, and Bloomberg have expressed their reservations about Tether. Interestingly, a lot of the concerns they raised are mostly sourced from “anti-cryptocurrency” individuals; people who are poised to seeing cryptocurrencies fail.
Critics have often accused Tether of operating a fractional reserve scheme, meaning that the company is releasing more USDT than they actually have in their reserves. Also, critics have claimed that unbacked Tether accounts are used to manipulate the price of Bitcoin. To counter this, Tether has reported that they have more than enough fiat in their reserves to back their cryptocurrency. A 2017 audit of the company proved this, but critics are having none of it. Looking at it from a different perspective, it is plausible that an exchange as large as Bitfinex has up to $1 billion to back up Tether.