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With a $68 billion market valuation, Tether is the third-biggest cryptocurrency after Ethereum and Bitcoin.
The Hong Kong-based BitFinex and iFinex own Tether (USDT), a stablecoin correlated with the US dollar. It was created with Bitcoin in mind but currently works with many other blockchains.
Understanding Tether in Depth
Tether is a member of the rapidly expanding stablecoin cryptocurrency group, which aims to maintain a stable token price by typically linking it to the price of a conventional currency like the US dollar.
In addition, Tether issues tokens tethered to gold, the Mexican peso, the euro, and the offshore Chinese yuan; none of these tokens have a market capitalization more significant than that of its USDT tokens, which are tethered to US dollars.
Pegged Defined
Stablecoins are not subject to the same price volatility as more speculative cryptocurrencies like Bitcoin due to their peg to a traditional currency, sometimes backed by collateral reserves made up entirely or primarily of the pegged currency.
Transparency
As of January 29, 2023, Tether has $67.8 billion in reserves. Of those reserves, 82.45% comprised cash, short-term deposits, corporate bonds, and commercial paper; 9.02% were secured loans; and 3.85% were digital tokens.
Stabilization
Stablecoins – used as a medium of exchange are similar to traditional money if their value remains constant.
Stablecoins have made it simpler to speculate in cryptocurrency markets. The fact that decentralized finance (DeFi) lending and staking protocols utilize stablecoins as collateral has contributed to their explosive rise in popularity.
What is Stablecoin?
Tether and other stablecoins offer a digital asset with predictable pricing and slight fluctuation. Their goal is to keep the value of the linked asset, such as gold or the US dollar, constant.
Steve Bumbera co-founded Many Worlds Token, which lets you trade Tether for a dollar no matter what the state of the market is.
Tether is the biggest stablecoin with a 53% market capitalization, followed by USD Coin (USDC) at 31%, and Finance USD (BUSD) as the second-largest stablecoin.
Stablecoins, like Tether, give cryptocurrency traders consistent, dependable liquidity so they can enter and exit deals without worrying about unforeseen losses from erratic price swings.
How Does Tether Work?
Tether’s cryptocurrency holdings are categorized as stablecoins, a unique class of digital assets whose values are fixed or pegged, to a less volatile investment.
Stablecoins provide an essential connection between the cryptocurrency realm and the real world.
Stablecoins, ideal for trades and transactions on and between blockchains, protect cryptocurrency holders from volatility because their prices are proportional to a stable asset, such as a fiat currency issued by a central bank, such as the US dollar.
Tether offers tokens on third-party blockchains rather than on its proprietary blockchain. At the moment, USDT tokens are hosted on:
- Bitcoin
- Tron
- Algorand
- Solana
- A Snowfall
- Polygonal
What Can You Do With Tether?
Most cryptocurrency exchanges accept Tether, making it simple to buy cryptocurrencies. Traders and investors commonly utilize it to keep a position in the market while maintaining a steady store of value.
It is a well-liked resource for the exchanges themselves as well. Prices are sometimes expressed in fiat money, which is easier for most people to grasp, using tether trading pairings.
Some exchanges have turned to keeping their money in Tether tokens since they need help to open a fiat bank account.
A Brief History of Tether
Ten years ago, when J.R. Willet was trying to create new cryptocurrencies based on the Bitcoin protocol, Tether first emerged.
Willet put This concept into practice with Mastercoin, and in 2014, one of its founding members co-founded Tether. Since Tether was added to the BitFinex exchange in January 2015, it has been used as a liquidity source.
Tether broke its $1 peg due to recent market instability that saw the price of another stablecoin tied to the US dollar, TerraUSD, fall to less than $0.23. Investors’ concerns that if one stablecoin can break its peg, others can, too, were a significant factor in the drop.
Marc LoPresti, managing director of The Strategic Funds, states,
“[Tether] stands a far better chance of weathering the current tsunami rocking the digital asset world as an asset-backed stablecoin with holdings primarily in the U.S. Treasury.”
According to him, USD Coin is the only stablecoin with similar collateral quality.
Tether and the TerraUSD Meltdown
Because of its algorithm-based peg to the dollar, the US dollar stablecoin TerraUSD was the cause of the 2022 cryptocurrency market meltdown and the present crypto winter.
Since UST relied on Luna coin and Bitcoin reserves during a liquidity crunch in early 2022, TerraUSD lost its price peg. The system crashed within days as traders used Luna’s algorithm to earn rapid profits.
The already faltering cryptocurrency market was rocked by the $300 billion loss that resulted from the TerraUSD crash. The price peg for the Terra/Luna crash, which caused a decline in Bitcoin, was removed.
Tether vs. Bitcoin
The main distinction between TetherUSD and Bitcoin, according to Daniel Rodriguez, chief operating officer of Hill Wealth Strategies, is that Tether is dependent on the US dollar, a non-crypto asset. Beyond the dynamics of supply and demand, Bitcoin is independent of anything.
Furthermore, Bitcoin is decentralized, but Tether is a centralized cryptocurrency. This should keep Tether more stable than Bitcoin.
Market volatility affects cryptocurrencies that are not linked to real-world assets or money. Regarding the market, inflation, and interest rates, most conventional cryptocurrencies, such as Ethereum and Litecoin (LTC), will see tremendous swings and volatility.
According to Rodriguez, Tether exhibits higher stability as it maintains a close monetary value of one USD, give or take a few pennies. “Tether is intended to be a reliable store of value rather than necessarily to generate money.”
Is Tether a Good Investment?
Tether, a stablecoin, is not intended to appreciate but to act as a store of value, making it a more straightforward commercial tool than Bitcoin. However, shifting values makes developing pricing schemas based entirely on Bitcoin difficult.
Users of cryptocurrencies should think about stablecoins like USDT to reduce volatility, but they should also be mindful of the dangers of making investments. Tether is not a secure investment, even if it says it will always accept redemption requests.
Since TerraUSD’s fall has put regulators on high alert, Tether’s and other stable coins’ futures hinge on transparency, sufficient collateral, and liquidity. Digital asset regulations are changing as well.
Anas Hasan
October 19, 2023
7 months ago
