Key Takeaways
Tether (USDT) is a stablecoin designed to be pegged 1-to-1 to the US dollar and is backed by Tether’s reserves.
USDT exists on multiple blockchains, including Ethereum, Tron, and Solana.
Stablecoins like USDT eliminate the extra costs and delays associated with converting between crypto and fiat currencies.
What is Tether (USDT)?
Tether (USDT) is a stablecoin that plays a crucial role in the cryptocurrency ecosystem. As of 2024, it has a market cap of over $110 billion, and holds the rank of the world's third-largest cryptocurrency, just behind Bitcoin and Ethereum in terms of market cap.
Tether is designed to be pegged 1-to-1 to a fiat currency within the cryptocurrency space. Originally launched in 2014 as Realcoin by Bitcoin investor Brock Pierce, entrepreneur Reeve Collins, and software developer Craig Sellers, USDT has evolved significantly since its inception.
Initially issued on the Bitcoin protocol through the Omni Layer, USDT has since expanded its presence to various other blockchains. Most notably, a substantial portion of its supply now exists on Ethereum as an ERC-20 token. Moreover, USDT can be found on several other blockchains, such as TRON, EOS, Algorand, and Solana.
In addition to USDT, Tether offers a range of other stablecoins:
EURT: A Tether coin pegged to the Euro.
CNHT: A Tether coin pegged to the Chinese Yuan.
XAUT: A Tether coin pegged to physical gold.
The circulation of each of these coins on various blockchains can be observed on Tether's Transparency page.
While Tether aims to maintain its peg to various fiat currencies, the prices of the coins do fluctuate. For example, the price of USDT has exhibited some volatility, reaching highs of $1.20 and lows of $0.91.
How Does Tether Work?
Stablecoins serve a distinct purpose as they offer relative price stability, unlike the more volatile cryptocurrencies. Initially, USDT issuer Tether Limited claimed that each USDT represented $1 held in its reserves.
Tether Limited’s reserves include cash, as well as real-world cash equivalents, assets, and receivables from loans.
Users can obtain USDT by purchasing it from cryptocurrency exchanges or other platforms that support its trading. Tether Limited claims that holders of USDT can redeem their tokens for USD at a 1:1 ratio by going through an authorized redemption process. However, it's essential to note that the ease and practicality of redemption have been subject to scrutiny in the past due to limited transparency.
Why is Tether Important?
Tether serves as a bridge between cryptocurrency and fiat currencies, offering investors a straightforward method to trade at a one-to-one value with the USD, free from the inherent volatility seen in other cryptocurrencies.
This stability allows investors to hold a digital asset that closely resembles fiat currency, while still enjoying the convenience of trading it for other coins within the cryptocurrency markets. Despite its popularity, it's essential to note that Tether is not risk-free. Like any other investment, it comes with its own set of risks that investors should be aware of.
Tether Use Cases
1. Quick access to market stability
If the price of Bitcoin or other crypto assets is falling fast, you’re able to trade quickly to USDT instead of trying to cash out.
2. Easily move funds between exchanges
With Tether, you’re able to move your funds between exchanges very quickly. This can also be useful for arbitrage trading with other coins.
3. Trade on crypto-only exchanges
Some exchanges do not have facilities for fiat deposit and withdrawal but do allow USDT trading. By obtaining Tether first, you’re able to trade on these exchanges without worrying about the market volatility of placing your main trading funds in BTC (or other cryptos).
4. Forex-style trading
Since USDT is pegged to the USD, you can do Forex-style trading by exchanging local (non-US) currencies into USDT when their value is high against the USD. You can then cash out to local currencies when the local currency drops or exchange for other assets.
Benefits of USDT
USDT offers crypto investors numerous advantages:
1. Trading and market stability
USDT is widely used within trading pairs on cryptocurrency exchanges, such as BTC/USDT or ETH/USDT. Traders often convert their cryptocurrencies into USDT during periods of market volatility or uncertainty to maintain a stable value and lock in their profits.
2. Hedging
Traders and investors can use USDT to hedge their positions during bearish market conditions. By converting their holdings to USDT, they can protect themselves from potential losses, as its value remains relatively stable compared to other cryptocurrencies.
3. Quick transfers
USDT facilitates fast and low-cost transfers between different exchanges or wallets. By using USDT, users can avoid the longer processing times and higher fees associated with transferring traditional fiat currencies. USDT is also popular among those who regularly initiate cross-border transactions.
Risks of USDT
Like all other cryptocurrencies, USDT also comes with a few risks:
1. Centralization
Tether Limited, the company behind USDT, has faced criticism for lacking transparency in presenting proof that the USDT in circulation is fully backed by its reserves. This has led to concerns about the actual USD backing for each USDT token, raising questions about the stability of the peg.
This also means users of USDT are exposed to added risk, as the value of their holdings relies on the solvency and integrity of Tether Limited. If the company faces financial difficulties, trade with Tether Limited may fail to be completed and lead to potential losses for USDT holders.
2. Regulatory risks
Stablecoins like USDT have come under increased scrutiny from regulators worldwide. Changes in regulations or legal challenges could impact the stability and viability of USDT, potentially leading to restrictions. For instance, USDT could face challenges in its ability to be converted to fiat through exchanges and other platforms.
3. Price volatility
Although USDT aims to maintain a stable price, it’s not entirely immune to price fluctuations. Several factors can affect its value relative to the US dollar, resulting in temporary deviations from the peg.
How To Store Tether
Apart from cryptocurrency exchanges, you have the option to store your USDT using various crypto wallets. These wallets include web and mobile wallets, like Trust Wallet, or cold storage hardware wallets, such as Ledger.
However, it's important to be cautious when dealing with USDT, as it’s issued on different blockchains. When transferring USDT, ensure that you are sending it to a compatible wallet. Using the wrong network could result in the loss of your funds. For instance, sending USDT via Tron to an Ethereum address will likely lead to an unsuccessful transfer.
Closing Thoughts
Stablecoins have brought significant convenience to the world of crypto trading by minimizing the necessity for traders to frequently convert between fiat currencies and cryptocurrencies. USDT has grown to be the largest stablecoin in market cap as of 2023, but investors should always be cautious and aware of the risks involved in stablecoins.
Besides USDT, traders have the option to utilize other stablecoins like USDC, TUSD, and DAI for their trading needs.
Further Reading
Disclaimer: In compliance with MiCA requirements, unauthorized stablecoins are subject to certain restrictions for EEA users. For more information, please click here.
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