The Federal Reserve is about to announce its interest rate decision next week on September 18. The market is generally expecting the Fed to cut interest rates by one percentage point as a precautionary measure, and may have a cumulative four percentage points of interest rate cuts by the end of this year. U.S. Treasury bonds are an important source of income for stablecoins. Stablecoin issuer Tether estimates that it may lose $200 million in revenue per quarter. How will Tether respond?
The Tether empire continues to expand
Tether started as a stablecoin and has firmly established itself as the leader, accounting for nearly 70% of the market share among stablecoins. This year, it announced the establishment of four new business departments to move towards financial and technical ecosystems other than stablecoins to provide a A series of new decentralized infrastructure solutions to fulfill a broader mission.
(Tether expands its territory and uses four arrows to build decentralized infrastructure)
The quarterly assurance report starting from 2024 has also seen an update in the report format. In order to support its development into areas other than stablecoins, the report will be split into three entities as follows:
Tether International Limited & Tether Limited: Tether is a company registered in BVI and Hong Kong respectively. It is responsible for the issuance of stable coins, including USDt, EURt, CNHt and MXNt, and is the main body of Tether.
Tether Investments Limited: A company responsible for investing in sustainable energy, Bitcoin mining, data centers, AI infrastructure, etc.
Other reported group entities: Others, including companies such as Tether Operation Limited.
Tether diversifies stablecoin earnings
The newly added report not only splits the net profits of each entity, but also shows the items of "Dividend Distributions" and "Capital injections". The author speculates that the main purpose is to inject the proceeds of stable coins into other companies.
We can see in the chart above (representing the table for the first half of the year) that the stablecoin issuer Tether International Limited & Tether Limited transferred 97% (US$4.98 billion) of its net profit of US$5.11 billion in the form of dividends and injected capital into Tether Investments Limited $5.857 billion and other reported group entities $118 million.
According to previous reports, Tether’s investments this year include US$100 million in BitDeer, US$600 million in XREX Group, etc.
How is Tether’s stablecoin revenue?
In an era of high interest rates, stablecoin issuers invest a large amount of dollars in the U.S. bond market and earn a yield of more than 5%. Unlike banks that have to pay interest to depositors, it seems to be a business that is sure to make money without losing money.
Tether’s statements for the past three quarters show that its short-term treasury bonds and cash are as follows:
2023Q4: $82.1 billion
2024Q1: US$92.7 billion
2024Q2: $99.8 billion
Its main investment is three-month U.S. Treasury bills, with a yield of more than 5.4% in the first half of the year, bringing Tether more than $1 billion in stable income every quarter.
How profitable is Tether?
Tether reported a record profit of $5.2 billion in the first half of 2024 in Q2, and said its operating profit of $1.3 billion was a milestone worth remembering, but is it really so?
Since the second quarter report is presented in the form of summing up the first half of the year, it deliberately presents a net profit of US$5.2 billion. In fact, the net profit in the first quarter was as high as US$4.5 billion. In the second quarter, it only made US$670 million, of which stable currency The net profit margin of Tether International Limited, the main entity, is only US$808 million, while the other two entities are experiencing losses. The data compiled and analyzed by Lianxin News are as follows:
It stands to reason that the amount of U.S. Treasury bills invested by Tether continues to hit highs and should bring more than US$1 billion in income in the second quarter. Why is the net interest rate only US$808 million? Tether pointed out in the report that the main reason was an unrealized book loss of approximately US$653 million in holding Bitcoin (the book value of Bitcoin is assessed at market price every quarter), but there was also an unrealized surplus of US$165 million in gold in the second quarter.
The impact of Bitcoin’s unrealized gains and losses on its financial reports
As previously reported, Tether announced that starting in May 2023, it will allocate 15% of its realized net operating profits (such as realized U.S. dollar interests from Treasury bills) every month to purchase Bitcoin. The number and price of Bitcoins it holds in the past three quarters (Tradingview quarter-end price) are as follows:
2023Q4: ~58,000 Bitcoins (roughly estimated in the thousands using Arkham charts), end-of-quarter Bitcoin price ~$42,258
2024Q1: 66,466 Bitcoins, end of quarter Bitcoin price ~$71,285
2024Q2: 75,354 Bitcoins, end of quarter Bitcoin price ~$62,676
Pro forma Bitcoin unrealized gains and losses were estimated at $1.7 billion in the first quarter and -$653 million in the second quarter.
The Federal Reserve is about to cut interest rates, how will Tether respond?
The Federal Reserve will announce its interest rate decision next week on September 18. The market is generally expected to make a precautionary interest rate cut by one point and adjust the benchmark interest rate to 5%~5.25%. In fact, the bond market has already reacted in advance. The three-month U.S. Treasury bill yield has dropped from 5.48% at the end of June to 5.06%, which will inevitably affect Tether's stable income in the future.
Based on the amount of US$99.8 billion in the second quarter, the quarterly earnings affected by a one-cent rate cut would be US$62 million. The current market expectations are that there is a chance of a four-cent rate cut by the end of the year, and the impact is estimated to be US$200 million in the fourth quarter.
Perhaps Tether also foresaw this situation and began to actively expand outwards at the beginning of this year, because in the early stage of investment, it is inevitable that funds cannot be recovered quickly, and there may even be a dilemma of burning money in the early stage of new ventures. In addition to new investments such as AI data centers, , Tether also recently spent US$100 million to invest in South American agricultural giant Adecoagro (stock code: AGRO). Tether said that land is also an important asset, but the author speculates that the stable dividend income of Adecoagro, which is listed on the New York Stock Exchange, should also be considered. Let us take a look at how far Tether’s industrial territory will expand!
This article: The Federal Reserve is about to cut interest rates, and Tether’s revenue may be reduced by 200 million mg per quarter. How will the leading stablecoin respond? First appeared in Chain News ABMedia.