Tether is the third-biggest cryptocurrency in the world by market value. And it’s got some economists — including an official at the U.S. Federal Reserve — worried.
Last month, Boston Fed President Eric Rosengren raised the alarm about tether, calling it a potential financial stability risk. Meanwhile, some investors believe a loss of confidence in tether could be crypto’s “black swan,” an unpredictable event that would severely impact the market.
The issues surrounding tether hold significant implications for the nascent cryptocurrency world. And economists increasingly fear that it could also impact markets beyond digital currencies. Here’s what you need to know:
What is tether?
Chances are you’ve heard a thing or two about bitcoin. But what about tether?
Like bitcoin, tether is a cryptocurrency. In fact, it’s the world’s third-biggest digital coin by market value. But it’s very different from bitcoin and other virtual currencies.
Tether is what’s known as a stablecoin. These are digital currencies that are tied to real-world assets — the U.S. dollar, for example — to maintain a stable value, unlike most cryptocurrencies which are known to be volatile. Bitcoin, for example, rose to an all-time high of nearly $65,000 in April and has since almost halved in value.
Tether was designed to be pegged to the dollar. While other cryptocurrencies often fluctuate in value, tether’s price is usually equivalent to $1. This isn’t always the case though, and wobbles in the value of tether have spooked investors in the past.
Crypto traders often use tether to buy cryptocurrencies, as an alternative to the greenback. This essentially provides them with a way to seek safety in a more stable asset during times of sharp volatility in the crypto market.
However, crypto isn’t regulated, and many banks avoid doing business with digital currency exchanges due to the level of risk involved. That’s where stablecoins tend to come in.
Tether (USDT) is a stablecoin, a type of cryptocurrency which aims to keep cryptocurrency valuations stable. Tether is used by crypto investors who want to avoid the extreme volatility of other cryptocurrencies while keeping value within the crypto market.
Some investors and economists are worried tether’s issuer doesn’t have enough dollar reserves to justify its dollar peg.
In May, Tether broke down the reserves for its stablecoin. The firm revealed that only a fraction of its holdings — 2.9%, to be exact — were in cash, while the vast majority was in commercial paper, a form of unsecured, short-term debt.
That would place Tether in the top 10 biggest holders of commercial paper in the world, according to JPMorgan. Tether has been compared to traditional money-market funds — but without any regulation.
With more than $60 billion worth of tokens in circulation, Tether has more deposits than that of many U.S. banks.
There have long been concerns about whether tether is being used to manipulate bitcoin prices, with one study claiming the token was used to prop up bitcoin during key price declines in its monster 2017 rally.
Earlier this year, the New York attorney general’s office reached a settlement with Tether and Bitfinex, an affiliated digital currency exchange.
The state’s top law enforcement official had accused the firms of moving hundreds of millions of dollars to cover up $850 million of losses.
Tether and Bitfinex agreed to pay $18.5 million in the settlement and were barred from operating in New York state, however the companies didn’t admit to any wrongdoing.
What Is Tether Used For?
Tether is useful for crypto investors because it offers a way to avoid the extreme volatility of other cryptocurrencies. Furthermore, having USDT (as opposed to the U.S. dollar) removes transaction costs and delays that impair trade execution within the crypto market.
How Do I Buy USDT?
Tether tokens can be transacted on popular cryptocurrency exchanges that include WazirX, Binanace, CoinSpot, BitFinex, and Kraken.
What Is the Point of the Tether Token?
Tether (USDT) offers a way for investors to avoid the extreme volatility of other cryptocurrencies. By moving value to USDT, a trader might reduce their risk of exposure to a sudden drop in the price of cryptocurrencies. It is also much quicker and cheaper to transfer BTC into Tether rather than the U.S. dollar.
Is Tether (USDT) a Stablecoin?
Yes, Tether (USDT) is the first and most well-known stablecoin in the crypto world. Other stablecoins include True USD (TUSD), Pazos Standard (PAX), and USD Coin (USD).
How Does Tether Stay at $1?
While Tether has dropped below $1 before, the stablecoin is able to retain its value because it is pegged to a matching fiat currency and 100% backed by Tether’s reserves.
Security and liquidity
Tether claims that it intends to hold all United States dollars in reserve so that it can meet customer withdrawals upon demand, though it was unable to meet all withdrawal requests in 2017.Tether purports to make reserve account holdings transparent via external audit; however, Tether never produced an audit showing it had the purported reserve. In January 2018 Tether announced that they no longer had a relationship with their auditor.
About $31 million of USDT tokens were stolen from Tether in November 2017. Later analysis of the Bitcoin distributed ledger showed a close connection between the Tether hack and the January 2015 hack of Bitstamp. In response to the theft, Tether suspended trading, and stated it would roll out new software to implement an emergency “hard fork” in order to render all of the tokens that Tether identified as stolen in the heist untradable. Tether has stated that as of 19 December 2017, it has re-enabled limited cryptocurrency wallet services and has begun processing the backlog of pending trades
Analysts at JPMorgan have previously warned that a sudden loss of confidence in tether could result in a “severe liquidity shock to the broader cryptocurrency market.”
But there are also concerns that a sudden increase of tether withdrawals could lead to a potential market contagion, affecting assets beyond crypto.
In June, Rosengren mentioned tether and other stablecoins as one of several potential risks to financial stability.
“These stablecoins are becoming more popular,” he said during a presentation.
“A future crisis could easily be triggered as these become a more important sector of the financial market, unless we start regulating them and making sure that there’s actually a lot more stable stability to what’s being marketed to the general public as a stablecoin,” Rosengren added.
Last week, Fitch Ratings warned a sudden mass redemption of tether tokens could destabilize short-term credit markets.
“Fewer risks are posed by coins that are fully backed by safe, highly liquid assets, although authorities may still be concerned if the footprint is potentially global or systemic,” the U.S. credit rating agency said.
“Whereas stablecoins that use fractional reserves or adopt higher-risk asset allocation may face a greater run risk.”
Tether isn’t the only stablecoin out there, but it’s by far the biggest and most popular one. Others include USD Coin and Binance USD.
Also CheckOut: Top 10 Cryptocurrencies in the world in 2021