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Guide to Tether Crypto

February 18, 2021 · 4 minute read

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Guide to Tether Crypto

There are several different types of crypto. In general, there are currencies (e.g., Bitcoin), tokens (e.g., Ether), and coins known as “stablecoins.” This article is a cryptocurrency guide for Tether, the first stablecoin.

What is Tether (USDT)?

Tether (USDT) was the first stablecoin to enter the cryptocurrency market, having launched in 2014. As of the time of writing, USDT has a market cap of about $9.6 billion dollars. The coin is supposed to be backed by real US dollars by a 1:1 ratio while also maintaining a value equal to one US dollar per coin.

Stablecoins’ value is pegged to an existing currency. The goal is for one coin to always maintain equal (or stable) value to one unit of the other currency. This type of cryptocurrency was created as an option for people who would like to use crypto but don’t want to be exposed to the price volatility of most other coins and tokens. (Risk is just one of the 6 things to know before investing in crypto.)

Stablecoins are well suited to perform the medium-of-exchange function of money—i.e., using it to buy something. These types of coins also allow cryptocurrency exchanges to simplify their compliance to financial regulations.

Is Tether Crypto a Good Investment?

Holding USDT is a lot like holding regular US dollars. The value of each remains the same, give or take a penny or two now and then.

Tether is not quite an investment, since it has no potential for price appreciation and doesn’t produce any income like interest payments or dividend distributions.

There might be some instances where people might prefer to pay with a stablecoin like USDT rather than US dollars, such as in e-commerce. Some proponents are also pushing credit card companies to start taking payments in stablecoin. But it’s safe to say that no savvy investors hold Tether for the long-term expecting to make a profit.

USDT can more closely be called a “currency” or an “investing tool” rather than an “investment.”

How Does Tether Crypto Work?

So, what is USDT and how does it work exactly? Tether crypto is owned and operated by a company called Tether Limited. Tether’s history is long and controversial. In the simplest terms, one Tether remains equal to one US dollar because Tether Limited maintains its reserves at a 1:1 ratio.

Whenever a new Tether coin gets created, the company is supposed to acquire a new US dollar to back that coin. So long as USDT coins are “minted” (created) in accordance with new dollars being taken in, and “burned” (destroyed) in accordance with new dollars going out, then the value of USDT should stay equal to one dollar.

(There has been some controversy surrounding the issue of whether or not Tether Limited does in fact back all of its coins with an equal amount of US dollars at all times, but for the sake of simplicity, we’ll assume that they do.)

Tether was originally created on the Omni Protocol, which is often used for digital assets that run on top of the Bitcoin blockchain. This tech allows for the minting and burning of tether coins based on how many are under custody. The circulation of USDT Tether can also be tracked through the protocol.

The ledger of Tether transactions is stored on the Bitcoin blockchain through Omni, and users can view their verified transactions via the Omni Explorer.

In the years since 2014, Tether coin has also become available on other blockchains such as Ethereum, Tron, and EOS.

USDT Tether and Bitfinex Controversy

From 2014-2017, no one really knew who was in charge of Tether Limited. It wasn’t until December 2017 that the Tether website published an “about us” page, revealing that at least five individuals involved with the project also had ties to the Bitfinex cryptocurrency exchange.

Coincidentally (or not), several news outlets and academic scholars made claims that Bitfinex used Tether to help pump up the price of Bitcoin (BTC) during its massive 2017 rally, when the price of one bitcoin went from $1,000 in January to $20,000 in December.

Academics from schools like the University of Texas and Ohio State University published papers showing a correlation between the issuance of new Tether coins and the increasing price of Bitcoin. When more Tethers were created, the bitcoin price tended to go higher.

The Commodities and Futures Trading Commission (CFTC) even got involved at one point.

Why Use USDT?

The purpose of Tether is to let a user make crypto transactions without having to worry about the price changing suddenly. Beyond that, the use of a stablecoin like USDT becomes whatever someone wants it to be.

It’s widely believed that USDT has a very high average daily trading volume because day traders use the coin for taking profits.

This makes sense. If an investor is trading between lots of different coins for quick profits, holding those profits in cryptocurrency could be risky. Maybe a trader makes a 10% gain, puts those gains into bitcoin, and then bitcoin drops by 15% in an hour. Now this imaginary trader lost 5% instead of gaining 10%.

Immediately putting gains into Tether would let traders lock in gains without having to take their funds off of a cryptocurrency exchange.

Exclusively using something like Tether crypto instead of actual US dollars also lets some exchanges avoid the same level of regulatory scrutiny that other financial institutions find themselves being subjected to.

Rather than having users deposit US dollars directly, an exchange can offer only USDT tether, and could therefore skirt around some regulations surrounding traditional fiat currencies. Instead of being subject to both fiat currency rules and cryptocurrency rules, exchanges can simplify things in this way by only having to worry about complying with crypto regulations.

The Takeaway

Tether crypto is a stablecoin designed to maintain a value equal to one US dollar per coin. It was the first of its kind, but today it is one of many on the market. Coins like USDC, DAI, and the Gemini Dollar have all reached market caps in the billions or hundreds of millions of dollars.

While stablecoin can be useful in payment situations and is a stable medium for storing funds in a crypto exchange, it’s very stability makes it not an investment, per se.

For investors looking to buy, trade, or sell crypto, SoFi Invest® offers an easy, low-cost way to get started.

Find out how to invest in crypto with SoFi.

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