What is tether?

Tether, which goes by the symbol USDT, is the most popular stablecoin. It’s easiest to think of it as a digital version of the US dollar, administered by a third party. By design, one tether is always worth very close to US$1. Being pegged to the US dollar means that this crypto coin is considered “stable”, unlike Bitcoin and Ethereum whose values are free-floating.

Tether has been ranked as the third or fourth largest cryptocurrency with a market cap of over $30 billion, and is often the most-traded altcoin by volume.

Aside from being the name of the stablecoin, Tether Limited is also the name of the private Hong Kong-based company that issues the tether coins.

Stablecoins, explained

A stablecoin works differently to cryptocurrencies like Bitcoin because its price does not fluctuate according to market forces; instead, its value is tied to an appropriate currency. Tether is pegged (tethered) to the US dollar, hence the symbol USD.T. 

Stablecoins are not mined like other cryptocurrencies, but issued in response to demand from users who plan to use them on cryptocurrency exchanges. In addition, stablecoins’ infrastructure is not decentralised, making them either more or less trustworthy depending on who you ask.

Tether’s uses and applications

The main purpose behind tether is to make trading cryptocurrencies easier and cheaper. Something over 75% of bitcoin transactions are conducted in tether. Although some people invest in this stablecoin, it is mostly used because of its liquidity. Because it can so easily be exchanged for other cryptocurrencies like bitcoin, it is a useful tool for hedging against volatility in that market.

There are a number of reasons for using a stablecoin like tether. Most of them, however, relate to the difficulty and hazards of trading cryptocurrencies using another volatile crypto asset or a national currency like the dollar or the euro. 

Buying crypto using fiat currencies normally involves going through the slow and relatively high-fee banking industry. On the other hand, it is difficult to invest in any cryptocurrency if the crypto asset that you used to buy it is also volatile. Trading one cryptocurrency versus another cryptocurrency is more like forex trading than investing; Tether addresses this need.

Who uses tether?

1. Overseas investors who don’t have bank accounts in USD
2. Crypto traders who want to keep their funds in a cryptocurrency that holds its value
3. Any cryptocurrency trader who wishes to trade with lower fees

USDT vs USD vs cryptocurrencies

We can summarise all the reasons for choosing USDT as ease of use, while arguments against using it generally come down to concerns about the safety of your money. 

How does tether maintain its $1 value?

The actual mechanism by which tether is pegged to the U.S. dollar has increasingly come under critical scrutiny. In theory, tether coins are issued by Tether Limited on a one-for-one basis in return for a customer’s U.S. dollars. Therefore, similarly to currencies like the Central African franc (XAF), its value is defined in terms of another currency. The USDT/USD barely fluctuates and tends to remain very close to one.

How does Tether Ltd take money?

Hypothetically, you as an investor want to buy Bitcoin using a stablecoin. You can contact Tether Limited and deposit USD $100,000 with them, and they will give you USD.T 100,000 in exchange. Let’s say your crypto trading went well and you had a 2X trade in bitcoin and doubled your money. You sell out of your bitcoin position for $200,000 USDT and then withdraw $200,000 into your bank account.

Buying and selling tether

Cryptocurrency exchanges like Binance, Kraken and Coinbase allow individual cryptocurrency traders to conduct transactions in tether. Once you have an account with any of these companies, you simply fund it using fiat currency and then convert it into any cryptocurrency you desire.

How tether is stored

Tether’s main use is to be exchanged for other cryptocurrencies on a number of global exchanges. To store the Tether off the exchange on the blockchain, you’ll need a cryptocurrency wallet such as Trezor, Ledger, Exodus or Mycelium. Stored coins can later be re-inserted into the market.

Tether and Bitfinex

Bitfinex was the first cryptocurrency exchange to allow tether into its ecosystem, in 2015. Demand from customers to use Tether as part of their cryptocurrency investments subsequently exploded and Bitfinex become the largest cryptocurrency exchange by volume. 

As it later turned out later, in 2017, this was not a coincidence. Tether Limited and Bitfinex have the same management team and are, in effect, two branches of the same company. 

A lack of transparency from Bitfinex and the emergence of powerful new competitors like Binance dethroned Bitfinex as the biggest exchange. However, despite the apparent conflict of interest, Tether went on to become and remains today by far the most used stablecoin.

Can you trust tether?

In total, since its inception, trillions of dollars in cryptocurrency trades have been conducted in tether. Very few instances of people struggling to redeem their coins back into U.S. dollars have been reported. Of course, this kind of reliability is key to Tether Limited’s business plan: were such an issue to become commonplace, the resulting loss of confidence would see users flock away from using it. That said, tether has a slightly spotted history, and the lack of transparency surrounding it poses risks.

THE BIG ONE: Is tether a scam?

An ongoing class-action lawsuit alleges that Tether is being used as part of an elaborate cryptocurrency scam to drive the price of bitcoin and other cryptocurrencies higher. 

To summarise, the purported scam works like this: 

1. Print tethers backed by nothing, i.e. without corresponding dollar reserves 
2. Use these tethers to buy bitcoin on Bitfinex
3. Buying creates buying momentum from other traders
4. The BTC price rises as a result
5. When BTC is nearing a peak, liquidate into USD
6. Rotate the resulting funds through ethereum and other cryptos 
7. This results in “buy” signals for other cryptos
8. Cash out again, rinse and repeat

Is there a tether pump-and-dump scheme?

Firstly, does the idea that tether is not fully backed by US dollars have any merit? Well, according to Tether’s general counsel in a 2019 court filing, Tether Limited possessed cash and cash equivalents (money market investments, short-term bonds, etc.) backing around 74% of all outstanding tether coins.

Let’s take the 74% number and do some quick maths:

Tether’s market cap is $62 billion. If it’s only backed by 74% USD, then $16 billion was presumably created out of thin air and used to buy BTC and other cryptos. $16 billion is about 2% of the float of nearly $700bn market cap for BTC.

2% is not a large amount. In historic instances of cornering a market, traders have bought up most of the float in order to influence the price. If tether were not backed by any fiat currency, the entire made-up supply would represent 10% of the float of bitcoin.

The open question is how much buying power would be needed to really get the cryptocurrency market moving. One could make the argument that it is possible to unduly influence the price if the average daily volumes are low enough, but there is no hard proof on this matter.

Arguments for manipulation

• Dominance: Tether has considerable influence as a stablecoin, giving it market power
• Centralised: Tether is not decentralised – one company (Tether Limited) issues tethers, so one doesn’t have the usual checks and balances found on the blockchain
• Transparency: No mining or formula for tether issuance, so an unlimited number of tethers could theoretically be printed
• Bitfinex: The relationship between them and Tether Ltd gives the appearance of having something to hide.
• USD Backing: Question marks about whether tether is really backed by USD 1:1 (a minimum of $100k withdrawals and lack of public audit is suspicious in this regard).
  A) Tether lawyer admitted in Apr 2019 that tether was only 74% backed
  B) NY Attorney General says Bitfinex overstated its reserves
  C) Griffin-Shams study says tether purchases were timed after big price downturns

Arguments against manipulation

• Officially backed: Tether says its reserves are fully backed by USD and cash equivalents
• Natural Demand: Tether is, in theory, issued only to satisfy transaction demand. If the price of bitcoin is rallying, it’s reasonable that more people will be interested and more tether will be issued.
• NY Attorney General: Tether claims no wrongdoing after settling its case with the New York Attorney General and agreeing to no longer operate in New York.
• Lyons-Natraj: This study says “shock” tether issuance did not have a consistent effect on BTC or ETH prices. The authors did not conclude that no manipulation took place, but asserted no correlation on tether issuance and crypto prices. The study concludes tether issuance is instead caused by:
  • Arbitragers buying USDT from Tether when the market price for tether rises over $1 during risk-off market moves
  • Stablecoins being used as a haven by crypto traders during market sell-offs instead of switching to fiat

USDT vs USDC

USD Coin (USDC) is the biggest rival to tether (USDT) as a stablecoin. USD Coin was launched in 2018 by Circle and Coinbase through a joint company called Centre Consortium. Just like tether is associated with crypto exchange Bitfinex, USD Coin is linked to Coinbase, the online cryptocurrency brokerage that went public as a listed company on the Nasdaq in 2021.

The two stablecoins offer equivalent functionality. If a difference is to be found between the two, it is transparency. USD Coin is fully funded by US dollars and its reserves have been publicly audited. Tether has not been audited and its proof of funds, as noted above, leaves some open questions.

Other stablecoins to consider include: BUSD, TUSD and PAX.