Key Takeaways:
- Owned by iFinex and pegged to the US dollar, Tether (USDT) is the largest stablecoin by market capitalisation.
- Tether maintains its stability by tying its tokens to traditional currencies, claiming to back each token with a mix of cash, bonds, loans, and digital tokens.
- Tether is used in various ways, including as a trading pair or fiat gateway, as well as for remittances and in DeFi applications.
- The decision to include Tether in a crypto portfolio depends on factors including stability, regulatory concerns, and diversification, amongst others.
What Is a Stablecoin?
Before diving into Tether, let’s first understand the concept of stablecoins, which are a type of cryptocurrency designed to have a stable value, unlike Bitcoin and Ethereum, which are known for their price volatility.
The value of a stablecoin may be pegged to any fiat currency, but the majority of stablecoins are pegged to the US dollar (at the time of writing). Stablecoins like Tether provide a measure of stability for traders in the crypto market. They may offer a way to mitigate the risks associated with the price fluctuations of other cryptocurrencies, making them a popular choice for those who want to trade or hold digital assets without being exposed to constant severe volatility.
Learn more about stablecoins and how they work.
What Is Tether?
Tether (USDT) is a cryptocurrency stablecoin pegged to the US dollar. Owned by iFinex, the company behind cryptocurrency exchange Bitfinex, it is the largest stablecoin by market capitalisation (at the time of writing).
Tether aims to maintain a steady valuation by tying its tokens to traditional currencies like the US dollar and euro. It is used by crypto traders to transfer between different cryptocurrencies or fiat currencies. Tether maintains its stability through currency reserves, which consist of a mix of cash, bonds, loans, commodities, and digital tokens, and publishes daily reports on said reserves.
How Does Tether (USDT) Work?
USDT is specifically designed to be pegged to the US dollar in order to remain relatively stable and equivalent, so each token represents one US dollar. To achieve this stability, Tether Limited, the company behind Tether, claims to maintain reserves of US dollars that are equal to or greater than the number of USDT tokens in circulation. These reserves are meant to back the value of each Tether token, providing confidence to users that they can redeem their tokens for US dollars at a 1-to-1 ratio.
How Is Tether Backed?
Tether claims to back each Tether token with reserves that include cash, cash equivalents, and other assets. The company periodically publishes reports that provide information on the composition and breakdown of its reserves. These reports aim to provide transparency and give users insight into the backing of their Tether holdings.
It is important to note that, while Tether claims to have 1-to-1 reserves in order to maintain a 1-to-1 peg with the US dollar, the actual composition and valuation of its reserves may vary. The company has faced scrutiny in the past, as critics have argued that the lack of independent audits raises concerns about the transparency of Tether.
How to Use USDT
As a stablecoin, Tether is used in various ways within the crypto ecosystem. Below are some common use cases for USDT, and stablecoins in general:
- Trading Pairs: Tether is widely accepted on cryptocurrency exchanges and often used as a trading pair for other cryptocurrencies. It provides traders with a stable asset to trade against more volatile cryptocurrencies.
- Fiat Gateway: Tether often serves as a bridge between the traditional financial system and the crypto market. It provides a gateway for users to move funds into or out of the crypto ecosystem.
- Remittances: Tether is also used for cross-border transactions and remittances, a faster and potentially cheaper alternative to traditional money-transfer services.
- DeFi Applications: Tether is also utilised in various decentralised finance (DeFi) applications, where it is used as collateral for borrowing or lending activities.
It is important to note that, while Tether offers a level of stability and convenience, it is subject to the risk of depegging, as it is still a cryptocurrency and comes with the same risks associated with the broader crypto market, such as regulatory uncertainty and market volatility.
How to Trade USDT
For those interested in trading USDT, follow the steps below:
- Choose a Crypto Platform: Select a reputable cryptocurrency platform like the Crypto.com Exchange or Crypto.com App — the industry leader on security standards.
- Create an Account: Sign up for an account on the chosen exchange and complete the necessary verification process.
- Deposit Funds: Deposit the desired amount of fiat currency or other cryptocurrencies into the account.
- Buy USDT: Once the account is funded, navigate to the ‘Buy’ section of the chosen exchange or app and search for USDT. Place a buy order for the desired amount.
- Store USDT: After the purchase is complete, transfer USDT tokens to a secure wallet, like the Crypto.com App or Crypto.com DeFi Wallet.
Pros and Cons of Including USDT in a Crypto Portfolio
The decision to include Tether in a crypto portfolio depends on individual goals and risk tolerance. Below are some factors to consider, amongst others:
- Stability: Tether’s peg to the US dollar offers stability; it is a useful asset for traders looking to mitigate risk and volatility in the crypto market.
- Regulatory Challenges: As with any cryptocurrency, Tether has faced regulatory scrutiny and may face legal challenges, which are factors that can impact long-term stability and acceptance in the market.
- Diversification: Diversifying a crypto portfolio helps spread risk. Including stablecoins like Tether alongside other cryptocurrencies may offer a balanced approach.
Ultimately, a stablecoin’s stability is not guaranteed, and the decision to include Tether in a portfolio should be based on careful consideration of individual trading goals, risk appetite, and overall market conditions. It is always recommended to consult with a financial advisor and do thorough research before making any decisions.
Conclusion
Tether (USDT) is a stablecoin that aims to provide stability and reliability in the volatile world of cryptocurrencies. It offers a pegged value to the US dollar, making it a popular choice for traders looking to mitigate risk and volatility. When considering including Tether in a crypto portfolio, it is important to carefully evaluate the risks and benefits based on individual goals and risk tolerance.
Due Diligence and Do Your Own Research
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Past performance is not a guarantee or predictor of future performance. A stablecoin can lose its peg, and you could lose all or a substantial amount of your purchase price. When assessing a stablecoin, as with any crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.
