Tether, known for its symbol USDT, is a stable coin used by traders and investors that is pegged to the price of the U.S dollar. A stable coin is what investors use to transfer their profits out of other cryptocurrencies because it is exactly how it sounds, stable. Stability is important in a volatile market such as crypto because you can move out of a highly volatile investment like Bitcoin, and use Tether as a way to buy more in the future. Stablecoins allow for profits to be parked without having the anxiety of watching your investment go up and down throughout the day.
Tether is the most liquid cryptocurrency and is even more liquid than Bitcoin. The reason it is so liquid is because it is one of the most popular stable coins in terms of volume and market cap.
In January of 2012, a fella by the name of J.R. Willet proposed the idea of building new cryptocurrencies on the Bitcoin blockchain, while also using the same protocols and fundamentals that are found in Bitcoin. This idea stemmed into the creation of Mastercoin which was a crypto that aimed to create a new layer on the Bitcoin blockchain, which then turned into Real Coin which had the idea to access Bitcoin’s protocol using a dollar. Real Coin turned into Tether because the word itself means that it is tied to something, which as I’m sure you can guess, it is tied to the dollar.
How USDT Combats Volatility
Typically, the smaller the market cap that a cryptocurrency has, the more volatile the price will be. Volatility in the market can be terrifying for people when the volatility is not going their way and the price is going down. It is hard to use a cryptocurrency like Bitcoin when one day it is worth one price, then the next day it is worth 10% less. By being pegged to the U.S. Dollar, 1 USDT is always going to be worth 1 USD and will never be affected by FOMO or FUD in the market.
To keep Tether pegged to a dollar amount is by gaining people’s trust through collateral. If people don’t trust that USDT is actually worth 1 USD, then they won’t buy it. In Tether’s case, 1 USDT is actually backed by 1 USD as collateral. This way, the company would be on the line if the price of the stable coin were to change with the market.
Tether does not use this method although another way to maintain the pegged dollar amount is through algorithmic pegs that change the supply of the coin. The stable coin has written a smart contract, which is a programmable set of rules, that can interact with the supply of the coins in order to adjust the price. The increase in supply will prevent the price of the coin increasing when more people buy it. This kind of algorithmic peg will devalue the coin back to $1 by increasing supply as more people buy. In contrast, if people start selling the coin, to prevent devaluation, coins are then burned to allow the price to rise.
Criticism Surrounding Tether
Technically speaking, Tether is not really a cryptocurrency because it is not decentralized. The company needing to back the coin by the U.S dollar is what makes Tether not decentralized. It is completely dependent on the company behind it. By being a centralized coin with a somewhat centralized bank controlling it, Tether follows the worst aspects of the traditional fiat system.
USDT Use Case
Tether allows for users to have the same benefits of the other cryptocurrencies without worrying about price action. The benefits include peer-to-peer transactions, low fees and faster transactions. Tether accomplishes eliminating the middleman or a bank just like a traditional coin.
Although intended for everyday purchases, stable coins like Tether are not widely accepted yet for everyday purchases. The main use of stable coins for now is more within exchanges in order to park your money while lowering risks. Many traders use USDT to sell and buy back into a project without using actual fiat currency. For example, if a trader has 1 Bitcoin worth $60,000 and they project the price is going to go down, they will convert that Bitcoin to $60,000 USDT which is the equivalent of $60,000 U.S dollars. Then, that money is sitting off to the side ready to be used in the future. If the price of Bitcoin drops to $50,000, then that trader is able to use $50,000 USDT to buy 1 Bitcoin, and will profit $10,000 from the trade.
What Tether Means for Investors
Tether allows for investors to have the option to “cash out” at any time without the headache of converting your cryptocurrency to fiat. Majority of crypto investors are not looking to convert their crypto earnings to fiat and instead, wait to buy back in or buy another cryptocurrency. Tether makes this possible and keeps money on the sidelines to anticipate the next move.
By being pegged to the U.S dollar, Tether can also help be a hedge against inflation as the U.S dollar seems to continue to be devalued. Many investors hold a lot of money in USDT as security during highly volatile times in cryptocurrency. Tether is one of the best cryptocurrency projects with a real use case to investors rather than a use case to developers and blockchain experts.