What is Tether?
Tether (USDT) is a cryptocurrency in the category known as stablecoins. It’s operated by a company called Tether, based in Hong Kong.
Tether coins are designed to remain valued at US$1 each. It accomplishes this by backing the circulating supply of USDT with assets held in reserve. The end result is a cryptocurrency that offers the best of both worlds.
As a cryptocurrency, it’s digital, programmable and can easily be transferred anywhere in the world. But as a US dollar-backed asset, its value remains relatively stable compared to most cryptocurrencies, and its value is backed up by trust in the US dollar.
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How does Tether work
Tether is unlike many other cryptocurrencies, in that its intended purpose is to remain at a consistent value. Tether does this by minting and destroying tokens.
- New USDT enters the system when the Tether company mints it.
- When someone wants USDT, they make a payment to Tether. The company then adds those funds to its reserves and mints new USDT for the customer.
- USDT is removed from circulation when someone wants to redeem USDT for USD and they can sell it back to the Tether company. Redeemed USDT is then destroyed and removed from circulation.
This process is typically only for customers with large orders. The everyday Tether user will instead buy and sell USDT on a cryptocurrency exchange, the same as they would any other cryptocurrency.
Where to buy Tether
Since Tether is designed to hold a consistent price, many investors use it as a storage of value when the market is volatile. Compare exchange that offer Tether by deposit methods, fiat currency support and more.
How to use Tether
On the technical level, the Tether coins are issued as tokens on three different blockchains. This means there are three different types of USDT in existence.
All of them are functionally the same, but when using USDT, you must be aware of which type you’re using. The easiest way of finding out which type you have is by looking at your Tether wallet address. Each type of address will begin with different letters or numbers, which tells you what type it is.
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Is Tether safe?
Rumors and concerns are constantly swirling around Tether, and whether it’s safe is a matter of personal opinion.
Some people have expressed fears that Tether may not be fully backed, that it’s printing tokens out of thin air without any actual demand for USDT, that it’s a party to price manipulation of the Bitcoin markets and that, in the event of a bank run, USDT users may be left holding worthless, unredeemable tokens.
These rumors have periodically boiled over and the value of Tether has swung wildly by stablecoin standards. USDT is meant to be worth around $1, but at various points, it has been valued above $1.05 or below $0.95 as the markets gain and lose confidence in Tether.
It’s hard to separate fact from fiction as far as Tether is concerned, but the following points are widely accepted:
- Tether is not 100% backed, but it is at least 74% backed.
- The markets don’t mind that Tether isn’t fully backed, and traders still reliably value USDT Tether at around $1 each.
To decide for yourself whether Tether is safe, and how it can simultaneously be 74% backed, worth $1 each and trusted by the markets, you need to know the whole strange story.
Tether and Bitfinex: The whole story
There have been rumors swirling around Tether for years, with two of the most persistent being:
- That it isn’t actually fully-backed, and it’s just printing money without having reserve assets.
- That Tether is a party to price manipulation in the Bitcoin markets, and it’s artificially elevating Bitcoin prices by pushing unbacked USDT onto the market.
These rumors also envelop the Bitfinex cryptocurrency exchange because although they’re separate companies, Tether and Bitfinex are very closely related and share much of the same management.
Over the years, these rumors were fanned by the following suspicions and evidence:
- Tether abruptly terminated its relationship with an accounting firm hired to audit its reserves. No audit was ever completed, and Tether never gave a credible reason why its reserves could not be audited.
- Researchers found a striking correlation between the issuance of new USDT and Bitcoin price rises, suggesting foul play.
Things came to a head in 2019, when it was revealed that Tether was under investigation by the New York Office of the Attorney General and other organizations. When this investigation went public, it also revealed a lot of behind-the-scenes information about Tether.
This information contained both good news and bad news.
The good news
The good news was that Tether appears to have been fully or near-fully backed.
This went a large way towards debunking many of the rumors around Tether and showing that some of people’s worst fears of the company were incorrect.
The bad news
The bad news was that Tether was no longer fully backed.
Bitfinex was using a third-party payment provider called Crypto Capital Corp, which was holding a large amount of Bitfinex’s funds for the purpose of processing its customers’ withdrawals. But at some point in 2018, US$851 million of Bitfinex’s money, held by Crypto Capital Corp, was rendered inaccessible, according to the New York Office of the Attorney General, which said it was told that the funds were erroneously seized and being held by authorities in several different countries.
As a result of this, Bitfinex now had an $851 million hole to fill. That’s when Tether stepped up to help, loaning its sibling company money taken out of its own reserves.
Now Tether was no longer fully backed by cash reserves. The company confirmed this, saying that as of April 30, 2019, it was only 74% backed.
To fill in this gap, Bitfinex initiated an ICO and started selling an exchange token called LEO. Bitfinex is using part of the proceeds of the ICO, and its other revenue, to pay back Tether for the loan and restore its backing.
That’s where Tether is today. Based on this series of events, one can say that Tether is more than 74% but less than 100% backed by cash reserves. While the New York Attorney General’s office has uncovered many peculiarities and raised several concerns, it also found that Tether had large cash reserves.
The cryptocurrency markets as a whole appear to trust Tether, and USDT continues to be the primary stablecoin and liquidity-driver in the cryptocurrency markets.
Whether it’s safe is a matter of trust. In its terms and conditions, Tether says it “reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens.”
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volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
You should also verify the nature of any product or service (including its legal status and relevant regulatory
requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.
Disclosure: At the time of writing the author holds BTC and BNB.