A majority of cryptocurrencies that exist in today’s market either aim at serving as an alternative to fiat currencies or serving as the native currency of their respective blockchain network. There are not a lot of cryptocurrencies which intend to serve as a bridge between fiat currencies and virtual currencies but among the ones that do exist, Tether is widely popular.
What is Tether?
Tether (USDT) is a cryptocurrency that mirrors the value of 1 U.S Dollar for every token issued. In simple terms, every single Tether token is backed by a single U.S Dollar. In order to ensure that each Tether token is tethered to $1, Tether Limited - the company behind the Tether cryptocurrency, holds the traditional currency in 1:1 ratio in their reserves. Doing so ensures that they can easily meet their customers’ withdrawal requests, without facing liquidity constraints.
This feature is essential for the functioning of Tether. Therefore, every Tether purchased can be redeemed via Tether Limited. However, this also means that each Tether token represents a liability for the company.
Tether exists on the Bitcoin Blockchain via the Omni Layer Protocol. This protocol has essentially enabled for the U.S Dollar to exist on blockchain in the form of Tether, without incurring a great deal of volatility like traditional cryptocurrencies. In layman’s terms, Tether is completely independent of market forces. This also means that all the advantages that come with having a decentralised, traditional currency on blockchain can now be enjoyed by this ‘pseudo’ dollar.
Some of these advantages are:
- Using Tether, it is possible to transact in USD without the need for an intermediary
- Tether can also be used to safely store USD with the help of private keys
- Merchants can price their goods in Tether instead of Bitcoin or other cryptocurrencies and as a result, save considerably on associated fees and conversion rates
- It also becomes easier to buy virtual currencies on exchanges as it enables users to move fiat in and out of exchanges, quickly and cheaply
The only entity that can put Tethers into circulation or take them out is Tether Limited. For every fiat currency that is deposited with Tether Limited, the company distributes the corresponding amount of Tether tokens. For example, if you deposit $100 into Tether Limited’s account, then the company will give you 100 Tether tokens, represented by 100 USDT. These Tether tokens can be then transferred, exchanged, or stored.
When the holder of Tethers decides to redeem them, all he/she has to do is deposit the Tethers with Tether Limited following which, the company will destroy the Tethers and deposit the corresponding fiat currency into the user’s bank account.
Even though Tether’s primary focus is on mirroring the U.S Dollar, Tether Limited has also expressed interests in backing its cryptocurrency with the Yen and the Euro.
As mentioned earlier, the Tether system works as long as the company has sufficient funds in its reserves to back its cryptocurrency. Without this backing, Tether will be subjected to extreme volatilities, just like every other digital currency. That’s why, the company regularly releases transparency updates known as Proof of Funds/Proof of Reserves. However, there are certain risks and problems associated with this system of proof and the same has been explained in a latter section.
Where to buy Tether (USDT)?
In order to buy Tether, you will first need to buy Bitcoin or Ether and then transfer the same to an exchange that supports USDT. Some of the leading cryptocurrency exchanges that support Tether are Bitfinex, Cryptopia, Kraken, Gate.io, et cetera.
The best way to store USDT is in a hardware wallet like Nano Ledger S and Trezor. The official website of Tether may also offer wallet services to store USDT for their customers.
Tether (USDT) cryptocurrency cannot be mined. The only way to buy them is through Tether Limited or through cryptocurrency exchanges that support Tether.
Tether Price Trends
As mentioned earlier, the value proposition of Tether relies on the company backing the cryptocurrency with fiat currency in 1:1 ratio. Theoretically speaking, this should keep the price of Tether stable at $1. In real life however, the price of USDT has undergone slight fluctuations, although the price remained close to $1. Over the course of the last couple of months, it has varied only by a few cents.
Risks associated with Tether
Owing to its business model, Tether Limited has ensured that USDT is free of volatility and market constraints. Considering that the price has remained close to $1 since its inception, it is impossible to imagine Tether as an investment capable of delivering strong returns.
However, there are other issues that plague Tether, the most prominent of which is liquidity. As of April 2018, a little over 2.3 billion Tether tokens are in circulation. This means that Tether Limited should ideally have $2.3 billion in its reserves to meet its liabilities, and this is where the problem lies. At the time of writing this article, the company has not released an audit report explaining its cash reserves of more than $2 billion.
Furthermore, Tether has refused to reveal the name of the bank in which they are holding the funds. This was evident in their last ‘Proof of Funds’ update, which redacted the name of the bank from its report. The fears that Tether Limited does not hold enough U.S Dollars to meet its liabilities also prompted the U.S Commodity Futures Trading Commission to send subpoenas to the company in December 2017. Therefore, without any concrete audit report, it is impossible to say with absolute certainty if the company can back its claim of having a truly stable cryptocurrency.
Even though Tether’s plan to have a stable cryptocurrency would solve a majority of problems in the cryptocurrency space, its failure to satisfactorily back its claim has put it in a grey area. It will be interesting to see how the company faces this challenge but for the time being, parking your money with Tether may not seem that good of an idea.
An alternative to this is to invest your money in mutual funds , which are free of legal hurdles and controversies that surround cryptocurrencies. They are safe, convenient, and if chosen smartly, can deliver healthy returns in the long-run.
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