In today’s article we’ll be covering Crypto 101: What is Tether (USDT)? I’m sure many of you have already heard about Tether (USDT), a digital token backed by the fiat currency. The token is most widely known as a stablecoin as it is pegged to the USD for trading digital assets. The initial issuing was done by Tether Limited.
At the launch of Tether, the initial reception of this crypto was that of controversy, but we won’t dive into that. The introduction of this cryptocurrency was first on the Bitcoin blockchain and later integration with Ethereum and Tron’s blockchain. As of right now, the digital currency supports hundreds of different exchanges and billions of dollars in transactions using Tether across the world.
Tether or USDT is a cryptocurrency pegged 1 to 1 with the USD. USDT (Tether) is currently the most popular USD-pegged cryptocurrency for trading digital assets. According to Tether, the design of USDT is to be worth 1 USD and each tether unit it issues into circulation with the reserve backing in a one-to-one ratio. However, the price of USDT can be fluctuating and it was once trading at >10% discount to USD in 2018.
Many consider Tether as an optimal way for users to move effectively money without a decentralized authority. Users are able to actively trade the currency and use it for international transactions in countries with capital controls. Hence, the massive international payment market is a driving force for Tether’s supply and demand movements.
For Tether to equilibrate the price at one dollar, the company uses issuance and redemption to maintain it. Charging a 0.1% fee for every issuance or redemption. In USD terms, this means that the Tether company is always willing to buy back Tether at $0.999 and offer Tether at $1.001. This mechanism helps maintain Tether’s price within a 0.2% spread from one dollar.
Tether is actively trading against USD, BTC, ETH and other altcoins and currencies. Active USDT/USD markets can be found on Binance, Kraken and FTX. The price is usually fluctuating near 1 USD and can be volatile in extreme market movement.
As a cryptocurrency that trades freely on the market, the price of USDT is driven by different forces. The forces driving Tether’s demand and supply are from Tether’s price maintaining mechanism, cross-border payment processors and market sentiment.
Tether is actively trading for the purpose of international payments in countries with capital controls. For instance, Chinese importers are buying more than 30m USDT a day to move money back to China. The huge international payment market has become a driving force of USDT price movement. It also creates arbitrage opportunities to traders who have access to the respective currencies.
Though the white-paper states that one USDT should receive the backing of one USD. There are a lot of questions about its legitimacy. The level of reserve has been a mystery as numbers of rumours suggest that Tether’s reserve is not sufficient to back the amount of USDT. The last audit was in mid 2018 by a Washington law firm. The mistrust and speculations brought in a large price movement in Oct 2018.
In early Oct, Bloomberg reported that Noble Bank, which Tether has been using, is seeking for sale. Investors were worrying if it would affect Tether’s USD reserve. On 15 Oct, a fake announcement of Binance delisting Tether was in circulation on Twitter. So a network congestion by numerous attempts of USDT withdrawals took place. As a result, a few exchanges halted the deposit and withdrawal of USDT. Causing anxious investors rushing to market-sell USDT to Bitcoin or other cryptocurrencies. The price of USDT once fell below $0.9 at that period.
The credibility of the Tether has always arisen some concerns especially regarding whether Tether’s reserve has sufficient reserves. Despite such speculation, Tether still remains at the top, holding 10 times more market share than other USD stablecoins. It will be interesting to see in the future if Tether will be able to maintain such dominance given the introduction of Facebook’s Libra and China’s DCEP. However, for now it still serves as a valid tool for users to effectively move money around.
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