The digital asset market offers plenty of opportunities for investments. By now, you are probably acquainted with the most popular cryptocurrencies, such as Bitcoin (BTC), Etherum (ETH), Litecoin (LTC), Ripple (XRP), etc.
However, there is yet another type of cryptocurrency that you might not have heard of, a kind of digital coin that opens the door to cryptocurrency investments with lower volatility. We’re talking about the so-called stablecoins.
In this article, we’ll explain what stablecoins are and introduce you to Tether, the world’s most widely used stablecoin. You’ll also learn how Tether works and what makes it a good investment.
What Is a Stablecoin?
A stablecoin is a new class of cryptocurrencies that are meant to achieve a stable price by having their value tied to an external reference. Stablecoins are issued by a centralized company that ties the stablecoin either by setting up collateral or by using algorithms that manipulate the supply of stablecoin, depending on the demand, in order to create price stability. Stablecoins can be tied to fiat currencies, cryptocurrencies, and precious metals like gold.
Stablecoins are an attempt to reduce the gap between fiat currencies, such as US dollars and Euros, and cryptocurrencies. In basics, the stablecoins are divided into three categories depending on the working mechanism they use.
The name fiat-collateralized stablecoins suggests that these stablecoins are backed by fiat currencies, like US dollars or euros. This means that in order to issue a particular number of tokens of a given digital currency, the issuer has to put reserves in USDs or euros that are worth the same amount as the collateral.
Other than fiat currencies, you can also use commodities like gold for collateral. The reserves are managed by independent guardians, and they’re regularly inspected for compliance. The most well-known stablecoin that is backed by reserves in US dollars is Tether (USDT).
The value of crypto-collateralized stablecoins is tied to the value of other digital currencies, such as Bitcoin, Ethereum, or Litecoin. When the underlying asset is also a digital currency (also known as crypto-collateralized stablecoins), the stablecoins aren’t very secure and they may be highly volatile. We use the term “over-collateralization” for these types of stablecoins, which implies that you’ll need to reserve a significantly large amount of backing cryptocurrencies in order to issue even a small number of tokens.
Non-Collateralized (Algorithmic) Stablecoins
Algorithmic stablecoins don’t use reserve assets to obtain their stability. Instead, the stability of non-collateralized stablecoins is obtained through a working mechanism, like the mechanism of printing banknotes, to maintain the valuations of a fiat currency that is used by central banks. For example, Basecoin is a stablecoin that is tied to the US dollar and it uses a consensus mechanism. This mechanism or algorithm is used to decrease or increase the tokens’ supply on a need basis.
What Is Tether?
Tether Limited is a company located in Hong Kong that developed the first and most popular stablecoin named Tether. The company operates an eponymous software platform that issues blockchain-based cryptocurrencies that are pegged to the value of fiat currencies held in a designated bank account.
Tether was first presented as RealCoin in July 2014 via whitepaper, and in November of the same year, it was renamed Tether. The stablecoin was developed with the idea to make fiat currencies more compatible with the new cryptocurrencies that are traded 24/7 on the active global market. Tether tokens that are pegged to US dollars are known as USDT. When a new Tether token is mined and issued, it can be traded, stored, and transferred by crypto exchanges like any other cryptocurrency. However, unlike some other cryptocurrencies (e.g. Bitcoin), Tether has an infinite supply of tokens.
How Does Tether Work?
In the beginning, Tether was issued on the basis of the Bitcoin protocol using Omni Layer, an open-source, decentralized platform that runs on the Bitcoin blockchain. However, today, Tether can be issued on other blockchains as well. As a matter of fact, most of the USDT supply exists on Ethereum in the form of ERC-20 tokens, and it’s also issued on numerous other blockchains, such as EOS, Algorana, and TRON.
The USDT peg is managed by using a collateral. Tether Limited claims that for every 1 USDT that exists, there is 1 USD worth of currency kept at the reserve. In order for the price of 1 USDT to equal 1 USD, it has to be redeemable for 1 USD fiat currency at any time. You can directly exchange USDT for USD by using a crypto exchange such as Coinbase, Kraken, Binance, and Bitfinex, or by using Tether itself, but the minimum fiat withdrawal or deposit on Tether is 100,000 USD and the fees on this platform are considerably high.
How to Sell Tether
You can store, sell, or buy Tether in the same way you would do other crypto assets. The easiest way of selling USDT for fiat or crypto is by using a cryptocurrency exchange.
Selling Tether is an easy three-step process:
- First, you have to choose a crypto exchange that supports Tether in one or more fiat currency pairings, such as Kraken, Coinbase, or Bitfinex, and sign up for an account. Review the crypto exchanges carefully, so that you can choose the one that has the lowest withdrawal fees and best exchange rates;
- The next step is to store the USDT that you own into your exchange account. Given that the exchange that you have chosen supports Tether, you can sell USDT for US dollars directly.
- Finally, go to the navigation section on the exchange’s dashboard to find the USDT pairing you want, such as USDT/USD, USDT/BTC, or USDT/ETH. Afterward, enter the amount of USDT that you want to sell and confirm the transaction.
The Tether and Bitfinex Controversy
Bitfinex was the first cryptocurrency exchange to present Tether into its platform in January of 2015, and it immediately became a huge success. There was a huge interest among users regarding USDT, which is how Bitfinex became recognized as the best and largest cryptocurrency exchange for USDT trading.
But some researchers became suspicious and started raising the question of whether Tether was as solvent as it claimed to be. Their data digging confirmed these concerns and in 2017, the Paradise Papers revealed that the corporate structure and the management of both Bitfinex and Tether were almost identical, and this was the main reason for the overnight success of Tether. In other words, the success of Tether was also engineered.
The researchers revealed that both Tether and Bitfinex have listed the same chief of finance, chief of strategy, executive chief and that Tether’s founder, Philip Potter, has been managing the major activities at Bitfinex as well.
However, this wasn’t the only controversy surrounding Bitfinex and Tether. Another surprise came in April 2019, when the New York Attorney General, Letitia James, made an accusation against iFinex Inc., the parent company of Tether Limited that operates the Bitfinex crypto exchange as well, for hiding a loss of 850 million US dollars that consisted funds from corporate investors.
So, after all that, we can’t really say that Tether is the most transparent stablecoin to invest in. On the other hand…
Three Reasons Why You Should Invest in Tether
Since crypto assets are interesting investment opportunities due to their volatility, you might ask yourself: what is the purpose of the cryptocurrencies that want to maintain a stable price and experience very little volatility? Well, you can compare owning Tether to leaving a deposit in a bank account, except that the interest is 0%.
If Tether is riskier in comparison to regular crypto assets and if it doesn’t provide an opportunity for you to earn some money, then why use it at all? In reality, Tether is mainly used by investors and traders worldwide as a substitute for fiat currencies. Here are three reasons why you may find Tether useful:
- Transaction processing time.
The withdrawals and deposits of US dollars to and from foreign exchanges can take a lot of your time. It takes approximately one to four days to complete the process. Moreover, if a transaction is made overnight, on weekends, or during holidays, the waiting time might be longer as the banks are closed.
On the other hand, Tether transactions can be completed in just a few minutes. This advantage is important as traders of crypto assets are sometimes in a hurry to withdraw their assets and make use of arbitrage, the process of buying crypto assets on one crypto exchange and selling them on another one in order to take advantage of price fluctuations.
- Transaction fees.
The transactions that are made using SWIFT are typically very expensive and can cost you approximately 20-30 US dollars. Moreover, if the fiat currency that you use isn’t supported by the crypto exchange, then the bank will additionally charge you an extra fee for foreign exchange conversion and add a percentage for the transfer.
Tether doesn’t charge a fee for transactions that are made between Tether cryptocurrency wallets, but you still have to pay the standard fees that apply for the blockchain network.
- Lack of price volatility.
Since crypto assets are volatile, it’s better to buy them using Tether instead of some other currency. You may find that many cryptocurrency exchanges on the crypto market don’t accept fiat currencies, but they do accept Tether.
A Few Words Before You Go…
Hopefully, we’ve helped you understand what stablecoins are and the differences between them and regular cryptocurrencies. Now that you are familiar with the Tether stablecoin and its use cases, you can decide whether you’ll invest in it or not.