What is Tether? | Using Stablecoins | Is USDT a Bitcoin Scam?

As the dominant stablecoin used in Bitcoin and cryptocurrency trading, Tether has become hugely important. Here we explain how USDT works and discuss the company’s run in with the law.

Contents: Tether

Definition

What is tether (USDT)?

What is a stablecoin?

Using Tether

What is tether used for?

Who uses tether?

USDT vs USD vs Cryptocurrencies

How does Tether stay on $1?

How does tether take money?

How to Buy Tether

How to store Tether

Is Tether safe?

Scam?

Tether & Bitfinex

Is Tether a scam?

USDT vs USDC

What is Tether?

Tether, which goes by the symbol USDT, is the most popular stablecoin. Tether is a tokenized version of the US dollar, meaning it is pegged in a 1:1 ratio with the US dollar. It is this relationship to the US dollar that keeps the value of this coin ‘stable’.

 

shutterstock_1131021020 (1)

 

Tether has been ranked as the third or fourth largest cryptocurrency with a market cap of over $30 billion and is often the most-traded altcoin.

Aside from being the name of the stablecoin, Tether Limited is also the name of the private Hong Kong-based company that issues the Tether coins.

What is a stablecoin?

A stablecoin works differently to cryptocurrencies like Bitcoin because its price does not fluctuate according to market forces, its value is tied to a fit currency. Tether is tied (tethered) to the US dollar (hence the symbol USD.T).

Stablecoins are not mined like a cryptocurrency and are not decentralised but issued in response to demand from users who plan to use them in cryptocurrency exchanges.

What is Tether used for?

The main purpose for Tether is to make trading cryptocurrencies easier and cheaper. As of 2021, more than 75% of Bitcoin trading is done in Tether. Although some people invest in Tether, it is mostly used for liquidity and to hedge against volatility when trading other cryptocurrencies like Bitcoin.

There are a number of reasons for using a stablecoin like Tether, most of which relate to the shortcomings of trading cryptocurrencies using another volatile crypto assets or a normal currency like the dollar, euro or Swiss franc.

  • Fiat currencies involve going through the slow and relatively high-fee banking industry.
  • On the other hand, it is difficult to invest in one cryptocurrency if the crypto asset that you used to buy it is also volatile. Trading one cryptocurrency versus another cryptocurrency is more like forex trading than investing.

Who uses Tether?

  1. Overseas investors who don’t have bank accounts in USD
  2. Crypto traders who want to keep their accounts in a cryptocurrency that holds its value
  3. Any cryptocurrency trader that wishes to trade with lower fees

USDT vs USD vs Cryptocurrencies

We can summarise the reason to use USDT as ease of use, while reasons not to use it are more due to the safety of your money. More on that shortly…

 

 

USDT

USD

Cryptos

Price volatility

stable

stable

volatile

On a blockchain

yes

no

yes

Transaction fees

low

high

low

Liquidity

liquid

liquid

illiquid

Anonymous

yes

no

yes

Decentralised

no

no

yes

Safety

uncertain

safe

uncertain

How does Tether stay on $1?

How Tether holds its value at one dollar has increasingly become a source of controversy. Tethers are supposed to be issued by Tether Limited ‘one for one’ when a customer deposits US dollars. The value of Tether in dollars (USDT/USD) does fluctuate but tends to remain very close to one.

 

tether usd tv

Source: TradingView

How does Tether take money?

Hypothetically, you the investor want to buy Bitcoin using a stablecoin. You can contact Tether Limited and deposit USD $100,000 USD with them and they will give you USD.T 100,000 in exchange. Let’s say your crypto trading went well and you had a 2X trade in Bitcoin and doubled your money. You sell out of your Bitcoin position for $200,000 USDT and then withdraw $200,000 into your bank account.

How to buy Tether

Most individual cryptocurrency traders will buy Tether on a cryptocurrency exchange like Binance, Kraken or Coinbase. You open an account with any one of these companies or others, deposit fiat currency and use it to buy Tether or any other cryptocurrency.

How to store Tether

While the USDT is on a global exchange, it can be exchanged for other cryptocurrencies. To store the Tether away from the exchange on the blockchain, Tether ‘hodlers’ will use a cryptocurrency wallet such as Trezor, Ledger, Exodus or Mycelium to keep their coins as safe as possible when they are not planning to use them for cryptocurrency trades.

Tether and Bitfinex

Bitfinex was the first cryptocurrency exchange to introduce tether into their ecosystem in 2015. Demand from customers for Tether as part of their cryptocurrency investments exploded and Bitfinex become the largest cryptocurrency exchange by volume.

 

 

As it later turned out later in 2017, it was not a coincidence. Tether Limited and Bitfinex have the same management team and are in effect two branches of the same company.

A lack of transparency from Bitfinex and the mergence of powerful new competitors like Binance dethroned Bitfinex as the biggest exchange but Tether went on to become and remains today by far the most used stablecoin.

Is Tether safe?

Tether has been used in trillions of dollars-worth of cryptocurrency trades and there have been very few, if any, reported issues of people finding it difficult to get their money back into US dollars when they want to. Were such an issue to become commonplace, the resulting loss of confidence would see users flock away from using it. That said, Tether has a slightly spotted history, and a lack of transparency poses risks.

THE BIG ONE: Is Tether a scam?

The argument put forward in a class-action lawsuit is that Tether is being used as part of an elaborate cryptocurrency scam to drive higher the price of Bitcoin.

To summarise, the scam could go like this:

  1. Create Tethers backed by nothing
  2. Send them to Bitfinex and buy Bitcoin
  3. Buying creates buying momentum from other traders
  4. BTC price goes up
  5. Cash out of BTC into USD
  6. Rotate into other cryptos
  7. Momentum traders bid up other cryptos
  8. Cash out of crypto
  9. Rinse and repeat

Tether Pump and dump?

First, does the idea that Tether is not fully backed by US dollars have any merit? Well according to the General Council of Tether in a 2019 court filing:

“As of the date [April 30] I am signing this affidavit, Tether has cash and cash equivalents (short term securities) on hand totalling approximately $2.1 billion, representing approximately 74 percent of the current outstanding tethers.”

 

tether pump it

 

Let’s take the 74% number and do some quick maths:

  • Tether market cap is $62 billion
  • If it’s only backed by 74% USD, then $16 billion was created in BTC buying power
  • $16 billion is about 2% of the float of nearly $700bn market cap for BTC.
  • 2% is not a large amount. In historic instances of cornering a market, traders have bought up most of the float in order to influence the price.
  • If Tether were not backed by any fiat currency, the entire made-up supply would represent 10% of the float of Bitcoin.

 

The open question is how much buying power would be needed to really get the cryptocurrency market moving? One could make the argument that it is possible if the average daily volumes are low enough but there is no hard proof on this matter.

Arguments for manipulation

- Dominance: Tether has big dominance as a stablecoin, giving it market power
- Centralized: Tether is not decentralized - one company (Tether Limited) issues Tethers, so there are not the usual checks and balances found on the blockchain
- Transparency: No mining or known formula for Tether issuance, so theoretically an unlimited number of Tethers could be printed
- Bitfinex: The relationship gives the appearance of having something to hide

- USD Backing: Question marks about whether Tether is really backed by USD 1:1 (a minimum of $100k withdrawals and lack of public audit is suspicious in this regard).
A) Tether lawyer admitted in Apr 2019 that Tether only 74% backed
B) NY Attorney General says Bitfinex overstated its reserves

- Price ramps: Griffin-Shams study says tether purchases timed after big price downturns

Arguments against manipulation

- Officially backed: Tether says its reserves are fully backed by USD and cash equivalents

- Natural Demand: Tether is in theory issued only to satisfy transaction demand. If the price of Bitcoin is rallying,it makes sense that more people will be interested and more Tether is issued to match the interest.

- NY Attorney General: Tether agreed to no longer operate in New York but claims no wrongdoing after settling its case with New York Attorney General.
- No price ramps: The Lysons-Natraj study says ‘shock’ Tether issuance did not have a consistent effect on BTC or ETH prices. The study did not conclude ‘no manipulation’ but just said there is no correlation between Tether issuance and crypto prices.

The study concludes Tether issuance is instead caused by:
- A) Arbitragers buying USDT from Tether when market price for Tether rises over $1 during risk-off market moves
- B) Stablecoins being used as a haven by crypto traders during market sell-offs instead of switching to fiat

USDT vs USDC

USD Coin (USDC) is the biggest rival to Tether (USDT) as a Stablecoin. USD Coin was launched in 2018 by Circle and Coinbase through a joint company called Centre Consortium. Just like Tether is linked with crypto exchange Bitfinex, USD Coin is linked to Coinbase, the online cryptocurrency brokerage that went public as a listed company on the Nasdaq in 2021.

The two stablecoins offer equivalent functionality. If a difference is to be found between the two it is transparency. USD Coin is fully funded by US dollars and its reserves have been publicly audited. Tether has not been audited and its proof of funds, as noted above leave some open questions.

Other stablecoins to consider include: BUSD, TUSD and PAX.

 

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