Finance, Industry, Markets, Opinion

What Exactly Is Tether (USDT) And How It Affects The Market

If you’re into Cryptocurrency for some time now, you’ll definitely notice that major exchanges like Binance, KuCoin among other are using USDT or formally Tether as one of their basic pairs for trading cryptocurrencies and tokens within their platform.

But what is Tether, really? – According to their White Paper:

“Tether is a digital token backed by fiat currency provides individuals and organizations with a robust and decentralized method of exchanging value while using a familiar accounting unit. The innovation of blockchains is an auditable and cryptographically secured global ledger. Asset­backed token issuers and other market participants can take advantage of blockchain technology, along with embedded consensus systems, to transact in familiar, less volatile currencies and assets. In order to maintain accountability and to ensure stability in exchange price, we propose a method to maintain a one­to­one reserve ratio between a cryptocurrency token, called tethers, and its associated real­world asset, fiat currency. This method uses the Bitcoin blockchain, Proof of Reserves, and other audit methods to prove that issued tokens are fully backed and reserved at all times.”

So what does that mean to a trader?

Basically, Tether (USDT) is a cryptocurrency whose price is “tethered” to the current price of the US Dollar (USD), hence the name of the token. Up until recently, regardless of your exchange, buying and selling cryptocurrencies would be strictly related to one of the major blockchain based digital currencies such as Bitcoin (BTC) or Ethereum (ETH). That means that every time you made a profit from an altcoin, let’s say Stellar (XLM) for example and you wanted to redeem that profit, you had to translate these earning into BTC or ETH respectively.

The thing is that no one could ensure you that your profits would be “Safe” as stable as BTC and ETH on their own experience huge spatial shifts in their respective prices per unit.

For example, if you start with 1 ETH when its price is equal to $100 USD and you trade it to buy Stellar (XLM) when its price is equal to $1 USD, you’re purchasing x100 XLM for 0.01 ETH each.

Then after being patient for some time, you see XLM reaching a price of $5 per unit and you decide to sell. You’re confident that you made $500 out of your initial $100 investment and you’re now trading it back to ETH.

The thing is that Ethereum’s price might have also shifted during that period and now 1 ETH is equal to $1000 USD. Performing the trade from XLM to ETH will result in a redistribution of your funds and you will now be holding 0.5 ETH instead of 1 ETH that was your starting point.

So did you lose money? Practically no. Since 1 ETH now is equal to $1000 USD, half of that (0.5 ETH) would be equal to your $500 made by egging your XLM in the background.

The question you must be asking yourself is what is your basic platform to store your funds? Are you trading in order to make a lot of USD? Are you trading to make a lot of XLM? Are you trading to make a lot of ETH? Depending on the answer you can then analyze and recognize whether you lost or won.

Most people don’t really pay attention to the trading pairs and they only focus on making their portfolio indicating more USD, which is not a bad idea, but that would also mean that your goal is to make more USD and that you shouldn’t trade back to ETH or BTC when getting profit out. Why? Here’s the other example similar to the previous, only this time Ethereum’s price goes down as soon as you redeem your profit.

You got your x100 XLM worth of $500 USD in total. You trade them to get 0.5 ETH and as soon as you complete your trade, you start to see your funds going from $500 to $450 and $400 shortly after. You’ll wonder “why is that happening?” The answer is simple: as mentioned before, ETH, BTC and other cryptocurrencies don’t have a steady price and they can shift as much as your XLM shifted when you made that profit. In this example, the moment you got your 0.5 ETH, Ethereum’s price per unit started to drop and 1 ETH would now cost $900 USD and $800 respectively after a series of trades, meaning that your funds, which are now stored in ETH, are losing value as well.

Concluding – What all that has to do with Tether (USDT)?

Tether is also a cryptocurrency, but unlike BTC and ETH, Tether’s price is always trying to be stable around the price the US Dollar has at that specific moment. Using the examples above, if your x100 XLM worth of $500 went into USDT, you would still have $500 and its change would range from $498 to $502 since Tether won’t see shifts like +/-20% or +/-50% like most cryptocurrencies experience nowadays.

That creates a safe option to deposit your earnings, although it does not give you the option to raise that amount by “egging” Tether (USDT) since its price will be relatively the same even after months, even after years.

How Tether manages to do that?

Taking a look at Tether’s chart on CoinMarketCap, we can see that it’s price is around $1 USD regardless of their total market cap, which is the main reason a token’s price would go up or down. Tether officials have stated over the past months that they base their token supply on an amount of Fiat Currency they currently possess, but there are concerns about this statement as there is no legal confirmation supporting that fact and numbers.

It seems that Tether gradually “prints” new USDT tokens out of “thin air” every-time Bitcoin’s price is on a decline. The traders use Tether as a cold storage and rumors want it pumping Bitcoin’s price when the time is right.

This happened in the past, and happened again with the recent bear market that took over the scene and especially Bitcoin, starting a couple weeks back. Tether again has “printed” more USDT without any public or legal confirmation that the platform really holds to an amount of Fiat Currency equal to their current market cap.

While it keeps climbing the list in CoinMarketCap’s top 100 cryptocurrencies based on market capitalization, Tether’s price remains at $1 USD and its total token supply keeps generating out of nowhere. Currently Tether has more circulating USDT tokens than their total token supply and nobody seems to have a clear idea of how’s that even possible.

Rumors

Back in 2017, I was across several Reddit discussions where some interesting figures from the cryptocurrency scene had multiple theories, all sharing very familiar concepts about Tether, talking about USDT planning to pump Bitcoin (BTC), then dump everything into Bitcoin Cash (BCH), then shift the earnings into USDT, from where the funds would disappear into private Chinese banking institutions and cryptocurrencies that have not even invented yet.

All these discussions are “disappeared” from Reddit and no one is really talking about these “concepts” nowadays.

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Do you believe that Tehter (USDT) is a good way to store your funds when the market is experiencing major declines? Could the rumors about Tether be true until a point or even entirely true and what does that mean about the future of the cryptocurrency market?

Let me know your thoughts in the comments below.

Reporting for The Independent Republic, Ross Peili

 

 

 

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