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What is Tether? USDT explained

by | Feb 22, 2018

If you trade cryptocurrency, you’ve probably seen USDT listed as a trading pair for other coins.  You may even have used it.  But do you know what USDT really is?  USDT is the ticker symbol for USD Tether — an important trading tool which can help you minimize losses in your portfolio. Read on to learn how Tether can help you manage your portfolio during downturns in quick and efficient manner, but also to be aware of some of the controversy and pitfalls around this digital token.

What is USDT

Otherwise known as Tether, USDT (or EURT or GBPT, etc.) is a crypto asset issued on the bitcoin blockchain. It was developed in 2015 and can be transferred, traded, spent, used for transactions and stored like any other currency.  Tether was designed to be a safe and price-stable system because it is pegged to fiat (mostly USD). Originally, it was intended to provide businesses with a way of transacting in fiat currency on the blockchain at a fraction of the price of alternatives. Now it is primarily used on crypto exchanges to enter and exit cryptocurrency trades against USD “value”.

USDT is available on most of the larger crypto exchanges such as Poloniex, Bittrex, Binance, Bitfinex and Kraken and can be stored in wallets that are so-called “Omni Layer protocol” enabled. Tether has no transaction fee, however external wallets or exchanges may charge their own fee to transact using it.  Officially there is a small fee to convert USD to USDT on the Tether platform, tether.to. The only other place where USD Tether can be exchanged for USD is Kraken.

How is Tether Used?

Tether is frequently used by traders to take advantage of expected up or downturns in the market. Because cashing out to fiat can be time-consuming when a desired profit or price has been reached (because most of the altcoin exchanges like Bittrex, Binance and Bitfinex don’t support fiat currency deposits and withdrawals), Tether can be a good alternative to exit cryptocurrency risk exposure into a USD (tethered) holding.  Instead of cash, you can buy another coin that is tethered to — and closely follows — the price of that fiat currency. The price difference between USD and USDT value is usually not more than 1-2%.

For example, Ethereum a while back was at an all-time high of around $1300 USD.  Many investors/traders following the “buy low, sell high” principle of investing were looking to sell ETH to cash in profits, thereby resulting in a decrease in price.  So maybe you want to sell your ETH but you notice that the price of Bitcoin is decreasing a well.  One option would be to “park” your funds in USD Tether to ride out the wave and get back in a later stage while preserving your USD value, without actually having to switch back to an exchange that support “real” USD.  You would then buy back into ETH once you feel the price has reached its bottom.

Aside from trading, Tether is used for exchange and wallet audits as an alternative to Proof of Solvency methods by way of the Proof of Reserves Process. The amount of USDT circulating can be ascertained on the Bitcoin blockchain and verified against the total amount of USD reserves during official exchange audits.

The Value of Tether

Supposedly Tether is pegged to fiat currencies at a one-to-one ratio, meaning for every one Tether token there is/should be an equivalent value in Fiat held in Tether’s bank account.  When new tether tokens are issued, an equivalent amount of fiat is supposed to be deposited to the Tether bank account. You can see how much tether is held via omniexplorer and this must correspond with the amount of fiat held in Tether Limited bank accounts. Tether publishes their balance sheets daily on their website transparency page which is supposed to be certified by auditors. On omniexplorer you view the Tether account that creates new Tether tokens. After token creation the Tether tokens are held in reserve in the Tether Treasury account. Exchanges can request new USDT tokens at the “Treasury”. Officially the exchange should then in return for the Tether tokens make a deposit at Tether of real USD to make sure all issued Tethers are still backed. For example a lot of traffic takes place between the Tether Treasury account and the Tether account of crypto exchange Bitfinex. At the time of writing the amount of Tether in circulation was $2.2 Billion USD.

The Controversy with Tether

As great and convenient as some might consider Tether to be, others are convinced it is a scam, Tether being created out of thin air (not 1:1 backed by real USD bank balances) and being used to manipulate the price of Bitcoin.  Tether’s CEO is the same as the Bitfinex exchange CEO.  Bitfinex claims to be able to maintain a constant and stable price at all times. Where are those official, yet seemingly anonymous, audits that Tether claims to perform to verify the Tether coin balance with the daily fiat reserves bank balance? And why did the supply rise by one third since December 2017 and by $850 million in January 2018 alone after the United States Commodity Futures Trading Commission issued a subpoena on December 6th? According to a private investigation by the Tether report, Tether could have been responsible for 48.8% of the bitcoin price rally in 2017 and claims have been made that when the price of bitcoin falls more Tether is created/issued. Another Twitter account called Bitfinex’ed is also constantly scrutinizing Bitfinex when it comes to USD Tether. And although it is clear for every one to see that large amounts of USDT are transferred from Tether to Bitfinex account address; it is rarely mentioned that there is a constant back and forth of funds transfers between both accounts, so Bitfinex also pays back a lot of received USDT to Tether company (although the net result is still a significant increase of USDT balance for Bitfinex).

Outside the circulating conspiracy theories around USDT little to no proof has been presented so far from the side of Tether or Bitfinex to debunk the accusations. It is obviously odd that so far (despite claims of the contrary being made on the Tether website) no real and official independent audit has been made by an official auditor to proof the 1:1 backing of the USDT supply with USD bank balances. So far only 1 “audit” has been published but this was done by an unofficial auditor and the auditors only stated that at the time of the audit the bank balances matched the circulating USDT amount; however the question that people have is if from historical records appears that at any time those balances match, because a single “screenshot” is very thin proof of balances. Some people consider Tether a huge potential “Black Swan” that could have a devastating effect on the crypto market if it would indeed collapse due to fraud (which until now has not been definitely proven nor disproven).

Is Tether/Bitfinex indeed manipulating the price of bitcoin and are a major part of the USDT in circulation created out of thin air? The question remains unanswered for the time being. We would urge users to research and understand the controversy and theories that exist around Tether to be able to better estimate the potential (existing or non-existing) risks with regards to USDT, but at the same time take any kind of information with a healthy amount of skepticism, because nobody knows the real motives that those people have who present certain “evidence”.

Apart from the suspicious aspects around Tether being backed by USDT or not and the accusations of price manipulation there are also other risk factors with USDT: first of all using Tether means putting an enormous amount of TRUST in a basically anonymous entity, the company Tether, that they act ethically and won’t for example pull an exit-scam of epic proportions; trust in a company that so far has not been transparent about their finances. Second risk factor is that Tether is a huge single point of failure as a centralized company that can run into massive issues if any government decides to confiscate its assets or freeze their accounts, or if their bank does.

Conclusion

Tether can be a great way to manage price fluctuations when many coins are decreasing in value because it’s value is tethered to the value of fiat.  However, we urge readers to use Tether with caution based on the controversy that has existed for a few years now already. In fact try to minimize the time and amount of funds that you hold in USDT, no longer than strictly necessary. Be aware and not surprised that on a regular basis FUD (Fear, Uncertainty and Doubt) is being spread around Tether in news articles or posts on social media, but so far this has not led to any permanent damage in the market (that doesn’t guarantee that it won’t ever happen though; despite all theories nobody really knows absolutely sure).  As with all investing, but in case of Tether especially: BUYER BEWARE!

Disclaimer:

This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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