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Tether, also known as USDT, is the largest stablecoin by market capitalisation as at the time of writing. A stablecoin is, as its name suggests, a cryptocurrency whose value is stable compared to the price of a fiat currency. When people ask what is USDT? The answer is actually in the name. Tether is pegged to the value of the US dollar at a 1:1 ratio.
For every Tether, there is supposedly one US dollar that is stored as reserves. As such, the value of one Tether should always equal to one US dollar. However, as with most things in cryptocurrency, this is far from certain. This guide will tell you all about USDT.
USDT was created by entities related to one of the largest cryptocurrency exchange, Bitfinex. It was designed to give cryptocurrency traders the ability to park their funds in a coin that is stable in value. For example, Trader A may have 10 cryptocurrencies on his watchlist. Instead of depositing US dollar every time he wants to buy, or withdrawing US dollar every time he wants to sell, he can park his funds in USDT. The beauty of USDT is that it is also extremely easy to move between exchanges. This is useful because sometimes trader wants to trade on a number of exchanges to their advantage.
USDT was officially released in 2015 and has gained worldwide popularity since then. It is perhaps the most adopted stablecoin by volume, and is traded on almost every cryptocurrency exchange. In fact, USDT provides the perfect gateway between fiat currency and cryptocurrency. In recent years, especially during the 2017 crypto boom, there was unprecedented need for this solution.
As an investor or trader, Tether (USDT) should be used very carefully. This is because there has been numerous criticisms and even lawsuits aimed at Tether. Therefore, before buying Tether, one must understand what it is and whether it is safe to use.
One key concern that people have around Tether is that there actually isn’t enough US dollar reserves to back the Tether on issue. During the 2017 crypto boom, numerous statements were issued that Bitfinex and its related entities created Tether out of thin air. In fact, in 2019, Tether stopped claiming that they have enough USD to back the cryptocurrency. Rather, the statement became that there were enough ‘reserves’ to cover the coin. What these reserves are, and how secure or liquid they are, is anyone’s guess.
Before buying USDT, one must think about the purpose of buying. How does Tether work actually? USDT is a good solution for people who need to actively trade multiple cryptocurrencies, especially across multiple exchanges. Also, for Australians, it may be more advantageous to trade with USDT rather than AUD, due to the tighter spreads and more competitive prices on the USDT markets.
Further, USDT provides the benefit of accessing the USD denominated cryptocurrency market without the need of having a USD bank account. This is very advantageous for traders located outside of the United States or have issues with banking relationships.
However, many would advice against holding USDT for extended periods of time. The key reason is that whether Tether has enough USD reserves to back the current circulation is still a myth. In fact, if USDT fails, it would have a big negative impact on the cryptocurrency industry.
It is for good reasons that many seasoned traders see Tether as a channel to get access to better markets and more cryptocurrencies. They do not see Tether as a long-term holding that makes up a percentage of their portfolio. As an investor, you must be extremely mindful of this!
About the author
Ting is a finance professional and an accomplished investor. Ting is well-conversed in financial markets, as well as having a background in taxation and law. Having previously worked for a top-tier accounting firm and an US-listed fintech company, Ting decided to pursue his passion in cryptocurrency in 2017 by joining forces with high school friend Mena.
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