Cryptocurrency

Tether (USDT), A Cryptocurrency Stablecoin Full of Success and Controversy

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Since its launch in 2014, Tether has had a journey filled with a mixture of both success and controversy. Launched as a stable coin (cryptocurrencies that are pegged to the fiat currencies and commodities), Tether is currently the 3rd biggest cryptocurrency in market valuation. It is also the most successful and largest stable coin.

The creators of Tether envisioned developing a cryptocurrency on top of the bitcoin layer. After its creation, it was pegged to the dollar at the rate of 1 USDT: $1. Since then, Tether has mostly maintained this value to date though occasionally there are slight deviations. Initially, it was known as “Real coin” however, the name later changed to “Tether”

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Tether Controversy

Controversies have been part of Tether’s story since its initial days. There have been numerous claims that Tether is not backed by the dollar as claimed.

To ascertain this, several audits have been conducted by various auditors. However, the matter remains inconclusive since the findings have been contradictory.

Bitcoin manipulation

There have been sustained accusations of Bitcoin price manipulations through Tether. As a stablecoin, Tether is pegged at one dollar making it possible to artificially buy Bitcoin through the BTC/USDT pair.

Sustained buying pressure on the pair could cause the Bitcoin price to rise. Most critics claim this trick has been used severally. An accusation that Tether continues to deny.

One of the major cited cases is the high volatility experienced by Bitcoin in 2017. Tether is claimed to have played a part in influencing price movement.

These concerns are founded on the fact that it is possible to create Tether from nothing. Then use it to purchase Bitcoin.

As earlier highlighted, the majority of these accusations remain unproven. This makes it difficult to differentiate what is true and what is false.

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BitFinex

BitFinex is one of the large cryptocurrency trading platforms in the world and is based in Hongkong. Occasionally, Bitfinex has been the biggest holder of bitcoins in the market.

The association between Tether and BitFinex has always raised a lot of concerns since they are sister companies.

In 2019, BitFinex was accused of using Tether funds in covering an $850 Million loss. The loss originated from Bitfinex depositing money with a foreign payment firm without any formal contact.

Later, the payment firm declined to meet its obligations. Without any legal protection, BitFinex had no remedy in recovering its money. Hence, it booked it as a loss.

To maintain investor confidence, BitFinex illegally used funds belonging to Tether in hiding the loss. This disclosure attracted investigators to look into the dealings between the two companies. Finally, the case was settled after Bitfinex paid an $18 million fine.

Investor funds risk

These actions have raised concerns about Tether and BitFinex relationship. They exposed a loophole in regulations creating a potential risk to the investor funds. Using funds from Tether reserves means that some tokens were not backed by the dollar as it is supposed to be.

Understanding why Tether Remains successful

Despite the challenges and controversies, tether continues to record huge successes in terms of acceptability, usage, and market valuation. Currently, it has a total market valuation exceeding $60 billion. This ranks it as the 3rd largest cryptocurrency in the market.

Tether as a Stablecoin

We are experiencing an explosion of Stablecoins in the market. As the pioneer stablecoin, It is both the most used and most famous stablecoin.

The main success element driving Stablecoins is pegging them to the normal currencies and commodities. An example of a commodity is gold.

This helps shield it from the price volatility usually experienced by its peer cryptocurrencies. Price volatility remains a major threat hindering mainstream adoption and usage of cryptocurrencies.

However, through stablecoin cryptocurrencies, usage will surge as the challenges of volatility are no more.

USD/USDT

As the curve indicates, Tether has managed to remain relatively stable to the price of the dollar.

The ability to peg and sustain its valuation to the dollar has propelled its success to date.

Tether as a cryptocurrency

Despite being a stablecoin, tether is first a cryptocurrency. This means it continues to ride on the benefits cryptocurrencies have to offer. These include decentralization, scalability, and lower transactional costs.

Hedging asset.

Hedging is an important strategy used by investors to manage investment risks associated with price movement. It helps to minimize devastation if the market takes the wrong direction.

In the cryptocurrency market, Tether is the first go-to tool in case of a sudden price movement. Being, a stablecoin, it rarely experiences huge price changes as its peers. This characteristic allows investors to change their cryptos to Tether in case there is high market volatility.

Example

Let us take a scenario where Bitcoin experiences a sudden price drop. To protect your Bitcoin portfolio from taking a huge loss, you can convert your Bitcoins to Tether and still maintain the current bitcoin value. This is possible as Tether does not experience huge price volatility.

Purchase of other Cryptos

There are those brokers that only allow buying of cryptocurrencies through it. To do this, you are required to first convert your fiat currency to Tether. Only by doing this, you can make crypto purchases. This adoption as the preferred transactional crypto has made it valuable.  

Tether’s Future as a stablecoin

Through learning from the success of Tether, the stablecoin idea is attracting a lot of interested parties. Currently, there are over 150 different stable coins in the market and more are expected soon.

Several reputable institutions including JP Morgan are also researching on launching their stable coins. This is an indication that Stablecoins have a role to play. In the future, it will face increased competition as Stablecoins increase and saturate the market.  

Market disruption and Regulation

Recently, there has been a warning from the US government regarding the threat Tether poses to the traditional financial market.

This could be interpreted as an indicator that it is already causing market disruptions. Cryptocurrencies are meant to disrupt the traditional financial system by offering affordable, less controlled, and faster financial solutions.  

Conclusion

As a disruptive asset, it could face more regulatory pressure in the future. As more stablecoin joins the market, there will be an increased competition going forward. I expect the market leadership position of Tether to continue soon as the competitors still have a long way to catch up.

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