Among the top cryptocurrencies by market capitalization, Tether stands out in several ways.
Unlike the other relatively volatile crypto assets occupying top positions in the charts, Tether (USDT) is a stablecoin – one of several blockchain-based tokens whose value is pegged to another currency or asset. This means its price fluctuates very little, if at all, compared other cryptocurrencies.
Associated with Bitfinex, one of the industry’s largest cryptocurrency exchanges, Tether is not a native cryptocurrency tied to a blockchain ecosystem, but as one of the most-traded currencies on crypto markets by volume, has played an important role as a trading pair against Bitcoin and other top crypto assets.
While it is not necessarily an attractive investment like Bitcoin or Ether due to its fixed value, it is a popular instrument used to access crypto markets – and sometimes a strong indicator of upcoming market movements.
It has also generated its share of controversy.
Tether can trace its history back to an early currency built on top of the Bitcoin blockchain, called Mastercoin. Two founders of Tether, Brock Pierce and Craig Sellars, were involved in the Mastercoin Foundation and they later joined forces with Reeve Collins to launch the direct predecessor of Tether, known as Realcoin in 2014.
Based in Santa Monica, California, the Realcoin project issued its first tokens on the Bitcoin blockchain, using the Omni Layer Protocol in October 2014 and shortly thereafter changed its name to Tether. In this first phase, there were three variations of stablecoins to be issued: USTether, EuroTether and YenTether, of which USTether became the most popular.
Trading of Tether was launched on Bitfinex in 2015, and since that time the currency has been closely linked to the exchange, although the legal and company structures and their relations are not entirely clear.
The huge popularity of Tether as a trading pair for Bitcoin (by some accounts it accounted for up to 80% of Bitcoin trading in the summer of 2018) has also given rise to accusations that USDT has been used to manipulate crypto prices. Other, more recent studies, however, cast doubts on these accusations.
There has also been controversy around the backing of Tether with US dollars. Originally, declared to be supported 1-to-1 with cash, Tether later indicated that only a percentage of the coins were backed by cash and “cash-equivalents.” It has since reaffirmed its assertion that all coins are completely supported 1-to-1 by USD.
After starting out with a token built on Bitcoin, Tether expanded to issue a version of USDT on Ethereum with an ERC 20 token, as well as varieties on TRON, EOS and Algorand. As of mid-2019, an ever increasing amount of Tether was issued on Ethereum which has led to some problems of congestion on the 2nd largest blockchain.
As mentioned already, stablecoins do not generally represent a strong investment case, since their value by default is pegged to another asset, in the case of USDT, that of the US dollar. While they are not totally risk free due to issuer default risk, they do not face the same volatility as other crypto assets.
However, in times of negative interest rates across much of the world, some investors view Tether and other coins like it as a viable way to protect large amounts of cash reserves against banking fees.
Tether has also been used as a major on/off ramp for those investing in major cryptocurrencies such as Bitcoin and Ether. For this reason, large jumps in the amount of newly-minted USDT is sometimes viewed as an indication of upcoming buyer interest on the open market.Great increases in the amount of USDT created may also occur during periods of market sell-offs when investors sell cryptocurrencies such as Bitcoin for USDT, leading to demand from exchanges who need to top-up their supply of the popular stablecoin.
Through the recent crypto market ups-and-downs, Tether has remained popular with daily volumes reaching into the billions.
Stablecoins in general have become a hot topic in recent months as negative interest rates burden traditional safe-haven currencies and threats of inflation increase interest in crypto assets in general.
Major players in global monetary policy have begun to explore the possibility of imitating stablecoins like Tether with a so-called “central bank digital currencies.” The European Central Bank has made explorations in the area and the Bank of China has gone so far as to launch a pilot of its digital yuan.
This may indicate that Tether faces stiff competition. At one point, Tether accounted for over 99% of the entire stablecoin market. With time, however, the range of options, besides digital currencies from central banks, has steadily increased. Other major stablecoins include the USD Coin (USDC) by Coinbase, and Binance USD (BUSD), both issued by major crypto exchanges as well as the Swiss franc-denominated CryptoFranc (XCHF), and DAI from MakerDAO, the most popular decentralized stablecoin.
Even with fiercer competition, USDT remains extremely popular. Since the recent coronavirus-inspired uncertainty, circulating supply has hit a new all-time high of over 8 billion, a jump of around 2 billion since the beginning of 2020.
If current conditions persist in global markets, the interest in time-tested stablecoins such as Tether might increase further, especially if there is increased adoption of blockchain as settlement-layer technology with a demand for USD-denominated tokens.
Meanwhile, in addition to growing its trading volume, Tether continues to innovate with an offshore Chinese yuan-denominated coin called CNHT and issued on Ethereum, launched in 2019.