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Is Tether (USDT) a Safe Investment? Understanding the Risks and Controversies

Tether, boasting the highest market cap among stablecoins, remains mired in controversy despite its widespread use.

An illustration of a physical Tether (USDT) coin

In this guide, we delve into the world of Tether (USDT) to help you determine if it's the right investment for you. We'll provide a comprehensive understanding of Tether's potential as a secure investment by examining its history, past performance, and comparing it to other popular stablecoins. Our primary objective is to empower you with all the necessary information regarding Tether's stability and reliability, enabling you to make an informed decision about whether or not to buy Tether.


Tether's Origin


Tether, also known as USDT, was first introduced in 2014 by Tether Limited, a company based in Hong Kong. The stablecoin was created as a way to provide a digital alternative to the U.S. dollar, which could be used for trading and transactions on blockchain-based platforms.


In the early days of its existence, Tether was not widely used, but it began to gain popularity in 2017, when the value of Bitcoin and other cryptocurrencies began to rise dramatically. Investors turned to Tether as a way to protect their investments from market volatility.


Since then, Tether has become one of the most widely used stablecoins in the world, with a market capitalisation of over $60 billion as of 2023. It is used on a variety of blockchain-based platforms, including Bitcoin and Ethereum, and is often used as a form of collateral for trading and transactions.


How does Tether Work


Tether, the world's first stablecoin, is a cryptocurrency that is pegged to fiat currencies like the U.S. dollar or euro. Its value is maintained at a 1:1 ratio with the dollar, meaning 1 USDT = 1 USD. Stablecoins like Tether are designed to eliminate volatility, making them more suitable for everyday transactions compared to other cryptocurrencies. They offer the benefits of a stable fiat currency with the added convenience of a digital currency.Investors find stablecoins attractive for their ability to facilitate cross-border payments, offer low transaction costs, and provide a stable asset for investment.


Tether operates on the Omni Protocol, which allows for the creation and use of smart contracts and peer-to-peer transactions. The Omni Protocol is built on the Omni Layer, which runs on Bitcoin's blockchain and supports extensive exchange features without requiring extensive modification to its protocol's settings.


How is Tether Backed


Tether ensures the stability of its stablecoins through a reserve system that fully backs each coin's value with assets. This ensures a one-to-one exchange ratio with the currency or asset to which the coins are pegged. Like a casino's reserve that holds enough cash to cover all chips in play, Tether's reserve guarantees that all USDT holders can convert to fiat currency if desired.


The company provides transparency through a quarterly declaration on its website, detailing the breakdown of assets in its reserve, as shown below.


Tether updates the total value of its reserve assets daily.


Visual representation of the allocation of Tether's reserves
Tether's Reserves as of February 2023


Why are People Having a Hard Time Trusting Tether


Tether's past has been mired in controversy, with the New York Attorney General's office launching an investigation into Tether in 2019 and its associated exchange, Bitfinex, for allegations of fraud and mismanagement of funds. The investigation found that Tether had not fully backed its stablecoin with U.S. dollars and had used reserves to conceal a $850 million loss at Bitfinex.


The lack of transparency is a major concern for Tether, as it is issued by Tether Limited, a company not subject to the same level of regulation as traditional financial institutions. This results in limited information about the company's finances and operations.


Tether's reserve credibility has faced challenges within the crypto community, with ongoing questions about the composition of its reserve despite the introduction of regular reports in 2021. The absence of a formal audit of Tether Limited has further fueled concerns about its ability to back its stablecoin with the U.S. dollar.


Research showed that Tether minting events during market downturns were correlated with an increase in Bitcoin prices showing signs of market manipulation. The findings, by Griffin and Shams, were met with criticism from Bitfinex who claimed the data was cherry-picked. Subsequent research found little to no evidence of Tether manipulating Bitcoin prices and concluded that price increases were due to investor response to news announcements. The CEO of Tether and Bitfinex has stated that they have never engaged in market or price manipulation.


What other Tether based Stablecoins can you Buy


Tether offers various stablecoins in addition to its well-known USDT, including:

  • MXNT: Mexican Peso-pegged Tether token that mirrors the value of the Mexican Peso

  • XAUT: An ERC-20 token based on Ethereum, digitizing the value of gold

  • CNHT: Chinese Yuan-pegged Tether Token reflecting the value of the Chinese Yuan

  • EURT: Euro-pegged stablecoin that maintains a stable exchange rate with the Euro.


Table showing Market Cap of Tether's Stablecoins
Market Cap of Tether's Stablecoins as of February 2023

Differences between Tether's USDT and other Stablecoins


  • USDT vs. Algorithmic Stablecoins Algorithmic stablecoins maintain their stability through a smart mechanism that automatically adjusts the coin's supply in response to changes in demand. For instance, if the demand is high, the algorithm will increase the supply to keep the price stable. Conversely, if the demand declines, the algorithm will automatically reduce the supply to prevent the price from plummeting. Tether's USDT operates differently, as Tether Limited, decides when increase or reduce the supply.

  • USDT vs. USDC Tether's USDT and Circle's USDC are both centralized cryptocurrencies that are backed by tangible assets. However, their reserve compositions are not the same. According to its monthly report, USDC's reserves include only short-term US government bonds and cash, which renders it a more secure and open cryptocurrency in the eyes of the crypto community.

  • USDT vs. DAI DAI, MakerDAO's stablecoin, is designed to maintain its value close to one US dollar through a reserve system backed by assets. However, it is backed by more assets than its total value, and it only utilizes cryptocurrencies such as Ether and USDC. Furthermore, MakerDAO is not centrally governed, and the responsibility is shared among the MakerDAO governance token holders, making it decentralized, unlike Tether's centralized organisation.


What are the Advanatges and Drawbacks of Tether


Advantages of Tether

  • As a stablecoin, Tether is designed to maintain stability in value, pegged to the U.S. dollar or other fiat currencies. It is important to note that Tether's peg to the U.S. dollar is subject to change.

  • Being the first stablecoin and ranking as the third largest cryptocurrency by market capitalisation, Tether has gained widespread acceptance as a medium of exchange.

  • Its wide availability on major crypto exchanges enhances its accessibility to users.

  • Tether transactions between wallets are prompt and incur no fees, making it a convenient choice for crypto users.

Disadvantages

  • Despite its popularity, there are concerns regarding Tether's transparency and the validity of its reserve backing within the crypto community.

  • Accusations have also been made that Tether is being utilised to manipulate the high price of Bitcoin, leading to allegations of market manipulation.


Is Tether a Good Investment Opportunity


Tether, being a stablecoin pegged to the US dollar, does not offer the potential for significant gains like other cryptocurrencies. However, it can serve as a secure and stable option for individuals who wish to hold their assets in cryptocurrency while avoiding market volatility.


Tether operates as a store of value with each USDT being equal to one US dollar, making it a useful tool for conducting transactions in the crypto space with less uncertainty. Despite its stability, investing in Tether, or any other stablecoin, does come with risks, including the legitimacy of the platform and potential fluctuations in value.


As the regulatory environment surrounding digital assets continues to evolve, the success and reliability of Tether and other stablecoins will be determined by factors such as transparency, collateral, and liquidity.


Ultimately, Tether is not a good long-term investment as it will never appreciate in value. However, it can be a good option for holding during market volatility as it maintains a stable value.

How to Buy Tether


Tether can be bought through a variety of Centralized Cryptocurrency Exchanges, such as Coinbase, Binance, and Kraken. It is important to conduct research and compare the services, transaction fees, and other costs associated with each exchange prior to making a decision. Once you have selected an exchange, you may deposit your fiat currency in exchange for USDT or exchange your other cryptocurrencies, such as Bitcoin (BTC) or Ethereum (ETH), for USDT.


In addition, Tether is also available on Decentralized Exchanges (DEXs) such as PancakeSwap and Uniswap. When utilizing a DEX, it is recommended to have a good understanding of the technology and processes involved, as these platforms may require a higher level of technical knowledge. A step-by-step guide to using Uniswap can be found here.


Overview


Whether Tether is a safe investment or not remains a topic of debate among the crypto community. On one hand, Tether has become one of the most widely used stablecoins in the world and offers the benefits of a stable fiat currency with the added convenience of a digital currency. However, Tether's past has been plagued with controversy and a lack of transparency, with questions about its reserve credibility and the absence of a formal audit. While some see Tether as safe to buy, others consider DAI or USDC, which only hold cash and short-term U.S. government bonds, as safer alternatives. Ultimately, the decision to invest in Tether or any other asset comes down to personal risk tolerance and financial goals. It is recommended that investors do their own research and consult with a financial advisor before making any investment decisions.

 
If you have any questions or would like more information, please feel free to contact us via our contact form, or you may schedule an appointment with one of our experts through our booking page.

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