In the world of cryptocurrencies, stablecoins occupy an unusual position—they are meant to be a safe harbor protected from the volatility of the crypto marketplace.
Digital assets such as Bitcoin are notorious for swinging wildly in value in the space of days or even hours. Yet, stablecoins, which are pegged to reserve assets such as the U.S. dollar, maintain their value through changing market conditions. Or at least, they are supposed to.
Their primary function is letting investors convert dollars and other so-called fiat currencies into digital assets that can be swapped for cryptocurrencies or deployed in decentralized finance, or DeFi, projects to borrow, earn interest, or make loans.
As of August 2022, the no. 1 stablecoin is Tether, which was introduced in 2014. It’s the most popular token after Bitcoin and Ethereum’s Ether based on market capitalization. Yet, it is a completely different type of asset from those offerings.
What is Tether?
Tether has long been a fixture in the crypto markets. With a market cap that’s exceeded $40 billion since March 2021, Tether’s USDT token is a bellwether for other stablecoins.
Investors use USDT to move in and out of other cryptocurrencies without going to the trouble or expense of converting to fiat currencies. Investors also use USDT to access DeFi applications. These range from lending to trading to playing online games.
The stablecoin is pegged to the U.S. dollar on a 1-to-1 basis, meaning that the value of one USDT coin should always be worth $1.
Tether backs USDT with a reserve of cash, cash equivalents, bonds and commercial paper, which are short-term corporate debt obligations. The reserve also uses gold and other digital assets. Tether reports the contents of its reserves on its website.
Tether offers other stablecoins pegged to hard currencies such as the euro, the British pound, and the Mexican peso. They operate on the same 1-to-1 ratio and are backed by reserves as well.
Can Tether be mined?
The short answer is no—Tether cannot be mined.
Most cryptocurrencies—Bitcoin, Ethereum, Solana, Cardano, to name some of the most valuable—can be maintained and minted by anyone with enough computing power and expertise. The scarcity and demand for the tokens sets their prices in the marketplace.
Tether is controlled by one company: Hong Kong-based iFinex, which mints and regulates the supply of the stablecoin. Tether does this to maintain the peg to the dollar. Other stablecoins such as DAI, which is supported by a cooperative called MakerDAO, are decentralized and maintained by members and users on the internet instead of by a single entity.
In any event, if investors discovered Tether’s reserves did not support the circulating supply of USDT, then the price could collapse and wipe out the value of the tokens.
Think of USDT less as a currency and more like a product made by a manufacturer, with a centralized structure that runs against the decentralized ethos of crypto. Tether charges steep fees for access to its tokens—investors who buy it directly from the company must pay a one-time fee of $150 and a 0.1% commission on deposits of fiat currency. It costs $1,000, or a 0.1% fee, whichever is greater, to withdraw fiat currency from a Tether account.
This model is strikingly different from other digital assets that are designed to be an alternative form of freely traded money, like Bitcoin, or a software component in a web project such as Ethereum. The Ethereum network, for example, produces a so-called native token, Ether, to help produce and distribute smart contracts, which are software programs that automate agreements and financial transactions.
With both Bitcoin and Ethereum it makes economic sense to let miners maintain their respective blockchains, or digital ledgers, and help set the price for their respective tokens. Unlike USDT, they float on the open market and are the target of a lot of speculation, which is why they are so volatile.
How do you buy Tether’s USDT?
Investors can buy and trade cryptos on a variety of platforms. Each has some pros and cons, and the availability of different cryptos, coin prices, transaction fees, and additional costs can depend on where someone buys crypto.
Here are the steps to purchase USDT:
- Choose a crypto exchange: Tether can be bought on major cryptocurrency exchanges, including Coinbase, Kraken, and Binance. An investor must either maintain or open an account at one of the exchanges, which apply their own know-your-customer background checks and fees. Keep in mind that Tether imposes its own fees for buyers who purchase USDT directly through an account with the company that runs Tether.
- Buy USDT on an exchange: Enter the ticker symbol on an exchange “BUY” page and use fiat currency or other digital tokens to acquire the stablecoins.
- Store Tether: There are a number of options on how to store tokens. Systems that separate crypto wallets from the internet tend to be the most secure and the most expensive. Maintaining private keys in “gapped” wallets disconnected from the internet makes it tough to access tokens for investors who want to trade and are better suited for those who want to hold them for long periods of time. Here are the different types of storage options:
- Hardware wallets. Also known as cold storage wallets, these are encrypted devices that are disconnected from the internet to thwart hackers who may try to illegally access and steal digital assets.
- Paper wallets. An old school approach to keeping crypto safe. These cold wallets that are actually printed on paper or other materials and bear the alphanumeric private keys to digital assets.
- Software wallets. These commonly used storage systems are computer programs that store keys for digital tokens, yet they are connected to the internet. This approach tends to cost less than hardware wallets.
- Crypto exchanges. The easiest and cheapest way to store tokens is letting them sit in accounts at marketplaces. Users have to trust the exchange not to lose or freeze their tokens.
The bottom line
As a cryptocurrency pegged to the U.S. dollar and other fiat currencies, Tether is not an investment product but rather a tool for operating in the world of decentralized finance. It permits holders to exchange an asset with a fixed value for other cryptocurrencies or services without having to convert into fiat currencies. Yet stablecoins, which are largely unregulated, are only as stable as the reserves that support them. In the case of Tether, investors must trust that the reserves are indeed sufficient to back up the circulating supply of tokens. If confidence collapses, so, too, will the value of USDT, whether it’s pegged to the dollar or not.