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Tether has its uses, but it also has a checkered past.
While there are several stablecoins pegged to the U.S. dollar, Tether is by far the most popular. At the time of this writing, it’s the third-largest cryptocurrency in terms of market cap. And in terms of daily trading volume, it’s number one, even blowing away Bitcoin in that area.
If you’ve been thinking about purchasing Tether or wondering why so many people do, let’s take a detailed look at the coin to see whether it’s worth buying.
What is Tether?
Tether is a stablecoin, or a cryptocurrency that’s tied to another asset. In Tether’s case, that asset is the U.S. dollar, and 1 Tether is designed to be worth $1.
A company called Tether Limited controls Tether. It’s responsible for managing the Tether supply, keeping reserves to back the Tether tokens it issues, and maintaining a stable price.
There have been periods when Tether was worth more or less than $1. Tether Limited has had its share of controversies (we’ll cover those further below), and some have caused its price to drop as low as $0.90. Conversely, when cryptocurrency prices are falling, demand for stablecoins can rise and push up Tether’s price.
It’s worth noting that Tether Limited doesn’t provide any legal guarantee that 1 Tether can be exchanged for $1.
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Uses for Tether
The idea behind Tether is to turn your cash into a stable digital currency. Maybe you’re wondering what the point is, considering there’s no potential for huge profits like there is with other types of cryptocurrencies.
There are several uses for Tether. Here are the most common:
- Payments: One of the benefits of cryptocurrency is that people anywhere in the world can send each other money quickly and at a low cost. International money transfers, on the other hand, are often expensive and slow. But with most cryptocurrencies, the value of what you send could change by the time it reaches the recipient. Tether solves that problem since it has a stable price.
- Trading: Using cash for crypto transactions costs fees and can take days to process. An easier option is to use Tether for crypto trading. You can purchase Tether to keep in your exchange account, and then trade it for crypto whenever you want. If you have a crypto you want to turn into cash for the time being, you can trade it for Tether instead of selling it.
- Lending: Many crypto platforms let you lend your coins, and you can do this with any type of crypto, including stablecoins. Interest rates can be high, as some people are earning 25% interest lending out coins. The benefit of doing this with stablecoins is that you don’t need to worry about the price dropping like you would with other cryptocurrencies.
Issues with Tether
Even though Tether may seem secure because it’s a stablecoin, there have been issues with it and Tether Limited.
The reserves for a stablecoin are extremely important. If the company issuing it doesn’t have sufficient reserves for the coins it’s issuing, then it’s essentially creating money out of thin air.
Tether’s reserves have been the subject of frequent discussion, and unfortunately, Tether Limited has lied about them before. It used to claim that every Tether was backed one-to-one by a U.S. dollar. That wasn’t the case.
In 2019, Tether Limited’s lawyer revealed that 74% of Tethers were backed by cash and cash equivalents. And in 2021, Tether Limited published a reserves breakdown showing that only 2.9% of Tethers were backed by actual cash. The rest of its reserves are a mix of assets, including commercial paper, secured loans, and corporate bonds.
The lawsuit against Tether Limited and Bitfinex
Tether Limited has the same ownership as a crypto exchange called Bitfinex. In 2019, the New York Attorney General filed a lawsuit against the companies alleging that Tether reserves were used to cover up Bitfinex’s losses.
According to the lawsuit, Bitfinex used third-party payment processors for customer deposits and withdrawals. In 2018, approximately $850 million in funds went missing when Bitfinex sent it to a processor called Crypto Capital. To cover up the loss, Bitfinex took $700 million from Tether’s reserves.
The owner of Tether Limited and Bitfinex, iFinex, settled the case in 2021 and paid an $18.5 million fine. The companies didn’t admit nor deny wrongdoing.
Should you buy Tether?
If you want to buy a stablecoin, Tether is the most widely used. For the most part, it has maintained a price of $1. Even when the price has fluctuated, it has corrected back to $1 fairly quickly.
However, given that Tether Limited hasn’t proven itself to be trustworthy, you may want to go with another stablecoin. On top cryptocurrency exchanges, you can find several without the issues Tether has had, including:
- USD Coin
- Gemini dollar
The companies behind each of those stablecoins regularly publish information on their reserves.
There are quite a few stablecoins available. What’s important is finding one that you trust, especially if you plan to store funds with it or lend it.
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