Crypto space is filled with coins whose value alternatively ‘shoots to the moon’ or plummets to the floor. And that is not just the case for obscure meme-coins with little to no utility other than a possibility they will go viral, thereby making their creators and first-comers rich at the expense of those who were late to the party.
Extreme volatility is typical for the cryptocurrency sector as a whole. Out of the top 10 biggest digital tokes, the biggest gainer of 2021 – Solana (SOL) – is up by 13,206.31% year-to-date. The top 10’s average gain for the year so far is 2,197.50%.
Two constituents of the top 10, however, stand out with their limited movements: Tether (USDT), which is currently the fifth-biggest cryptocurrency by market value, and USD Coin (USDC), now at number 10, which recorded -0.07% and +/-0.00% changes over the past seven days of trading. This has happened in a week where bitcoin and a number of major altcoins have repeatedly registered new record highs.
The Tether cryptocurrency and USDC are the so-called stablecoins – a sub-sector of cryptocurrencies designed to be immune to volatility. Stablecoins’ value is intended to be pegged against government-backed assets, for example precious metals such as gold. This is what makes them “stable”.
Stablecoins are mainly used by crypto traders to buy and sell easily, or to speculate on digital assets across platforms, thus minimising the need for using fiat currencies and traditional financial institutions.
Moreover, tether is seen as a rare ‘safe haven’ asset in a famously volatile asset class. When the price of a digital asset crashes, traders may choose to move their position to tether quickly in an effort to minimise potential losses.
What is Tether (USDT)?
Tether’s market value of $73.8bn puts the coin steadily within the top five of cryptocurrencies. Tether boasts the biggest trading volumes across the whole sector. With $118bn, its daily trading volume is double that of bitcoin’s (at $50bn).
The Tether (USDT) token is the largest and the first stablecoin, as it was launched in 2014. It is supposedly pegged at a 1:1 ratio with a matching fiat currency, meaning that its issuer – Tether Holdings Ltd – distributes one Tether (USDT) stablecoin for every dollar it receives. The Tether cryptocurrency is intended to be 100% backed by Tether’s reserves.
Tether price analysis
The Tether price has mainly lived up to its ideals in recent months and years, with minimal price movements seen in a monthly low of $0.998 and a monthly high of $1.00, according to CoinMarketCap.
Tether’s price, however, experienced several notable slumps and jumps since its launch.
In April 2017, the coin took a hit and fell to $0.9244. Around the same time, an anonymous critic, who goes by Bitfinex’ed on Twitter, took to the social media channel to claim that tethers were not backed by anything at all for the first time, and asked why, according to Bloomberg, the company had not produced audited statements. “They are literally Dave & Busters/Chuck-e-Cheese Tokens,” Bitfinex’ed said in a tweet, as Bloomberg reported.
Following April’s slump, Tether swung up to its all-time high of $1.21 on 27 May 2017.
Another example of Tether’s momentary volatility occurred following the so-called “Black Thursday sell-off” of March 2020, when bitcoin crashed to $4,000, wiping off half of its price over the course of two days.
On that day, 12 March 2020, Tether’s price spiked up to $1.0536. It then slumped to $0.9742 on 18 March 2020 and experienced some more volatility before resuming trading at around $1.00.
A similar pattern was repeated – albeit to a lesser degree – during a market correction in April 2021. Analysts from cryptocurrency data provider Kaiko reasoned that during bitcoin crashes, Tether has a tendency to drift from its 1:1 peg positively rather than negatively as the traders sell their bitcoin positions in order to move them to Tether.
“This phenomenon was on clear display over the weekend as bitcoin crashed from above $61,000 to below $54,000 in a matter of hours,” they wrote in a newsletter on 19 April 2021.
“During a crash, traders will race to sell their bitcoin in exchange for Tether, which is similar to the US dollar in that it is recognised as a temporary safe haven amid extreme price volatility.
“A sudden increase in buying pressure for Tether often has the effect of causing positive drift from the stablecoin’s 1:1 peg. Over the weekend, the sudden bitcoin sell-off caused Tether to spike above $1.004, its highest USD price since last March’s sell-off.”
Advantages of using Tether
Tether is seen as a rare ‘safe haven’ asset in a famously volatile asset class. When the price of a digital asset crashes, traders may choose to move their position to Tether quickly so as to minimise potential losses.
The exact nature of these reserves was, however, recently thrown into question. Last month, US regulator the Commodity Future Trading Commission (CFTC) fined Tether issuers $41m for allegedly making untrue or misleading statements about USDT Tether reserves relating to years 2016–2019.
The regulator noted that since the coin’s launch in 2014, Tether issuers stated that the Tether token is a stablecoin that has its value pegged to fiat currency and is 100% backed by corresponding fiat assets, including US dollars and euros.
The CFTC ruled that from “at least 1June 2016 to 25 February 2019” Tether was misrepresented to customers and the market, and that it “maintained sufficient US dollar reserves to back every USDT in circulation with the equivalent amount of corresponding fiat currency held by Tether and ‘safely deposited’ in tether’s bank accounts” whereas “in fact, Tether reserves were not ‘fully backed’ the majority of the time,” the watchdog concluded.
As of November 2021, the Tether website states that its reserves include traditional currency and cash equivalents, and that “from time to time, [the reserves] may include other assets and receivables from loans made by tether to third parties, which may include affiliated entities”.
In addition to being the focus of regulators, Tether’s reserves have also been scrutinised by media and market participants.
Last month, an investigation by Bloomberg made a number of claims about Tether’s backing, and among other issues, said it includes “billions of dollars of short-term loans to large Chinese companies”.
Tether denied holding any debt at embattled Chinese property development company Evergrande. “Tether does not hold any commercial paper or other debt or securities issued by Evergrande, and has never done so,” the company said in a note to Capital.com, adding that the “the vast majority of the commercial paper held by Tether is in A2- and above-rated issuers”.
Last month, New York-based short-seller Hindenburg Research joined the ranks of those questioning Tether’s reserves. “We have doubts about the legitimacy of Tether,” the company tweeted, announcing a £1m (£747,738, €872,640) reward for details on the reserves.
“The company claims to hold a significant portion of its reserves in commercial paper yet has disclosed virtually nothing about its counterparties,” the research company added.
The fact remains that without audited, publicly available information, it is impossible to be sure what kinds of assets these reserves hold. In a note to Capital.com, Tether said that their reserves are audited, yet the data isn’t transparent or publicly available, which makes it difficult to verify.
What’s next for stablecoins?
It is not just Tether that found itself in the spotlight in the recent months. Stablecoins in general have recently been high up on the regulators’ agenda.
In September, Gary Gensler, chair of the US Securities and Exchange Commission (SEC), told the Washington Post that stablecoins were acting as “poker chips” at the crypto “Wild West casino gaming tables”.
Last week, US Secretary of the Treasury Janet Yellen, along with the heads of all US financial regulators, urged Congress to pass a law regulating the stablecoin sector.
“Congressional action is urgently needed to address the risks inherent in payment stablecoins,” the long-awaited report on stablecoins, published last week, noted.
The regulators concluded that different stablecoin reserves are held in assets of various risk profiles, with some supposedly holding all their reserve assets at insured depository institutions or in the US Treasury bills, and others reportedly holding riskier reserve assets, such as commercial paper or other digital assets.
Boyle added that none of the extant stablecoins come close to these standards. Should Congress pass a law bringing this type of regulation into effect, it would have “massive repercussions on the crypto space”.
What consequences should these regulations – should they come into effect – hold for Tether and its infamous reserves? This remains to be seen.
Tether (USDT/USD) price prediction
Tether coin is designed to be worth $1 at all times, and as such – if it lives up to its aspirations – Tether’s value should remain at $1. According to Trading Beasts’ Tether (USDT/USD) price forecast, by the end of 2022, the average Tether future price is expected to be…