Welcome back to another exploration post into the crypto industry. Today we are going to be looking at the infamous Tether stablecoin. There has been a lot of debate over the years about if this digital asset is even a cryptocurrency, if it is even legitimate, and if it is safe to hold funds in it.
Let’s take some time to discuss what Tether really is, who made it, what problem it solves, and if you should be keeping funds in it.
To kick things off, we will quickly run over what a stablecoin is. Hope you enjoy.
Nothing should be considered investment or financial advice. Enjoy the ride.
What is a Stablecoin
Kicking things off, what is a stablecoin? Well, there are two distinctive types of stablecoins to look into. Those two types are:
- Collateralized Stablecoins
- Algorithmic Stablecoins
The difference is kind of in the names, but ill explain it.
Collateralized stablecoins are just that, they are backed by collateral in the form of assets. These assets are traditionally the fiat pairs which they represent. For example, if a stablecoin is supposed to be pegged to the US dollar, then it is a safe bet that it is backed by USD on a one to one ratio.
Although an algorithmic stablecoin is slightly different. Algorithmic stablecoins are smart contracts that are constantly manipulating the circulating supply of their asset in order to continually achieve a one to one ratio with the fiat pairing it is supposed to be representing. For instance, if the price of an algorithmic stablecoin increases, then the smart contract will immediately print out more in order to adjust the price downwards.
There are many benefits to creating a stable coins and many exchanges have done so in order to pull more of the market share of traders to their platforms. Here is a small list of exchanges that have created their own stablecoin:
Why Are Stablecoins Needed
Stablecoins are actually temporary solutions to current problems across the market.
Currently, the crypto market is still small and there is plenty of volatility even with the largest assets. The volatility likewise increases as the market cap of assets gets smaller and smaller. Take the analogy of throwing a rock into a pond. Right now, most crypto assets are small puddles and any rock thrown at them leaves a huge effect moving the price upwards or downwards.
Until the market reaches maturity, there will still be extreme volatility in the prices of cryptos. At maturity, you could think of the puddle turning into more of a lake. Those rocks being thrown at it, really won’t do much to the price at those levels and the market will remain relatively stable.
Until the market reaches these levels and the price movements of cryptocurrencies become more nuanced, stablecoins will be needed in order to capture profits, protect investments, and capture arbitrage opportunities.
What is Tether
With that out of the way, lets bridge into the main topic – what is Tether?
With the above knowledge we can quickly place Tether into the collateralized stablecoin group. That means Tether tokens are supposedly backed on a one to one ratio with USD. Tether tokens are widely accepted across the market on most exchanges which also gives it additional credibility, trust, liquidity, and security for most investors. Although, there has been little proof of the physical collateralized assets behind the Tether tokens. In addition, the website changed at one point to allow for traditional assets to be collateralized in order to back the Tether on a one to one ratio.
That basically means, Tether is holding not only USD in reserves but other traditional assets as well probably like Gold, Oil, Bonds, Securities, and possibly indexes in order to back their stablecoin. This is not the intended purpose of the reserves, but it has become accepted across the market as an understood risk behind the token.
When Was Tether Formed
Tether was formed all the way back in November 2014 by three co-founders:
- Brock Pierce – Director of the Bitcoin foundation and advocator of EOS
- Reeve Collins – Entrepreneur
- Craig Sellars – Software Engineer
In order to build the crypto the team used an OmniLayer solution which is a fully decentralized platform built on top of the Bitcoin Blockchain for security and immutability. At some of it’s peak points of use, Tether has been able to facilitate over 40,000 secure and provable transactions in a single day which is pretty impressive.
In addition, Tether is not tied to any single bank or governing authority which makes it a perfect solution for the decentralized market place, the unbanked, and those wanting to stay hidden.
Can You Purchase Tether
You can easily purchase Tether tokens through the main website, but the best way to obtain Tether is though exchanges. Just about every exchange on the market will host some stable coin these days, and most of them are smart enough to allow Tether on their platform.
Why Would Exchanges Want To Offer Stablecoins?
Well, it is quite simple. By offering stablecoins on your exchange, you enable traders to effectively capture profits and execute trades more frequently. Stablecoins are the perfect counter option to the extreme volatility on the market. Traders utilize the benefits of stablecoins in order to capture wide swings in the price of digital assets and secure their profits without fear of their digital coins dropping in value over night.
Clearly, exchanges are incentivized to offer stablecoin trading pairs for traders as they get trading fees per trade that is executed on their exchange. Therefore, the more stablecoin pairs they have with other digital assets, the more opportunities they have for traders to find their platform as their trading home.
Is It Safe To Hold Tether
This is a common question across the market – is it safe to hold Tether?
In the mean time, I would say it is quite safe. The general market has a long way to go before any of even the top assets approach stable price levels. Bitcoin alone swings widely almost every month between 10% – 20%. That is not a very stable store of value for most traders.
Therefore, it is reasonably safe to hold some reserves in Tether, but not in large amounts. The market changes extremely quickly, and you never know when regulation or bugs will create problems with a digital asset. I would say Tether is safe for trading, holding some reserves, but never large amounts. It is still safer to keep your money in some of the other top assets in cold storage despite the volatility.
Overall, Tether is a great solution to a current problem in the market. It will probably be around for a minimum of another 5 years before more stable coins start to replace it or counties themselves start using their own stable fiat pairs for trading with digital assets on open markets.