Tether (USDT) is one of the most popular stablecoins in existence. It is designed to maintain a one-to-one value with the US dollar. The currency exists on many different blockchains, and its trading volume has been increasing in recent years, enhancing its liquidity.
Like other stablecoins, USDT is useful for trading cryptocurrencies as it allows traders to avoid the common market fluctuations of BTC and other crypto assets. Using stablecoins also eliminates the additional costs and delays of converting between cryptocurrencies and fiat currencies.
Tether is a fundamental component of the cryptocurrency ecosystem.
But what is Tether? What is it used for?
What is USDT?
Tether (USDT) is the world's first stablecoin (a cryptocurrency that mimics the value of fiat currency). It was initially launched in 2014 by Bitcoin investor Brock Pierce, businessman Reeve Collins, and software developer Craig Sellers under the name Realcoin.
USDT was originally issued on the Bitcoin protocol via the Omni Layer, but later migrated to other blockchains. Indeed, as you can see from the table below, most of its supply now exists as ERC-20 tokens on Ethereum. It is also issued on several other blockchains, including Tron, EOS, Algorand, Solana, and OMG Network.
Tether has experienced both success and controversy—like many of the world's most significant cryptocurrencies.
Especially in its early days, the price of USDT was somewhat volatile, reaching $1.2 at one point. However, since early 2019, the currency's volatility has significantly decreased. This is likely due to its stable turnover growth and the overall development of the cryptocurrency market.
How does USDT work?
Compared to more traditional crypto assets, the utility of stablecoins lies in their relative stability. As a stablecoin, Tether's appeal lies in its attachment or peg to fiat currency. It is said that USDT was originally backed by the US dollar on a one-to-one basis, with each circulating USDT being backed by $1.
According to the original Tether white paper:
Each unit of the circulating issue is backed by a corresponding unit of fiat currency held in deposits by Tether Limited in Hong Kong at a one-to-one ratio (i.e., one Tether USDT equals one US dollar).
Although Tether's original backing assets were US dollars, conversions have been made, including maintaining collateral with other actual cash equivalents, loan assets, and receivables.
As you can see in the USDT/USD chart below, the currency (usually) trades at a stable one-to-one exchange rate with the dollar. However, significant market events can affect its price.
Why is USDT important?
Tether bridges the gap between cryptocurrencies and fiat currencies. It offers investors a convenient way to trade one-to-one with the dollar without causing the inherent volatility of other cryptocurrencies.
By providing this stability, investors can maintain digital assets similar to fiat currencies but can easily trade other currencies in the cryptocurrency market. Tether's main features make it a popular currency—although it is not without its difficulties.
Main Features
1:1 ratio (US dollar to USDT exchange rate)
Stability (as long as the US dollar can be considered stable)
Usable on different blockchains
Different use cases compared to traditional cryptocurrencies
If the price of Bitcoin or other crypto assets drops rapidly, you can quickly trade USDT instead of trying to cash out.
Easily transfer funds between exchanges
With Tether, you can very quickly transfer funds between exchanges. This is also useful for arbitrage trading with other currencies.
Trade only on cryptocurrency exchanges
Some exchanges do not have funds for trust deposits and withdrawals but allow USDT trading. By first acquiring Tether, you can trade on these exchanges by putting your main trading funds into BTC (or other cryptocurrencies) without worrying about market fluctuations.
Forex-style trading
Since USDT is indexed to the dollar, when the value of USDT is high relative to USD, you can engage in forex trading by exchanging your local (non-US) currency for USDT. Then, you can withdraw local currency or exchange other assets when the local currency depreciates.
Conclusion
Stablecoins bring a lot of convenience to the world of crypto trading because they reduce the need for traders to make multiple conversions between fiat currencies and cryptocurrencies. Therefore, USDT is a useful asset available in crypto trading.
Despite several issues regarding the validity of its reserves, the trading volume in recent years shows that people have confidence in Tether as a stable currency. In addition to USDT, you can also choose to use other stablecoins such as BUSD, USDC, TUSD, and PAX.
