What is Tether USD (USDT) and how does it work?
Stablecoins play an integral role in the crypto market by acting as a bridge between traditional currencies like the US dollar and decentralised digital currencies operating on open blockchain networks.
Tether USD (USDT) was the first stablecoin to emerge in the global crypto markets, establishing itself as the leading dollar-backed stable digital currency.
In this guide, traders will learn everything they need to know about Tether USD and why it makes sense for traders to use a stablecoin, like USDT, to store and transfer funds.
Jump ahead through the below sections to get the information needed:
- What is Tether (USDT)?
- Who created Tether?
- What is a stablecoin?
- How does Tether work?
- What is Tether used for?
- Who uses Tether?
- How to buy Tether?
- How to store Tether?
- Is it safe to hold Tether?
What is Tether (USDT)?
Tether USD, which has the ticker USDT, is a blockchain-powered digital currency backed by US dollars. The idea behind USDT is to allow anyone with access to an internet connection and a crypto wallet to store, send, and receive US dollars in tokenised form.
In simple terms, Tether USDT is a digital dollar.
Unlike volatile cryptocurrencies, such as Bitcoin and Litecoin, USDT aims to track the value of the US dollar 1:1 by holding the equivalent of each issued USDT token in US dollars in a bank account.
Digital currencies that are designed to maintain a stable value are referred to as stablecoins. Tether USD was the first stablecoin ever invented when it entered the market in 2014.
Who created Tether?
Tether was founded as the first stablecoin in July 2014 by Brock Pierce, Craig Sellars, and Reeve Collins. Tether was built on Mastercoin (Omni), a protocol built on top of Bitcoin, which allows the creation of new cryptocurrencies.
While Tether operates as a decentralised digital currency on multiple blockchains, Hong Kong-based Tether Ltd, owned by iFinex, is responsible for creating and redeeming USDT as well as maintaining its fiat currency deposit backing.
What is a stablecoin?
A stablecoin is a cryptocurrency that aims to retain a stable value, typically linked to a currency or a commodity. They are designed to serve as protection from the large price swings of “traditional” cryptocurrencies, thereby enabling users to transact in digital currency without having to worry about price volatility.
Stablecoins act as a bridge between traditional finance and crypto finance by combining the trust and stability of sovereign currencies or popular commodities with the open, inclusiveness, and accessibility of cryptocurrencies.
The price stability stablecoins provide make them better suited for payments, money transfers, and commerce than cryptocurrencies, like Bitcoin, which helps to explain why the stablecoin market is booming, with over $100 billion worth of stablecoins in circulation by mid-2021.
Recommended reading: What is cryptocurrency trading?
How does Tether work?
Tether is a cryptocurrency that operates as a token on multiple public blockchains, including Ethereum, Tron, and Algorand. On the Ethereum blockchain, for example, USDT runs as an ERC20 token.
To ensure that one USDT token stays as close to 1 USD as possible, Tether tokens are backed by the US dollars held in bank accounts operated by Tether Limited and financial audits ensure that all dollars are present to maintain the 1:1 peg.
Each USDT can only be issued when the company receives 1 USD in their bank account. With a current USDT market capitalisation of about $64 billion, Tether Limited is expected to have US$64 billion in reserve to back those tokens.
Since Tether tokens are available on different blockchains, it’s important to check the destination blockchain address to confirm that traders are using the right blockchain when traders are sending USDT. Tether tokens on Ethereum can only be transferred on Ethereum, so switching chains would mean using a service that allows traders to deposit USDT as a token on one chain and withdraw as a token on a different chain. Many leading digital asset exchanges provide this service.
What is Tether used for?
It’s hard to picture the crypto markets without Tether. USDT has become the backbone of crypto trading, with more crypto trading pairs priced in stablecoins than in actual US dollars (or other fiat currencies).
The stablecoins ability to allow traders to move funds seamlessly from digitised dollars into crypto assets and back again makes it an incredibly popular asset for professional traders.
Let’s dive into the most common use cases for Tether USD.
Trading
Using fiat currencies to trade crypto isn’t efficient because it can take days to process funds through traditional banking methods. Also, it will require higher fees since it will incur some bank charges every time a money transfer is made to crypto exchange.
A better option is to convert the cash that is needed for trading to USDT, and then use it to trade as many assets as traders want with the stablecoin as the base currency. Most crypto traders sell their crypto positions for USDT rather than cash, so they can easily enter other trades.
Lending
There are numerous platforms that provide crypto loan services, allowing traders to lend or borrow cryptocurrencies with an interest rate. Tether USD is often used for this purpose since the lender doesn’t have to worry about the volatile risk of the lending asset, mitigating the risk of potential losses stemming from a drop in asset value.
Cross-border payments
One of the fascinating benefits of cryptocurrency is the ability to move money quickly around the world at a low cost. It’s common knowledge that international money transfers are expensive and slow, but with a price-stable digital currency like USDT, international remittances only take minutes and can be as cheap as a few cents.
Who uses Tether?
Almost everyone in the cryptocurrency space uses Tether USD in some way or another, be it for payments or trading. The primary groups that use USDT, however, include:
- Crypto traders: As of 2021, over 75% of bitcoin trading uses USDT as the base currency. Traders also use USDT to hedge against crypto market volatility and to deploy capital in yield-generating DeFi protocols to earn additional income on their crypto holdings.
- Crypto exchanges and brokers: It’s often hard and expensive for crypto platforms to deal with traditional banks. So instead, they provide the ability to fund accounts using USDT and utilise the stablecoins in their trading pairs. Axi also allows it’s users to deposit crypto into their trading account using the stablecoin Tether.
- Investors and businesses without US dollar bank accounts: For countries where citizens can’t easily create US dollar bank accounts, USDT wallets serve as a way to hold US dollars and perform international trade in digitised dollars.
How to buy Tether?
Like other cryptocurrencies, traders can buy Tether with credit/debit cards and bank transfers through any international or local crypto exchange. Most exchanges work in the same way, so traders can follow these steps to buy Tether:
1. Open an account
If traders don’t have an account with a cryptocurrency exchange already, then one can be created. Traders will have to provide some personal information as well as login details to set up an account. If traders are new to investing, it’s best to choose a local cryptocurrency exchange with a simple user experience.
2. Buy Tether (USDT)
After creating an account, traders have to fund the account with fiat currency. It’s similar to buying a stock or any other asset. Traders can buy with a fiat currency and get USDT in the exchange wallet.
3. Transfer or deposit USDT
Now that USDT is owned, the trader can transfer or deposit the stablecoin to whichever cryptocurrency wallet or trading account that they choose. Just copy the receiving wallet public address and transfer it. But it’s critical to know the blockchain that traders have the USDT on. Traders should only send USDT (ERC20) to a crypto wallet on the Ethereum blockchain. The same goes for other blockchains.
Tether is widely accepted and available everywhere in the cryptocurrency world. Traders will find it on almost every exchange and can buy it with fiat currencies and almost every other cryptocurrency.
As an alternative to buying USDT on an exchange, traders can also buy it directly with Tether Limited by minting USDT. To buy USDT directly from Tether, an account needs to be created here.
- Further reading: What is spot trading in crypto?
How to store Tether?
Like all cryptocurrencies, USDT is stored in a cryptocurrency wallet. Traders can pick between a software wallet, a hardware wallet, or store it on an exchange or broker. Each of these offers different levels of security, convenience and cost. However, the basic thing to know is to use a Tether-compatible crypto wallet.
The most straightforward option is to store Tether on exchanges and trading platforms. But keeping funds for the long-term on a third-party platform is often not advisable, though it provides flexibility for trading. All top crypto exchanges provide a Tether online wallet, often for multiple blockchains.
The next option is using mobile or desktop wallets. Traders can use wallets like Trust Wallet or MetaMask, or a hardware wallet such as Ledger. All of these options are safe but require a little bit of technical know-how about managing cryptocurrency.
The most important thing is using a wallet compatible with the network that is being used for USDT, be it Ethereum, Tron, EOS, or any other.
Is it safe to hold Tether?
Tether (USDT) is the biggest stablecoin in the world. It’s among the top five largest cryptocurrencies by market capitalisation and has been active in the crypto markets for over seven years.
While there have been some controversies around Tether’s US dollar reserves in the past, the company has made a point to provide regular proof of their reserves to ensure that traders and investors can rest assured that money held in USDT is safe.
Tether is key to the functioning of the cryptocurrency market, making it one of the “too big to fail” projects in the crypto space.
Tether price
How does the price of USDT stay so close to one US dollar?
In simple terms, Tether has a dollar reserve that backs up the value of each token. The 1 USD₮ = 1 USD pairing is what prevents Tether’s price from falling or rising sharply in the market.
Using a 1-to-1 ratio, the issuing company, Tether Limited, creates each Tether token based on one dollar deposited in its reserves. The reserves are held in cash and near-cash assets in regulated bank accounts and act as collateral for USDT.
Any USDT holder could request redemption of their Tether token against US dollars, but in most cases, only large crypto traders and institutional investors buy and redeem these tokens for US dollars.
The main risk to the US dollar peg is when the reserve assets are insufficient, which could lead to market participants losing trust in the stablecoin’s peg. At this point, the value of USDT could drop below one dollar.
What is the difference between USDT and USDC?
Tether USD (USDT) and USD Coin (USDC) are the two largest stablecoins by market capitalisation in the global crypto market, accounting for the vast majority of stablecoin trading volumes.
On the surface, USDT and USDC are essentially the same. They both operate on multiple blockchains and can be utilised for the same use cases.
The key differences between USDT and USDC is that USDT is a much larger cryptocurrency with a higher market cap and more liquidity than USDC, and that USDT is operated and managed by a single entity, Tether Ltd, owned by iFinex, while USDC is issued by a consortium, created by Circle and Coinbase.
USDT also has a much wider reach than USDC, thanks to its first-mover advantage, higher brand awareness, and deeper liquidity. For most professional crypto traders, USDT is the stablecoin of choice.
Get more information on funding an Axi trading account with USDT crypto deposits and start trading cryptocurrency CFDs today!
