Tether (USDT)

Tether (USDT) is considered to be the mother of all stablecoins and is therefore a crypto-currency that follows the principle of converting a classic currency usually in a 1:1 ratio into a block chain. In the case of tether, this was initially the US dollar as the global reserve currency, but now there is also a euro tether. Although USDT has been maintaining its position among the top 10 crypto currencies for years, doubts about the coverage of USDT by money reserves and business practices of the makers of Tether continue.

Quick Facts

Ticker Symbol: USDT
Maximum Number: Unlimited
Protocol: Proof-of-Work (Omni Layer)

Historical Background to Tether

When the crypto-currencies, led by Bitcoin (BTC), virtually learned to work in the mid-2010s and increasingly came into the focus of investors, the question arose: How can Fiat be stable in the crypto-market and how can it be kept there? Strong price fluctuations in the BTC and Co. made the market exciting for investors, but only allowed them to hold balances in a less volatile currency such as the US dollar in the block chains by means of detours and fees. The founders of Tether recalled the idea of a master coin published in 2012, which was developed by crypto-veteran J.R. Willett. Just as some developing countries peg their currencies to the US dollar in order to achieve currency stability, a master coin should work in the crypto world. Technically, the Omni Layer was developed for this purpose, which allows a second layer to be added to the BTC block chain.

In 2014, the master coin that was planned became a token called Realcoin, which appears in the BTC block chain from October of that year. Already in November 2014 the project was renamed to Tether and from then on it took off. The promise was: The Hong Kong-based company Tether Unlimited deposits one US dollar for every USDT spent on the project in a bank account and destroys (burn) the USDT when it is paid out in US dollars again. The system is funded by Fiat’s retention fees and mainly Fiat’s disbursement operations. As long as the money is held in USDT, holders can use it to trade freely with crypto exchanges and other financial service providers without incurring fees on tether, and transactions are validated and documented in the block chain of BTC.

In order to transfer this concept into broader practice, key figures from Tether participated in the creation of a crypto exchange called Bitfinex, which went live in early 2015. This marked the connection between the classic financial world and the crypto industry, Bitfinex quickly became the platform that made USDT popular. However, the close connection between Tether and Bitfinex was later to prove to be a major problem. To this day, the websites of Tether and Bitfinex list three people on the board of directors, with JL van der Velde as CEO, Giancarlo Devasini as CFO and Stuart Hoegner as chief attorney, who lead the fortunes of the two supposedly independent companies. Philip Potter, Brock Pierce, Reeve Collins and Craig Sellars, who played important roles as co-founders of Tether in the early days, have now left the company.

The complications of the largely identical management of Bitfinex and Tether are discussed in detail in the chapter “Criticism of Tether”. It was important for the historical development of tether that in 2017 a tether based on ERC20 was introduced and USDT can therefore easily serve as a stablecoin for Ethereum (ETH) and other ERC20 altcoins. With rising BTC prices and a developing crypto market, the market capitalization of USDT jumped from USDT 10 million in January 2017 to almost USDT 3 billion in September 2018. USDT did not have an ICO in the true sense of the word, and new USDT will be produced when Tether Unlimited Fiat has received it.

USDT is backed by Tether Unlimited, a private company and not a foundation as with many other crypto currencies. In November 2017, Tether had to admit that he was the victim of a hack that stole the equivalent of 31 million US dollars. Bitfinex, on the other hand, had already reported a large hack in August 2016, in which the equivalent of 73 million US dollars was lost. But despite all the setbacks, USDT has so far established itself as the leading stablecoin, whose further development is controlled by Tether Unlimted in close dependence on the overall crypto market.

Technology behind Tether (USDT)

USDT does not have exclusive technology like most of the other leading crypto currencies. USDT rather uses the two most important and proven blockchains of Bitcoin and Ethereum. The Omni Layer allows Tether to saddle its transactions from USDT to the BTC block chain and the ERC20 block chain respectively. Recently, Tether Unlimited has also made the USDT compatible with the block chains of EOS and TRON (TRX). However, these only play a subordinate role for the market capitalisation of USDT. The daily transparency report of USDT shows that at the beginning of August 2019, about two-thirds of all USDT are represented in the BTC block chain and one-third in Ethereum. The advantage for Tether is that no own computing power needs to be acquired and the risk of a 51 percent attack is very low due to the high hash rate of BTC and ETH. The disadvantage: USDT is dependent on technological development at BTC and ETH and has little influence there at best.

The focus of tether is on its use as a stablecoin in the crypto industry. Accordingly, it is seeking cooperation with crypto exchanges, payment service providers and other market participants. Official supporters are listed in this list, but in practice USDT is also the preferred stablecoin for many other crypto exchanges and related services. To maintain this status, Tether will continue to be forced to keep its USDT compatible with as many block chains as possible and not lose the trust of the crypto exchanges.

Criticism of Tether

Anyone who takes a closer look at tether and USDT automatically comes across two recurring points of criticism: Firstly, the hedging of USDT by Fiat reserves is not very transparent. Secondly, Tether and Bitfinex have been repeatedly associated with price manipulation. Experts also point out the technological dependence of Bitcoin, Ethereum and the Omni Layer. Let’s take a closer look at the criticism.

Tether advertised for years with the guarantee that for every USDT one dollar was deposited with a commercial bank. This should also be proven by audits by external, recognized auditors. But these promises were not kept; instead, Tether repeatedly has difficulties finding a partner bank. The law firm Freeh, Sporkin & Sullivan LLP certified in June 2018 that it was confident that Tether’s US dollar reserves were higher than the value of the USDT in circulation. However, FSS is not a recognized accounting firm and Tether’s partner bank Deltec in the Bahamas, which is led by Tether, has not made any statements to the media. In March 2019, Tether changed its terms and conditions and cancelled its promise to fully hedge all USDT with US dollars. From now on, it was also possible for Tether to be hedged with bonds. In May 2019, Tether had to admit that only 74 percent of its reserves were still held in Fiat. The remainder was issued as a loan to the crypto exchange Bitfinex (we recall again that Tether and Bitfinex have the same management). Since all these concessions were only made as a result of external pressure, it would be naive to still believe that Tether follows its principle of 1:1 coverage by US dollars, as originally outlined in the white paper on USDT.

At least as serious is the accusation that Tether and Bitfinex manipulated prices. This criticism arose when Bitcoin’s price reached unprecedented all-time highs in mid-2017. A double-digit percentage of BTC trading was conducted via USDT and Bitifinex, as an important crypto exchange, took a relevant market share. Analysts John M. Griffin and Amin Shams as well as journalists from the financial news agency Bloomberg expressed their suspicions, which were backed up by data: Tether “prints” USDT so that Bitfinex itself acts as a trader and buys BTC when prices fall and takes profits when prices rise and converts them back into USDT. Other crypto exchanges such as Kraken have also been used. Summarized: With a combination of wash trading and front running Bitfinex and Tether are said to have used their insider knowledge and market position to realize their own profits. The CEO of both companies, JL van der Velde, categorically rejected the allegations and formal investigation proceedings were not carried out. However, Tether and Bitfinex increasingly withdrew from the US market, where they face stiff fines and personal liability for such offences.

The amalgamation of Bitfinex and Tether is reflected to this day (August 2019) in an unfinished court case in New York, where a $900 million credit line between the two companies is at stake. Even with sympathetic consideration, Tether and Bitfinex have never been able to transparently refute allegations. Where which Fiat money is stored is one question, and exceeding the neutral role from service provider to active market participant is the second. As long as courts are needed to shed at least some light on this jungle, trust in Tether and Bitfinex seems to have been shattered. However, the market has so far decided to continue to support the USDT on a large scale as stablecoin, the price fluctuations are kept within narrow limits, and short-term large swings have not been seen since October 2018. However, investors should keep in mind: After all, Tether himself lists risks in his white paper, including the default of a partner bank, the seizure of assets and the scenario of an exit scam. Tether also admits that his central position as a bridge between Fiat and crypto means that he cannot fully follow the decentralized principle of Bitcoin and Co.

Compared to this, the technological risks of USDT are less threatening. So far, Tether has kept up with the development and has matured in the crypto scene to a size where, for example, software and hardware wallet providers automatically have to guarantee USDT support as a customer service. Put succinctly: USDT is “too big to fail”, a collapse of Tether and Bitfinex would shake up the crypto industry However, this does not exclude the possibility that a state regulatory authority could make an example of Tether and/or Bitfinex, precisely because a stablecoin would automatically create scenarios of money laundering and terrorist financing.

Buy Tether (USDT)

The only crypto exchange where you can buy tether for Euro is Kraken. Otherwise, most crypto currencies are traded at Binance, the world’s largest crypto exchange for tether. But there you don’t have the possibility to deposit Euros or US dollar.

Alternatives to tether (USDT) from an investor perspective

USDT is the native stablecoin in the crypto industry and also reflects the fact that neither the euro, yen nor other Fiat lead currencies come close to the importance of the US dollar. Nevertheless, there are now a handful of other stablecoins that have achieved recognition and a certain market capitalization. First and foremost are USD Coin (USDC) and TrueUSD (TUSDT), followed by Paxos Standard (PAX) and Gemini Dollar (GUSD). They partly have the advantage of being subject to US legislation, which tether tries to avoid. An investment in Stablecoins is basically not motivated by the desire to make profits directly from it. Rather, it is an instrument for being able to trade quickly and easily on the world’s crypto exchanges. In this context – despite all scepticism about Tether and Bitfinex – there is virtually no way around USDT among the crypto currencies. The real alternative to USDT for crypto investors is therefore either Fiat with the disadvantages of classic currency and time delays in trading. Or Bitcoin (BTC) as the leading currency of the crypto industry with the disadvantage of high volatility.

Wallets for Tether

Even if your tether (USDT) is pegged to the US dollar and is basically like credit in US dollars or converted to euros – you cannot keep it in your normal bank account. To park crypto currencies securely, you need a wallet. Three options are available: The so-called Paper Wallet, a Software Wallet or a Hardware Wallet. With a paper wallet, you secure the private and public keys to your USDT account physically separated from the Internet in writing on a piece of paper or engraved on a metal plate, for example. This method protects you from online attacks, but will annoy you every time you use your USDT because you have to type in long passwords. In addition, the piece of paper with your crucial access data can be lost or destroyed, making you lose access to your tether.

With a software wallet you can store the private and public keys for your USDT and thus comfortably trade crypto currencies. However, this also increases the risk of becoming a victim of a hacker attack. Whether it’s a smartphone, tablet laptop or PC – the device running the Software Wallet for tether and other crypto currencies is connected to the Internet, which is a potential point of attack. You can store your tether for example with the Trust Wallet (for the ERC-20 Tether version). The Omniwallet (for the Bitcoin Omnilayer Tether version) is also popular. With a Software Wallet, the balance between user-friendliness and security shifts towards convenience while compromising on security.

Therefore, you can’t really get around a hardware wallet where you store the private and public keys for your USDT on a security chip separate from the Internet, thus achieving the highest possible security paired with user-friendliness. With Ledger and Trezor, two established manufacturers are competing to see who offers the best hardware wallet. The testers largely agree: The Ledger Nano S as a hardware wallet for beginners and the Ledger Nano X for professionals are superior to Trezor in small details, such as the number of crypto currencies supported. You can find our comprehensive special for comparing hardware wallets here. To manage your tether securely, both Tresor and Ledger hardware wallets are suitable.

Conclusion on tether: USDT is the leading stablecoin despite all criticism

Tether (USDT) has become an indispensable part of the crypto industry because this altcoin has become the standard for the task of a stablecoin. Tether’s competitors, some of whom have been extolled with a lot of PR, so far only occupy about a third of the market capitalisation of tether. For you as an investor it is advisable to keep an eye on the situation of Bitfinex and the statements of Tether to hedge the USDT. Due to legal issues and the at least unfortunate coupling of the two companies, risks for the stability of USDT are lurking here, which in the worst case could lead to a crash of Tether. Whether Facebook Libra 2020 will be a powerful alternative to USDT remains open as long as it is not clear whether the major crypto exchanges will accept Facebook Libra as stablecoin.

Tether price and price development

The current tether rate and price development can be found here.

Important Links for Tether

Tether Website
Tether on Twitter
Block Explorer Tether
Tether Whitepaper
Bitfinex