Is USDT Safe? Everything You Need to Know.
by Sam Klemens Ethereum convert, world traveler and consumer of long form podcasts. Currently surfing the best waves in South East Asia.
Tether (USDT) is the largest stablecoin (crypto asset pegged to the value of something relatively more stable like the US dollar) in the world. Not only is it the largest stablecoin, but it’s also one of the largest cryptocurrencies by market capitalization (number of circulating Tether multiplied by Tether price).
The reason that investors and traders use Tether is liquidity, or binance akademían
the ability to get in and out of cryptocurrency positions without huge changes in price. Tether regularly posts billions of dollars in daily trading volume, making it more liquid than even Bitcoin at times.
Liquidity is important for institutional investors who move tens of millions of dollars’ worth of crypto at a time. If they were to use a smaller stablecoin, binance cryptocurrency exchange
kuponu an institutional player could move the entire market. Tether’s deep liquidity gives institutions and whales (big crypto holders) the trading volume they require.
Also, despite the controversy surrounding Tether and its potential lack of USD reserves to back its $1 value, it has done a good job of holding its $1 peg through many ups and downs.
The question we have to ask though: is USDT safe? To understand why so many people are wary of Tether, let’s begin by looking at what’s wrong with the coin.
In this article.
Is USDT Safe? The Main Problem with Tether.
When people ask "how safe is USDT?", they’re asking because of Tether’s main fundamental problem.
The fundamental problem with Tether is easy to summarize: we can’t be sure that each $1 of USDT is backed up by $1 of USD. For the first five years of its existence, Tether claimed to be backed 1:1 by dollars.
However, as of 2019 they adjusted their messaging and began saying that they had enough " reserves " to cover all of the Tether printed. What are those reserves? Can we verify them? These are questions we don’t have the answer to.
Bitfinex is the parent company of Tether. From time to time, Bitfinex will release audits that claim Tether is backed by dollars in a bank account, but these audits have yet to live up to traditional auditing standards.
According to Tether, this is due to reasons like major accounting firms not wanting to audit Tether due to the regulatory uncertainty surrounding the emerging cryptocurrency industry.
So therein we hit upon the fundamental problem: we don’t know what amount of dollar reserves Tether is backed by. One-hundred percent backed? Fifty percent backed? Nobody knows! If there was a huge "bank run" on Tether, where everyone tried to withdraw dollars at once, could Tether pay out or would they go bust?
That we don’t know the answer is the real cause for concern behind Tether. That being said, it’s not as though Tether is in uncharted territory.
Fractional Reserve Banking.
For those unfamiliar with current banking practices, a fractional reserve system is one whereby banks only need to hold a small amount of dollars in proportion to the loans that they make.
For example, say that a bank has a 10% reserve requirement. That means that for every $100 in reserves that they hold, they can issue $1,000 in loans. The $100 is their safety buffer.
In response to the coronavirus pandemic, the Federal Reserve (US central bank) lowered bank reserve requirements to zero. This means that the US no longer has a fractional reserve banking system, but a zero reserve one. Image credit: Reddit/Federal Reserve.
Banks count on the fact that not everyone will demand their dollars at the same time. If that does happen it’s called a bank run and if left uncontrolled, it can bring down a bank.
A bank run is, fortunately, a fairly rare occurrence. Just as it would be unusual for everyone to demand their money at the same time from a bank, so it would be unusual for that to happen to Tether.
The problem though is that banks have a safety net, and Tether doesn’t. For example, banks in the US are supported by FDIC insurance (bank deposit insurance) and in extreme cases the Federal Reserve.
Tether is supported by nothing. In the event of a Tether run, there will be nobody to compensate investors in case of losses.
So the truth is we don’t know how risky Tether is. Maybe this can go on for a long time, maybe Tether will still be around in ten years, and let’s hope it is! No matter how many people dislike Tether, its failure would have a huge effect on the markets.
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The Different Versions of Tether.
Tether is a unique cryptocurrency in that it "exists" on several different blockchains. Currently there is a Tether token on the Omni Bitcoin platform, Ethereum, EOS, and on Tron.
The Ethereum ERC20 version of Tether is the most popular. Most Tethers are held on the Ethereum network with the rest divided between the other three networks.
The difference between the four coins has to do with the properties inherent to the blockchain hosting Tether.
For instance, for maximum safety and immutability, some investors may prefer the Bitcoin Omni version of Tether. Other investors might prefer the ERC20 Tether token, as it can be used in DeFi to earn a passive income.
Decentralized finance (DeFi) and other developments in the crypto space have made it easy for you to earn passive crypto income, even while you sleep! Check our crypto dividends article for more information.
The largest risk doesn’t really have much to do with which version of Tether an investor holds, it has to do with the USDT reserves.
The risk of Tether is the risk that the coins are not fully backed and sasak binance cryptocurrency exchange
in the event of a "bank run", not everyone will be able to get their dollars back. This would be a problem regardless of which chain an investor holds their Tether on.
The smaller risk is that a particular blockchain fails and takes down all the Tether tokens with it. For instance, maybe an investor feels that the Ethereum 2.0 upgrade will "break" the network. In that case, they might prefer to hold Tether on the Omni network.
Too Big to Fail.
Tether is the crypto equivalent of J.P. Morgan or Goldman Sachs, it’s too big to fail. If Tether failed it would be a huge blow to the crypto ecosystem. So many traders and investors would lose money and in crypto, there is no central bank to bail you out. The money is gone, game over.
Tether’s failure would destroy a lot of people’s faith in cryptocurrency, binance cryptocurrency exchange
kryptovaluta utbyte nedladdning and that would almost certainly lead to a lot of selling and price declines. Crypto would eventually recover, but a Tether blowup could set the movement back months if not a year or two.
Not only would everyone lose money, but it would take a while for another stablecoin to take Tether’s place. After USDT, the next largest stablecoin is USDC. However, as of publication, USDC has a fraction of Tether's liquidity.
During that time when there wasn’t a highly liquid stablecoin, institutions would find it more difficult to move their money around the cryptocurrency ecosystem.
Finally, there are those who feel that Tether has been used to inflate asset values in crypto. That is, the Tether team prints USDT and uses it to buy Bitcoin to drive up the BTC price. Is this true? Is it actually happening? We don’t know!
However, a lot of times in markets it is perception that matters more than truth, so to lose the "Tether money printer" would be another reason that prices could decline.
In summary, here is why a Tether failure would be bad for crypto.
Many traders and investors would lose the wealth that they were storing with Tether.
This could be hundreds of millions if not billions of dollars.