Last updated on January 9th, 2018 at 09:39 am
Have you ever noticed that some crypto exchanges (such as Bitfinex) don’t accept US Dollars, but they do offer markets that are seemingly denominated in USD?
You may have also noticed Bitcoin trading against USDT on other crypto-only exchanges (such as Poloniex and Bittrex). These “USDT” prices are usually within a few dollars of the prices on exchanges that support USD (such as Coinbase or Kraken).
So what’s going on? How can exchanges that seem to be exclusively based on cryptocurrency run USD markets?
The answer is Tether. (Tether’s symbol is ₮, and its ticker is USD₮).
Tether is something of a hybrid. It’s a crypto-fiat “stablecoin.” Its value is pegged-or rather, tethered-to the value of fiat currencies.
USD₮ is the currency that Tether most frequently uses. Tether has been pegged as being equal to the world’s official reserve currency: the US Dollar. More specifically, 1 USD₮ is intended to remain exactly equal to $1-not a cent more or less. It’s basically a crypto dollar (at least in value).
Another currency that Tether uses is the Euro, in the form of EUR₮. And Tether will reportedly use the Japanese Yen soon, in the form of JPY₮.
It’s worth noting that Tether users are protected from the volatility of cryptocurrency, but they’re still exposed to fluctuations in the price of the pegged fiat currency.
For example, consider what would happen if a momentous event occurred that halved the value of the US dollar overnight. If you hold USD₮, it would lose an equal amount of value as the USD.
How Tether Works
Technically, Tether is based on the Omni Platform. This platform is used for various digital assets, which are anchored to the Bitcoin blockchain. Of course, only central banks backed by governments have the privilege of creating assets that they declare as a holding value (for example, money via fiat).
If Tether simply claimed that their tokens were worth $1, that statement would be transparently false, without some provable basis. In other words, if USD₮ does hold any value-much less a steady value-it must be backed by real USD reserves.
For 1 USD₮ to be worth $1, it must be redeemable at any time for $1 of fiat currency. At present, USD₮ is only directly convertible to USD via the Kraken exchange.
Similarly, any USD sent to Kraken’s bank by an approved client must be convertible to USD₮, at the rate of $1 per ₮. This mechanism is maintained by the USD-USD₮ peg. This peg is further facilitated by the indirect conversion of USD to USD₮ at a 1:1 ratio (via intermediary cryptocurrencies, primarily Bitcoin).
To sum up, the only reason why 1 USD₮ is actually worth $1 is that the exchanges keep a reserve of dollars to back every USD₮ in existence. However, some claims on Tether’s website are questionable.
The mechanism described above dictates that Tether is unavoidably and entirely centralized. This system depends on Tether’s capability and willingness to maintain the currency peg. For example, if Kraken runs out of USD that has been allocated to customers wishing to sell USD₮, Tether must promise or supply Kraken with USD within a reasonable timeframe. Otherwise, the peg will “slip.”
Tether is ultimately dependent on good financial relationships, as well as continued permission from legal authorities. A far riskier model involves regular cryptocurrencies that are not linked to fiat. In other words, Tether (more or less) requires no permission and cannot be censored. In contrast, Tether users are required to provide customer verification.
Since the majority of mainstream interest in cryptocurrencies is due to their fluctuation in price, one might question the purpose of a crypto, which is predicated on maintaining a fixed price. No pumps, no dumps, no bubbles. Without a doubt, Tether offers an odd coin.
The purchasing power of the US Dollar (and all fiats) steadily erodes over time, due to inflation. Therefore, Tether certainly can’t be considered to be an investment. Owning Tether is more like a deposit in a (somewhat risky) bank account that pays 0% interest.
So if Tether is riskier than regular cryptocurrencies and provides no possibility of financial gains, why use it at all?
The reality is that Tether is extremely useful to traders and investors as an alternative to fiat. There are several good reasons why:
USD deposits and withdrawals to and from foreign exchanges are often a time-consuming process. On average, they take 1 to 4 business days to complete. If the transaction occurs after banks have closed for the night, weekend, or holiday, wait times may be considerably extended.
By contrast, Tether transaction times are completed in minutes. This benefit is significant because cryptocurrency traders often need to rapidly shift funds, and take advantage of arbitrage opportunities.
SWIFT (Society for Worldwide Interbank Financial Telecommunication) transfers are very expensive. They cost upwards of $20 in fees, and average around $30. And if you’re using a fiat currency other than one supported by the exchange, the banks will charge an extra Forex conversion fee and percentage on the transfer.
By contrast, Tether charges zero transaction fees between Tether wallets.
Cryptocurrencies are notorious for being volatile. So a stable base currency is extremely useful- particularly for traders of smaller altcoins, which have no liquid markets that are readily available. Trading one volatile currency for another creates a great deal of complication and extra risk.
To understand why, imagine the following scenario, which involves trading Bitcoin for Ethereum (ETH):
- A trader uses their BTC to buy ETH, which then rises by 10%.
- The trader wishes to make a profit, so sells their ETH for BTC.
- However, while the trade is being processed, Bitcoin shockingly falls by 15%.
Despite being correct about ETH’s direction, the trader would take a loss, due to the fall of BTC. By using USD₮, the trader’s sole concern is the price of Ethereum.
Of course, USD is a relatively stable base currency. However, many altcoins are only available for trading on crypto-only exchanges; they accept Tether, but refuse any form of fiat.
Furthermore, the USD₮ benefits from the first two points above (transaction times and fees). However, taxation is more of a gray area.
Staying on the Sidelines
Frequently, the best position to take in a market is no position at all. Let’s say a trader feels that a crypto’s price is unsustainably high, but doesn’t wish to take the risk of shorting it. Therefore, their best move would be to “cash out,” then wait for a dip or crash to buy back in.
However, we frequently warn people against keeping money-fiat or crypto-on any exchange. History has shown that it’s risky to trust exchanges to store money!
Therefore, it makes sense for a trader to convert their position to USD₮, and withdraw it to their personal wallet for safekeeping. When the buying opportunity occurs, the trader can quickly transfer their USD₮ back to the exchange to take advantage of it, as opposed to waiting days for a bank wire to clear.
How to Get a Tether Wallet
Ordinarily, one gets a Tether wallet after registering on the Tether.to site. Unfortunately, the site was not accepting registrations at the time of this writing (January 1, 2018):
As the site indicates, you can request notification about registration reopening by sending an email to [email protected]. Tether mobile wallets are available for iOS and Android, but they require a registered Tether account.
In other words, you can only use Tether wallets to store and send USD₮ on supported cryptocurrency exchanges.
How to Buy Tether
By far, the most common method of buying USD₮ is to exchange it for another cryptocurrency. For the full list of USD₮ crypto markets, check out CoinMarketCap’s list. (For your convenience, they’re sorted by “pair.”)
There are also several exchanges that offer a fiat market for USD₮:
- On Kraken, Bitfinex, Coinut, Exmo, and C-CEX, US dollars will buy you USD₮.
- On Exmo, Russian rubles will buy you USD₮.
The Bitfinex Connection
Tether is directed by some of the same people behind Bitfinex: Philip Potter and Giancarlo Devasini. This leadership was confirmed by the recent Paradise Papers leak, although the news didn’t come as a surprise to anyone paying attention.
New Tether accounts flow mostly to Bitfinex. Then in April 2017, Bitfinex and Tether experienced a freeze of their fiat operations, when US Bank and Wells Fargo withdrew as banking partners.
As a result, Bitfinex now refuses US customers, and it no longer provides markets denominated in USD. Rather, it exclusively uses USD₮.
Tether and Bitfinex are taking heavy flak right now. The New York Times, Bloomberg, and Fortune all recently published articles that express concerns about Tether. These articles reflect doubts and fears that have been percolating in certain corners of the crypto community for months.
A lot of the criticism of Tether is clearly sourced from “anti-Bitcoiners.” They have a vested interest in the failure of Bitfinex, as well as the Bitcoin ecosystem at large. For example, the NYT article quotes Arthur Hayes, founder of the competing exchange BitMEX, and Emin Gün Sirer, a Bcash proponent.
However, the true wellspring of skepticism about Tether and Bitfinex skepticism is undoubtedly the writer known as Bitfinex’ed. He is notorious for his ongoing, fervent criticism of Bitfinex’s operations.
Critics accuse Bitfinex and Tether of running a fractional reserve scheme: More USD₮ are issued than are backed by fiat dollars. Critics further allege that unbacked Tether accounts are used to inflate the price of Bitcoin for the purpose of market manipulation.
Tether’s self-reported finances claim full-and even excess-reserves. Tether’s September 2017 auditor’s statement reveals no irregularities, but critics claim that these findings are unsatisfactory. However, it’s plausible that an exchange of Bitfinex’s size commands almost $1b, which is required to fully back Tether.
It can be difficult to separate fact from fiction. But here are the certain indisputable facts:
Tether doesn’t guarantee USD convertibility. Rather, it reserves the right to deny service to customers who fall out compliance with their terms. Check out Tether’s terms of service:
- During 2017, the issuance of USD₮ increased dramatically. This change seems somewhat in line with the increasing demand for Bitcoin, as well as Bitfinex’s banking situation.
CoinMarketCap charts this supply expansion from the low millions to nearly $1 billion. This expansion is marked in blue below:
- Tether has become a popular base currency across a variety of crypto exchanges. The shows the balance of identified exchange wallets:
A “quarantined” address above contains $30 m in recently hacked funds, which are frozen in place by Tether. (Thus, it disproves any claims of decentralization.)
- Tether accounts for a large amount of daily trading volume. New Year’s Day 2017 was a huge trading day for Bitcoin, as it breached $15 k. CoinMarketCap reported the 24-hour volume of USD₮ across various exchanges at $1.4 billion. The vast majority of this volume was Bitcoin trading.
For many ideologically minded Bitcoiners (including this author), Tether is uncomfortably close to the fiat banking system-and not just because of its obvious fiat linkage. Tether is also centralized, permissioned, and trust-dependent. Such a system is antithetical to the principles of Bitcoin.
As a result, many crypto enthusiasts are naturally skeptical of Tether. This justified skepticism creates an audience that is receptive to hearing about allegations of fraud.
However, without solid evidence of misconduct, the allegations made against Tether and Bitfinex are just elements in another FUD campaign. Since many of the same people and tactics are involved, it suggests a similar “conspiracy to paint a conspiracy.”
While there are several valid concerns about Tether-which certainly bear noting-stories about how Tether will crash the crypto ecosystem seem overblown. At best, they are click bait, and at worst, they are malicious.
But perhaps this anti-Tether campaign may achieve some good results. A critical glare might force Tether to adhere to the highest professional standards, and to shore up any potential weaknesses.
If you are interested in using Tether, I’d advise never storing significant sums in it. Always use Tether with caution. USD₮ should only be used for short-term trading and transfers. If converting to and transferring large amounts as USD₮, do so in batches, which will reduce your overall exposure.
Don’t expect to convert massive amounts of USD₮ to fiat-without encountering a price disruption. Remember this: While Tether offers the advantages of cryptocurrency with the price stability of a traditional fiat, it also exposes you to the risks that are inherent in both systems.