USDT Explained: Is it a Safe Investment?

Tether, also known as USDT, is the biggest stablecoin in the crypto market in terms of market capitalization. It serves as an important tool for crypto traders and acts as a bridge between digital and fiat currencies.

Tether’s strength lies in its peg to the U.S. dollar, which promises stability. Unlike more volatile cryptocurrencies, USDT allows you to invest in cryptocurrencies without having to worry about volatility.

The question that arises here is whether Tether is truly secure to store your funds or not. In the article, we will discuss what Tether is, how it works, and whether it is a secure cryptocurrency or not. Let’s take a look:

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What is Tether (USDT)?

Tether, also known as USDT, is among the early stablecoins in the crypto industry. Each USDT token is meant to be tied to the value of one U.S. Dollar, which provides a stable option for traders when moving in and out of trades in volatile cryptocurrencies like Bitcoin or Ethereum.

USDT was first introduced in January 2012 as MasterCoin but later underwent a rebranding in 2015 to receive its new name, Tether. It did not take USDT long to become one of the most active tokens in the cryptocurrency world.

At the time of writing this article, USDT holds the position as the third most traded cryptocurrency and is also the most traded stablecoin by a fair margin. Its widespread use can be attributed to its availability on multiple cryptocurrency exchanges, as most platforms are not using USDT-based pairs for trading. This facilitates straightforward transfers between exchanges, peer-to-peer transactions, and crypto-to-crypto trades. USDT’s presence in the market continues to grow due to its practical utility rather than overt promotion.

How Does Tether (USDT) Work?

Tether acts very much like a central bank as it mints its very own tokens and then puts them up for sale. Theoretically, anyone holding Tether can send it to Tether Limited and receive the equivalent in cash. Tethers operate on blockchains using the Omni Protocol, which is a form of open-source software that uses blockchain technology to issue and redeem these specific coins.

Tether Limited has repeatedly stated that each USDT is fully backed by actual fiat currency assets in its reserve account. To redeem Tethers, individuals need to agree to Tether Limited’s ‘terms of service,’ with a conversion rate of 1 tether USDT equaling 1 USD.

Interestingly, though theoretically redeemable for cold hard USD, this is an option that is not available to everyone. Since 2018, Tether stopped serving customers based in the United States due to regulatory challenges. This restriction raises some concerns, as a central entity, especially one issuing currency equivalent to the world’s most stable, might draw suspicion if it prints money for others but doesn’t accept it from its own citizens.

How Safe is Tether (USDT)?

USDT’s widespread use arises from its ability to facilitate quick entries and exits in cryptocurrency trades, offering shelter during market volatility. Tied to the U.S. Dollar, each USDT maintains a value equivalent to one U.S. dollar and only adapts to the fluctuations faced by the U.S. dollar. The U.S. dollar is one of the strongest currencies in the world, and that makes Tether’s case strong.

General Safety of Tether

With a daily trading volume in the billions, Tether is a major player in the crypto market. Its broad adoption allows investors to handle their crypto dealing securely. USDT caters to all types of crypto investors because stability in this market is golden.

In broad terms, Tether is considered secure, especially when stored in a reliable wallet. Examining its safety also involves understanding key factors that contribute to its security or vulnerability. But having the power to deal with volatility does make it shine already.

Another thing to keep in mind is that USDT’s value mirrors fluctuations in the U.S. dollar, which provides it stability. However, it also means that if the U.S. dollar is not doing well, the USDT will also lose value accordingly.

Centralized Nature and Ethereum Foundation

Tether operates as a centralized cryptocurrency built on the Ethereum network, which is one of the biggest and most secure Layer 1 solutions out there. Backed by one U.S. dollar stored on Tether Ltd.’s balance sheet, the value on the blockchain is protected. While wallet security is important, the main risk lies in the financial stability of Tether Ltd. This is where some people really get concerned. However, as long as the company is doing well, Tether will keep going strong.

Another thing to keep in mind is that USDT’s value mirrors fluctuations in the U.S. dollar, maintaining stability but exposing it to depreciation if the U.S. dollar weakens over time.

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Fractional Reserve System Concerns

Concerns arise from Tether’s fractional reserve system, where only around 74% of the real value is held in reserves for every issued Tether. Unlike banks with safety nets like FDIC insurance, Tether lacks such securities.

If you are not familiar with the fractional reserve system, just know that it allows banks to loan more money than they actually own. This means if the bank is only required to have 25% of reserves in their account, they can write loans bigger than their reserves. Imagine if every customer wants to cash out from the bank; the bank will not have enough money to pay them all at the same time. Though such events don’t usually occur, it is important not to ignore the drawbacks of the fractional reserve system. Banks that usually follow this system also have FDIC insurance, which protects them against the unlikely scenario.

The fact that Tether only has 74% of reserves can be seen as a concerning factor, and there are a bunch of traders who avoid tether for the very reason of being extra safe.

Is Tether Too Big to Fail?

Tether’s big hold on the crypto space raises concerns about its potential impact if it were to fail. Given its role as the largest stable cryptocurrency, a failure could erode trust in cryptocurrencies and also create doubts for the other stablecoins. In simple terms, Tether is one of those handful of cryptocurrencies that are too big to fail.  There is just so much trust put in USDT by the investors that its downfall seems highly unlikely from this point.

Protecting Your USDT

When talking about security, it is also important to mention that how you store your cryptocurrency plays an equally important role in protecting your assets. Choosing the wrong platforms for storing your USDT can raise some serious security concerns.

It is advised that you do thorough research and choose a reliable wallet with a good reputation. You can also opt for hardware wallets and keep your USDT secure in an offline environment.

Another option to consider is to store your USDT on platforms that offer interest. Binance is one of the biggest cryptocurrency exchanges out there, and it does allow you to earn passive income on USDT. If you are not planning to trade too much, this option can always come in handy. There are also other platforms that offer high interest, but always be careful with those and do your due diligence before making a decision.

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Conclusion: Is USDT Really Safe?

In conclusion, Tether (USDT) has seen both successes and challenges and still stands resilient as one of the most trusted cryptocurrencies globally. Its current stability and apparent “too big to fail” status make it an easy option to choose. Nevertheless, it’s important to acknowledge that Tether Limited doesn’t maintain 100% reserves, and the cryptocurrency has faced past incidents of hacking and centralization. While USDT presents a good choice for stablecoin investment, if you are still skeptical, you may explore alternatives like USDC and BUSD for added assurance.

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