Tether 101: Should I Trade This Crypto Right Now?

The world of cryptocurrency is an unusual one for most people. You might probably think that it is a recent development, with the most famous one being Bitcoin. However, there are many currencies, some existing for a long time, all claiming to improve on various aspects of Bitcoin such as in security, privacy of transactions, and speed of processing.

Among these is the currency Tether, which also is one of the strangest cryptocurrencies in existence, as it is money that claims not to be money.

RISK WARNING: YOUR CAPITAL MIGHT BE AT RISK

What is Tether?

This is an unregulated cryptocurrency formed in 2015. Cryptocurrencies all use cryptography technology to regulate their supply and management instead of financial institutions like banks for regulation and supply. In fact, Tether has the distinction of being among the top capped cryptocurrencies globally (ranking at no.25), with the market cap being $1 billion as of December 2017.

Initially released on the Bitcoin blockchain network (it later shifted to Litecoin blockchain), it is peculiar among cryptocurrencies because of its ties to the US Dollar reserves, which one can redeem via the Tether platform. In particular, the currency aims at facilitating transactions at rates affixed to the USD and this will prevent government oversight. The founder of the currency is also unknown.

 

How Tether works

Because its intrinsic value ties to the US Dollar, this makes it a very strange currency to deal with, especially for those that do not know how it works. However, the simplest explanation of this currency is that it is digital in nature, but it changes the currency into conventional currencies like the Yen, Dollar, Pound, and so on. In other words, fiat currencies can convert to digital currencies.

In this sense, the Tether currency acts as a currency board (monetary authority that maintains fixed rates of exchange with foreign currencies). It holds the USD in reserves and distributes a token for each reserve dollar. The current exchange rates are one Tether equal to 1USD.

The model relies on market forces, and it meets user withdrawals on demand basis. In the occasion of insolvency or liquidity crisis, counterparties can exchange Tether with USD. The currency system allows users to transact in USD without using the actual Dollar and without intermediaries.

What makes Tether different?

  • The currency structure itself – it is not legal tender, contrary to the expectations of many. The ownership lacks contractual rights or guarantees against losses. Because of this, Tether Limited is not a bank and does not hold reserves at the Federal Reserve.

  • It is unregulated unlike other cryptocurrencies, so the risk of non-compliance with banking standards is very high.

Alternative coins to use

Tether is a controversial currency because not many people understand how it works or what it does. There are several currencies having greater potential and work better, in addition to having fewer risks in investment. We outlined several below.

  • Bitcoin – the most famous out of this list, it is a P2P (peer-to-peer) currency, which is also open source. You can operate it on the internet easily without using intermediaries, and transactions cannot reverse once completed (due to their design).

  • ETH (Ethereum) – the main rival to Bitcoin, aside from Ripple. Started in 2013, it allows equalized distribution and running of contracts without third party views. It has a fast rate of processing transactions because it uses programming codes of decentralized applications, unlike Bitcoin and Monero that focus on blockchain technology.

  • XRP (Ripple) – another blockchain user. It is among the largest in the market, and it gives you friction-less, and prompt international payment. The coins do not require mining (only trading) therefore, it reduces computing power. It is also gaining popularity among financial institutions because it allows them to process their customers’ payments immediately.

  • Verge (XVG) – this currency is also a recent one, improving on the Bitcoin and Monero blockchains. Its main aim is to provide both businesses and individuals with a faster and decentralized method of direct transactions while they maintain their privacy. Among its features is an anonymity-centric network including 12P and Tor, and results in transactions becoming untraceable.

  • Dash (XCoin or Darkcoin) – sets itself as becoming a “more private version” of Bitcoin. A 2014 product, it provides opportunities for private transactions, instant transactions and self-funding, all to add value to the network. These aspects also enhance the private nature and intractability of the transactions.

  • XMR (Monero) – 2014 was the launch year for this currency and its development is unique – it uses donations as well as the power of the community to improve its features. It allows for complete privacy as well through a technique called “ring signatures”.

Technology behind Tether

Tether works in a different way to other cryptocurrencies. It does not rely on blockchain technology, nor does it use ‘smart energy’. Instead, it changes cash into digital currency, and this serves as an anchor to the price of fiat currencies such as the Euro, US Dollar, the Yen or the Pound. USDT is the token that sets its value based on the current US Dollar exchange rates, and assets within the reserve account of the company further support this.

The Tether must store the equal amount of dollars as the Tether amounts they make, and this ensures that the value remains at 1:1. The main issue is transparency – no one is aware if Tether have a bank, if it banks at all.

The cryptocurrency is very popular among individuals and businesses that seek to have stable assets that can hold in their profits during trading. This is also because Tether acts as a substitute for the Dollar, and has led to some theories regarding Tether and Bitfinex (an exchange service).

 

Tether transactions

Because Tether currency is still newer than most, it is still undergoing development. You cannot mine the currency, instead using cryptocurrency exchanges to get the coins.

Some exchanges however, will not provide direct exchanges from US dollars to Tether, so you may need to use other cryptocurrencies such as Ethereum or Bitcoin to trade for Tether. The overall strategy for the company is to ensure there is wide adoption of the currency, such as in:

  • Trading – business people can use Tether to buy and sell goods, and even move the currency quickly across different exchanges and wallets.

  • Transfer between peers – regardless of the region or country you come from, peer-to-peer exchange should not be difficult. The Tether currency will allow people to redeem the coins for their normal currencies at lower rates than banks.

  • Use of digital exchanges – Tether aims to be an alternate way of depositing and withdrawing assets, and making it easier to settle your fiat debts.

Tether prices and trading history

Since the currency is newer than most, it does not have an extensive record of price changes. It is different from other cryptocurrencies because of one aspect – price volatility. Since its value pegs (or tethers) to the US dollar, it wants to keep a stable exchange rate of 1:1. This makes it among the more stable currencies in terms of intrinsic value.

It also means you cannot aim to make money with Tether, since its value does not fluctuate. When you change your fiat currency to Tethers, it enables you to participate in blockchain transactions without going through or becoming subject to the volatile nature of other currencies. You cannot mine the currency either – because the company issues and makes Tethers.

Is it worth trading in the coin?

This question has a complicated answer, because some authorities and analysts do not approve of investing in cryptocurrency generally. The reasons they usually give range from the highly volatile nature of these currencies, and the fact that their value is unpredictable.

Tether is not like other currencies however, because it does not have the same problem with volatility. Issues with Tether relate to the transparency levels – you do not know where the Tether comes from. You cannot make money from using it to speculate either, since its value does not change quickly. However, some advantages come with the currency.

  • You can conduct transactions using tokens, and these tokens retain their stable value to US dollars. This is a good alternative to the usual cryptocurrency because of the stability.

  • With Tethers, you no longer need to worry about getting bureaucratic processes like getting receipts from transactions. It allows you to withdraw or add dollars, in conjunction with Bitcoin blockchains to enhance a seamless experience.

  • Users have the advantage of security and quick processing of transactions.

  • You no longer need to worry about the exchange rates. The Tether tokens derive their value from the US Dollar, which also happens to be the most stable currency. It also implies that you do not need to put so much money in the token.

  • It is in the process of developing an electronic wallet service, which you can use to store Tethers.

 

Final thoughts

Tether may be a risky currency to deal with, based on all the factors above. However, when you look at it critically you will realize that it is better in many aspects compared to cryptocurrencies in general. It may be more reliable than others may in this regard, though you need to be careful and do your homework before investing in such a project.

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