Tether, an easy and safe gate to the crypto-market
Tether is an unregulated cryptocurrency token backed by the US dollar reserves detained by Tether Limited. Tether was created on November 2015 to facilitate the transactions of US dollars from the traditional financial system into the blockchain ecosystem.
What differentiates Tether from bitcoin is that each unit of Tether is worth one US dollar.
Recently, Tether played a specific role in the crypto-universe. Tethers often served to prop up the market in times of depressed prices, as they conveyed cash into the crypto-system without being impacted by price volatilities.
As such, Tether is considered as the easiest way to buy bitcoin, ethereum, or any other alt-coins and even perceived as a quantitative easing tool for the crypto-market. In other words, the quantity of cash entering the crypto-market through Tethers could be compared to a quantitative easing, QE, conducted by a traditional central bank in order to maintain liquidity in the financial system and to avoid asset prices from falling.
As long as the individuals believe in the cryptocurrencies, they should continue pushing cash into this system, allowing the excess cash to spread among the cryptocurrencies and act as a safety net.
Of course, in the context of the crypto-market, the cash supply is decentralized, and liquidity can be pushed to the system by anyone and through any currency without passing by Tether.
However, it is more likely for traders to buy Tethers in times of heavy market unwinds, as the value of a Tether doesn’t change in terms of US dollars.
Tether, a safe-haven in the crypto-universe
Pegged to the US dollar, Tether has a fixed USD value unlike other cryptocurrencies. Tether holders benefit from the underlying blockchain technology for their transactions, although they could not speculate on the value of a Tether versus traditional currencies.
Whilst this feature seems little attractive to most traders, Tether sure offers an important safe-haven asset within the crypto-universe. Traders could diversify their portfolio of cryptocurrencies with low risk Tether.
Also, Tether provides a refuge to crypto-traders in times of high market volatility and aggressive unwinds, in the same way gold offered security to paper-money users when first banks started to pop up in history.
In theory, crypto-market is not riskier than a traditional money market
Tether gained spectacularly against most cryptocurrencies, as a heavy sell-off hit the market in January 2018.
Meanwhile, hundreds of millions of Tethers were printed in a matter of a short time.
The extraordinarily high volumes in Tether in flows raised doubts among traders. Were newly printed Tethers really backed by US dollars?
It is impossible to tell if every unit of Tether was immediately backed by US dollars, given that today, there is little regulation in the crypto-market.
It is true that if Tether Limited is unable to survive a massive, simultaneous outflow from Tether, the confidence in Tethers would be extensively damaged.
This is a very important risk. Yet, to what extent does it matter?
It is of course important for traders to know that they could exchange their entire Tether holdings against the US dollars immediately. But, what truly matters is the value assessed to Tether by the community of users and more importantly, their thrust in this particular asset.
Therefore, trust is by far the most important pillar here, in the same way that the traditional banking system is based on confidence.
We pertinently know that the banks have only a percentage of the monetary supply in cash. This means that if everyone runs to the bank to withdraw their money, there will not be enough cash to pay everyone back.
Although the confidence in the banking system is a given today, it has not always been the case in the past. History witnessed numerous bank runs, which have threatened the banking sector without however being able to bring it down.
Today, the US dollar is no longer backed by gold, yet the greenback has value on its own. It doesn’t matter if we are talking about the percentage of US dollars available in gold, physical banknotes or a virtual number in a bank account.
For now, the crypto-market is in an unstable and booming phase. Yet, as the crypto-market matures, the confidence in this newly born asset class will likely build stronger, also allowing sub-classes to emerge within the crypto-universe.
In this respect, Tether could be a plausible candidate for playing the role of a safe-haven asset in the digital financial era.
Written in association with MBAex.com
This report has been prepared by Swissquote Bank Ltd and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Swissquote Bank Ltd personnel at any given time. Swissquote Bank Ltd is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.
Recommended Content
Editors’ Picks
USD/JPY flat-lines below 151.50 after soft Japanese CPI data
USD/JPY stays defensive below 151.50 after the release of a soft Japan's CPI report and mixed Industrial Production and Retail Sales data on Friday. Japanese verbal intervention also weighs on the pair amid the holiday-thinned conditions on Good Friday. US PCE inflation awaited.
AUD/USD buyers lack vigor above 0.6500 amid Good Friday trading lull
AUD/USD is trading listlessly above 0.6500 in the Asian session amid light trading on Good Friday. The Aussie pair shrugs off encouraging comments from China's FX regulator, as price action remains subdued ahead of the US PCE inflation data.
Gold flirts with record highs above $2,230, all eyes on US PCE data
Gold price flirts with record highs around $2,230 during the Asian session on Friday. The uptick of yellow metal is bolstered by the safe-haven flows amidst growing economic concerns and the prospect of interest rate cuts from the US Federal Reserve.
Optimism price could fall as nearly $90 million worth of OP tokens is due flood markets
Optimism volatility has shrunk in the ours leading to the network’s cliff unlock. It joins the likes of dYdX and Sui, which have similar events on their calendars. As token unlocks are often considered bearish catalysts, investors should brace for a reaction after the event.
Will they won’t they cut rates is the question of Q2?
There has been some significant push back from Fed and Bank of England members around the timing of rate cuts, and the Bank of Japan still haven’t physically intervened in the FX market to stem yen weakness although they are threatening to do so.