Inside cryptocurrencies: Tether, an easy and safe gate to the crypto-market

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