Gareth Johnson
Gareth Johnson
Updated on November 16, 2021

One of the main characteristics of cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), and other popular coins is that they are highly volatile. This means that their prices are subject to unpredictable changes due to various factors that may influence the market. The bottom line is that you can never be sure whether your crypto investment will stay on a path of growth and for how long. There are constant crashes of the Ethereum and Bitcoin prices, as well as those of other altcoins. These market fluctuations frustrate crypto enthusiasts who want to profit from their crypto investments.

However, not all cryptocurrencies are highly volatile assets. In fact, there is a special class of cryptos whose price fluctuates very little, mostly just a few decimals in the range of 0.01% to 0.1%  of their usual market value. These currencies are called stablecoins and they have a very important role on the crypto market by providing users with a means for stable investments on an otherwise highly unstable market.

Let’s take a deeper look at stablecoins and Tether (USDT) in particular, the most popular stablecoin on the market.

What Are Stablecoins?

The fact that the crypto market is so volatile and price changes can’t be efficiently predicted created the need for a new type of cryptocurrency, which could bridge the gap between fiat money like US dollars or euros and digital currencies. 

When you have some altcoins that were on an upwards price-changing path for a couple of days and managed to reach some new all-time highs that turned out to be very profitable for you as an investor, you may want to exchange a part of those assets into fiat money, just in case their price suddenly starts falling. Without stablecoins, users need to exchange their altcoins into a more popular intermediary cryptocurrency such as BTC or ETH before they can turn their assets into fiat money, which can cost a lot of trading fees and they can lose a substantial amount of their profits.

Red rising arrow on top of pile of small boxes on blue wood background

Stablecoins such as Tether, Binance USD (BUSD), USD Coin (USDC) and other such cryptos have enabled users to directly exchange their altcoins into a stablecoin whose value doesn’t drastically change. In fact, the market price of stablecoins always stays almost the same, with only very minor fluctuations. Once you change your altcoins to a stablecoin, you can keep your assets in that form without fear of losing value due to a sudden market crash, because even then, the price of a stablecoin stays the same.

The reason why stablecoins have a fixed price is because they are collateralized by some sort of mechanism that assures their value will always stay at a certain point. These mechanisms can be by tying the value of a stablecoin to a fiat currency, another cryptocurrency, or to a special consensus algorithm. Stablecoins can even be tied to the value of precious metals such as gold.

These cryptos are issued by a single company who controls the supply and guarantees the financial value of each coin.

Stablecoin Types

In order for a cryptocurrency to be considered a stablecoin, it needs to be tied to a collateral that ensures users will always get the same value for that coin on the market. The company that issues a stablecoin is legally required to back the value of their asset. 

Let’s look at the three types of stablecoins.

Stablecoins Collateralized With Fiat Money

The most popular stablecoins are those that are collateralized with a fiat currency like USD or EUR. The company that issues a fiat-collateralized stablecoin backs each coin by an exact amount of a selected fiat currency. Stablecoin like USDT or USDC are backed by the value of the US dollar and each of these coins is worth 1 USD. 

Before a certain amount of stablecoins like Tether can be issued by the parent company, that amount needs to be backed by USD as a reserve. Users can convert their stablecoins into USD at all times. The fiat money reserves that serve as a collateral for stablecoins are legally managed by independent guardian entities that ensure all of the coins are truly backed by fiat money. This ensures the security of stablecoin users and reassures them that their digital assets kept in the form of stablecoins are truly backed by real-world money.

Man carrying tons of cash running towards woman holding bitcoin vector illustration

The value of a fiat-collateralized stablecoin can really fluctuate only due to the inflation of the fiat currency it’s tied to, but no type of cryptocurrency market volatility can lead to the crash of a stablecoin’s value. The only event in which a stablecoin could crash in value is if the parent company behind the coin turns out to be some sort of scam or becomes a victim to a major cyber attack and doesn’t cover the financial losses inflicted upon users. 

Stablecoins Collateralized With Cryptos

Another, less popular option for issuing stablecoins is by collateralizing them with another cryptocurrency. Due to the fact that standard cryptos are highly volatile and unpredictable in terms of price fluctuations, these stablecoins can also fluctuate a bit more. In order for such a stablecoin to work, the company that issues it needs to have a reserve of backing cryptocurrencies which is considerably larger than the amount of issued stablecoins so as to ensure that their coin truly is stable and subject only to minor price changes.

These stablecoins are over-collateralized. You can’t issue the same amount of backing cryptos and stablecoin tokens because the whole currency is then under risk of high volatility. As an act of ensuring the currency’s stability, over-collateralization is necessary. The Dai (DAI) stablecoin is the most popular token backed by cryptos. It’s always worth around 1 USD per coin, but it isn’t backed by fiat money, instead, other cryptocurrencies ensure its stability.

Algorithmic Stablecoins

Algorithmic stablecoins are non-collateralized, which means they aren’t backed by any fiat currency or other cryptos. Instead, they used a fully decentralized network with a specially designed consensus algorithm to ensure the stability of the coin at a certain price. 

Smart contracts are an integral part of these stablecoins because they sell or issue new tokens according to the needs of the market to keep up with user demands and maintain the currency’s stability. Carbon USD (CUSD) is a good example of an algorithmic stablecoin.

Tether: The Largest Stablecoin

Tether Limited, the issuer of Tether, is a company based in Hong Kong. When Tether was launched back in 2014, it was first called RealCoin, but the name was changed just a couple of months later. It was the first stablecoin on the crypto market and it was quite revolutionary at the time of its launch because it introduced the concept of a cryptocurrency that isn’t volatile and holders don’t have to fear if their crypto investment in USDT will suddenly crash in terms of market value.

The idea behind Tether is really simple. Tether Limited backs all Tether tokens with 1 USD in a designated bank account, enabling users to exchange other cryptos for Tether and then use them just like fiat money for new crypto investments or withdraw their funds to their bank account after making a profit. The Tether price is constantly 1 USD and all of the coins are backed by Tether’s reserves.

USDT drastically improved the compatibility of fiat money with the crypto market, because users no longer had to either keep their funds in the form of volatile cryptocurrencies or sell them for fiat. Now, users can just keep money in the form of USDT. 

Tether transactions on screen floating on dark background

In case you buy Bitcoin for 40,000 USD and then its price rises to 50,000 USD and you convert those funds into Tether, but the price of Bitcoin drops in the meantime to 35,000 USD, you’ve saved yourself 5,000 USD of potential losses, plus you’ve profited 10,000 USD. This is just one among many ways crypto traders can save and earn money using the USDT stablecoin. Before Tether, people had to exchange their BTC directly into fiat which could incur substantial fees and then once again get charged fees if they want to deposit their fiat money and buy BTC or other cryptos at a later point with better market conditions. 

So basically, Tether provides security and bigger versatility to crypto traders and investors, along with a great fee system which we’ll elaborate on further in this guide.

The Mechanism Behind Tether

USDT has an infinite supply of coins in theory, but before a new coin can be issued and sent into market circulation, it has to be backed by 1 USD in the company’s bank account where the stablecoin collateral is kept. When it was first launched, USDT used the Bitcoin blockchain-based Omni Layer network. This open-source solution uses the BTC blockchain as a base, but as the years passed, Tether expanded its operations and now, it can run on several popular blockchain.

A large portion of USDT uses the Ethereum blockchain and stores the coins in the form of ERC20 tokens. Other popular blockchains which are compatible with Tether include TRON, Algorana, and EOS.

How Does Tether Profit?

Tether is a profit-oriented cryptocurrency project and its parent company Tether Limited earns money from the conversion fees from fiat to USDT and vice versa. Also, profit is made from the transaction fees on the blockchains where Tether assets are stored. 

USDT has one of the highest market capitalization among cryptocurrencies and it’s been ranked among the top 10 cryptos on Coinmarketcap for years. The huge popularity of Tether means that there are a lot of transactions and conversions between USDT and fiat currency, thus the company behind Tether earns huge sums of cash because of the stablecoin’s high adoption rate.

Controversy Behind Tether and Bitfinex

Even though Tether has become the most popular stablecoin in the world and is used by millions of satisfied users, there’s a considerable amount of controversy surrounding this cryptocurrency. When USDT was included on the Bitfinex crypto exchange platform back in 2015, it quickly became popular, attracting huge interest from the platform’s users, along with high USDT liquidity levels. Bitfinex soon became regarded as the best exchange platform for trading USDT.

Crypto trading trend on big screen

The rapid rise of Tether’s popularity among Bitfinex users was a bit suspicious to some, because the stablecoin basically just got enlisted on the exchange as a supported currency and thousands of users immediately started using it.

When the Paradise Papers financial scandal surfaced in 2017, revealing shady business endeavours by numerous companies and individuals worldwide, researchers found out that the management and ownership of Tether Limited and the Bitfinex exchange platform were basically the same. This explained how Tether became enlisted on Bitfinex so fast and reached exceptionally high trading volumes so quickly, because it was boosted on all fronts by the Bitfinex/Tether management.

Legal Trouble

In 2019, Letitia James, the New York Attorney General at that time, filed a case against iFinex Inc. a company that stands behind both Tether Limited and the Bitfinex exchange. The accusations were quite serious because the New York Attorney General’s office stated that iFinex tried to hide an 850 million USD loss of funds that belonged to large-scale investors of Tether and Bitfinex. The owner of Tether and Bitfinex paid a 18.5 million US dollar fine to settle the charges and the companies issued a statement explaining that these assets were fully refunded to their clients along with due interest. 

Finally, in October of 2021, Tether and Bitfinex were ordered to pay a fine of 42.5 million USD because of additional charges by the Commodity Futures Trading Commission related to the claim that each USDT token is backed by 1 USD in Tether’s reserves. The companies were also ordered to fully back each token with a corresponding US dollar amount, from the moment the charges were settled.

Reasons to Invest in USDT

Compared to classic market-driven cryptocurrencies where supply, demand, and market circumstances influence a coin’s price, Tether is a crypto that doesn’t offer huge financial gains to investors based on market volatility but it has several other selling points that make it a great investment.

Fast Transactions

Depositing or withdrawing assets from cryptocurrency exchanges can take a lot of time if you want to, let’s say, withdraw fiat money to your bank account or deposit some USD or other currency into your exchange account with a bank transfer. 

With Tether, you don’t have to deposit fiat money to buy another crypto. You can just keep some USDT in your crypto wallet or exchange platform account and use those assets for buying other digital currencies, thus evading the slow deposit process of fiat money to a crypto exchange. All of the largest crypto exchanges such as Coinbase, Binance, and Kraken support Tether, so it’s really easy to convert your crypto into USDT or buy some Tether coins with fiat.

Also, if you’re looking to convert your cryptos into fiat money that you don’t want to immediately spend, a far faster method is to just exchange your cryptos into Tether and store them in a crypto wallet, than go through the complex process of withdrawing money to a bank account.

Black alarm clock besid yellow sticky notes on white wall

When you already have money in the form of USDT stored in a crypto wallet, you can quickly react to market changes and buy or sell volatile cryptos quickly, without delays that can last for hours due to bank transfers.

Transfer Fees

Transaction fees when depositing money into an exchange platform account directly from your bank account can be really high. Tether doesn’t charge any fees when transferring USDT between Tether wallets. You’ll only be charged a small blockchain transfer fee for using the network but other than that, your transactions are free of charge between wallets.

Zero Volatility

The absence of volatility with Tether is one of the best things about this crypto. You won’t profit from just holding USDT in your wallet, but you won’t lose any value either. This is why USDT is an ideal intermediary cryptocurrency for keeping profits that you earned from trading with highly volatile cryptos safe. A lot of traders transfer part of their crypto earnings from volatile market periods into stablecoins like Tether, and use another portion of their crypto assets for further trading. When you buy Tether, you’re buying a crypto whose price is -more or less – always the same.

It’s a great way to keep some of your profit safe and ready to be used either by withdrawing USDT to fiat cash or using USDT to invest in another cryptocurrency.

A Few Final Words…

Among stablecoins, Tether is the largest cryptocurrency and even though there’s a bunch of other stablecoins, none of them managed to achieve such widespread use like USDT. If you’re investing in cryptos and trading digital currencies, you should definitely make use of Tether coins, especially during highly volatile market periods when converting assets into a reliable stablecoin can make the difference between a total loss and a huge profit.