Tether, the world’s largest stablecoin, is close to approaching all-time highs in market capitalisation. It sits comfortably above the rest of the stablecoin pack, with a full $18 billion in market cap separating it from the second largest stablecoin in the market, USDC. Yet, questions about the broader stablecoin sector remain, fuelled by the recent de-pegging of USDC and USDD. With this in mind, is it a good time to invest in USDT in 2023? Let us investigate.
USDT – A quick recap
USDT was created to solve two main issues that plagued the cryptocurrency sector – the lack of convertibility between crypto and fiat currencies and the highly volatile nature of cryptocurrencies. To tackle these issues, blockchain company Tether founded USDT in 2014 as a fiat-collateralised stablecoin that allows users to interact with blockchain assets. USDT’s value is tied 1:1 to the US dollar, meaning that a single USDT represents $1.
Exchanges have been the primary users of USDT, which has helped reduce their dependency on maintaining banking partners. However, USDT has developed a niche amongst investors and traders over the years. It is one of the most sought-after stablecoins during times of crisis or volatility in the crypto market, as it offers a relatively stable source of income.
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Despite its popularity within the crypto community, USDT has been subject to multiple controversies surrounding its reserves. Tether has yet to provide an independent audit of its books, something that experts say could hurt its credibility in the future.
Stablecoin Crisis
The biggest striking point for stablecoins, is, of course, the fact that they are considered to be ‘stable’. However, this notion drastically changed in the aftermath of the Terra LUNA crash, which exposed the first signs of cracks within the stablecoin sector.
In May 2022, the Terra stablecoin (UST) dropped to as low as 26 cents, making it essentially worthless to hold as it lost its peg against the US dollar. It was later revealed that the algorithm behind the stablecoin, which uses a complex system of minting and burning tokens to adjust supply and stabilise prices, may have backfired and led to UST’s downfall.
Come March 2023 and this time, Circle’s USDC was under the pump. During the US banking crisis, which resulted in the failure of three large financial institutions, it was disclosed that Circle, a USDC issuer, owned $3.3 billion, or around 8.2 percent of its entire USDC reserves, in the failed Silicon Valley Bank. This triggered a confidence crisis and many began dumping their USDC holdings. As a result, USDC fell as low as 87 cents in March, surpassing its all-time low of 89 cents in May 2019.
With the prices of some of the market's major stablecoins swinging significantly in only one year, the safety of investing in stablecoins has become a growing concern. Considering that stablecoins account for $129.42 billion, or 11.38 percent of the overall cryptocurrency market cap, a stablecoin collapse would most likely spread to every corner of the crypto market.
Where does USDT stand?
Coming back to the earlier question, is it safe to invest in USDT, considering the recent controversies surrounding stablecoins? To answer that, we need to look at two factors – how ‘stable’ it is, and how it performed during the USDC de-peg.
During the USDC stablecoin crisis, USDT maintained its value to the US dollar and even traded at a slight premium for a few days in March 2023. Speaking to CoinDesk, an analyst said that USDT is one of the safest stablecoins to rely on as it had no exposure to the banking crisis and did not rely on dollars held in American institutions. The analyst also added that other stablecoins, such as USDC and DAI, were being exchanged for USDT amidst the uncertainty.
Coming down to its stability, USDT is a fiat-collateralised stablecoin, unlike UST, That means its value, or stability against the US dollar, is dependent on whether or not Tether holds appropriate reserves. This is where most questions arise regarding USDT’s safety. In its latest attestation report, Tether stated that its USDT is backed by 100 percent reserves, the majority of which include cash & cash equivalents (84.7 percent of its total reserves). Other reserves are made up of a combination, of corporate bonds, precious metals, secured loans, and Bitcoins. Meanwhile, nearly 80 percent of its cash & cash equivalents are made up of US Treasury bills.
A brief look at this data reveals that the vast bulk of USDT reserves are backed by US Treasury Bills, which are often regarded as among the safest assets to invest in. Although this may sound reassuring, it is important noting that the entire nature of the report has been called into question. John Reed Stark, the former head of the SEC Internet Enforcement Office, criticised the use of attestations, stating that they are ‘meaningless’ and not considered audits. Furthermore, Tether’s image has already been tainted once, when the US regulator accused the company of ‘lying’ about its cash balances.
Finally, let’s not forget about the regulatory landscape in the US. It is well-known fact that US regulators have been cracking down on crypto businesses, especially since the collapse of FTX. Comments made by top officials indicate that regulators are still skeptical about Tether’s claims. There's no telling what would happen if a formal investigation compelled Tether to reveal its book.
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Conclusion
All in all, the safety of USDT is solely dependent on Tether’s claims. If you were to believe Tether, then USDT would be a relatively safer investment than other stablecoins in the market. USDT’s reserves are made up of a combination of different assets and it has proved to be resilient amid times of uncertainty.
If you are a cautious investor; however, it is advisable to hold USDT for short time periods and keep exchanging them for fiat currencies when you want to minimise your exposure to the crypto market.
