Stablecoin That Conquered Crypto 👑
Stablecoin That Conquered Crypto 👑
Tether's market cap of $119B as of Sep 2024 is 70% of total stablecoin market. As the influence grows, so do questions about its operations, reserves, and the risks to the broader financial system.
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Tether, known by its ticker USDT, is a cryptocurrency monster.
Since its inception in 2014, this digital stablecoin pegged to the US dollar has become the bedrock of the crypto ecosystem.
Facilitating billions in daily transactions and challenging traditional financial paradigms,
With a market capitalisation of $119 billion as of September 2024. It now accounts for 70% of the $170 billion stablecoin market.
It even surpassed Bitcoin in trading volume back in 2019.
With over 350 million users globally, Tether is the de facto tool for traders and investors in the crypto world.
A haven of stability in an otherwise turbulent market.
In the first half of 2024 alone, the company reported a staggering $5.2 billion in profits and holds $5.33 billion in excess reserves.
It holds more than $97.5 billion in US Treasuries. That amount of exposure to US treasuries is above Germany, the United Arab Emirates, and Australia.
This level of profitability, achieved with a lean team of approximately 100 employees, dwarfs that of traditional financial institutions.
Tether has also expanded into areas like artificial intelligence (acquiring Northern Data Group) and biotechnology (investing in Blackrock Neurotech).
Timeline of Tether's ascent
October 2014: Tether launches, introducing the concept of a dollar-pegged stablecoin to the crypto market
2017-2018: USDT gains traction as a trading pair on major exchanges during the crypto bull run
May 2022: Tether maintains stability during the Terra Luna collapse, showcasing its resilience
November 2022: USDT proves its mettle again during the FTX meltdown
March 2023: Tether's market cap reaches $87 billion, rebounding from previous declines
June 2024: USDT surpasses the $100 billion market cap milestone
September 2024: Tether's market cap hits $119 billion, with plans to double its team by 2025
Key factors for Tether's success
First-mover advantage: Launched in 2014, Tether was one of the first stablecoins to hit the market, allowing it to build a strong user base and network effect.
Liquidity and accessibility: USDT is widely available on most major cryptocurrency exchanges, making it a convenient on-ramp and off-ramp for traders.
Stability in turbulent times: Tether has consistently maintained its peg during various crypto crises, including the FTX collapse, reinforcing user confidence.
Diverse use cases: Beyond trading, Tether has found applications in cross-border transactions, DeFi protocols, and as a hedge against market volatility.
Unprecedented profitability in the digital age
Tether's bold move into Bitcoin mining
Bitcoin is important for Tether.
Read: Is Tether really more profitable than BlackRock?
Mining investments have played a significant role in expanding its influence and diversifying its business model beyond just issuing stablecoins.
Plans to allocate 15% of net profits toward Bitcoin investments
Substantial profits from stablecoin operations provide unique financial backing
Key investments and partnerships
A $100 million investment in Bitdeer, a publicly traded Bitcoin mining company
Participation in a $1 billion investment for the Volcano Energy project in El Salvador
A $610 million credit facility extended to Northern Data AG, a German Bitcoin mining and data centre operator
In 2023, it announced that it will invest about $500 million in next six months
Global expansion and renewable energy focus
Tether aims to control 1% of Bitcoin's total network computing power, positioning itself to become one of the world's top Bitcoin mining companies.
This goal puts it in competition with established players like Marathon Digital, which currently controls about 4% of the network's hashrate.
The company is building mining facilities in multiple countries.
Uruguay, Paraguay, and El Salvador, with capacities ranging from 40 to 70 megawatts per site
Plans to reach 120 megawatts across direct mining operations by the end of the year
Emphasis on sustainable mining practices, particularly in projects like Volcano Energy
Vertical integration and ecosystem influence
This approach could give Tether increased influence and control over the Bitcoin network.
Direct mining operations
Investments in public mining companies
Involvement in mining pool operations
Funding for mining hardware development
Tether's entry into Bitcoin mining could significantly impact the crypto mining landscape.
A newcomer to mining, with increasing competition it needs to balance mining investments with its core stablecoin operations.
As Tether continues to diversify beyond its core stablecoin business, its mining investments may provide additional backing and liquidity for its stablecoin operations while potentially mitigating risks associated with regulatory scrutiny.
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Success story is not without its dark chapters
Despite its success, Tether has faced scrutiny over its reserve management and transparency. Critics have long called for more rigorous audits of the assets backing USDT.
The company has made efforts to increase transparency, but some concerns persist. Regulatory challenges also loom on the horizon.
As stablecoins gain prominence, governments and financial regulators are paying closer attention, potentially impacting Tether's operations.
Tether's success is not without controversy.
In 2021, Tether paid a $41 million fine to the US Commodity Futures Trading Commission (CFTC) for misleading statements about its dollar backing.
A 2024 report by blockchain analytics company TRM Labs found that Tether was the most used stablecoin for criminal activity throughout 2023, with $19.3 billion in transactions linked to illicit activities.
The Wall Street Journal has reported on Tether's alleged involvement in financing Hamas, paying Chinese fentanyl suppliers, and even funding North Korea's nuclear program.
A United Nations report alleged that Tether plays a key role in criminal activities in Asia.
The report, titled "Global Study on Cryptocurrency Crime," claimed that Tether (USDT) has become the "preferred choice" for money laundering in Asian crime rings, particularly those involved in "pig butchering" scams and human trafficking.
Tether denied all the allegations of wrongdoing and claimed that its reserves are fully backed by US dollars. The company has also said that it is committed to working with law enforcement to combat crime.
Managing reserves: Stability at the cost of concentration risk
Tether claims to back each of its tokens with equivalent reserves, primarily in US Treasuries.
Stability and safety: US Treasuries are considered one of the safest and most liquid assets in the world. This provides a stable backing for USDT, reducing overall risk.
High liquidity: US Treasuries can be easily sold in large volumes, even during market stress, allowing Tether to meet redemption demands quickly.
Interest income: Holding Treasuries generates interest income for Tether, contributing to its profitability and potentially strengthening its reserves.
As of March 2024, the company reported more than $97.5 billion in direct and indirect Treasury holdings.
The composition of these reserves and the potential risks associated with them remain a subject of debate.
A sudden surge in redemptions or a significant market downturn could test Tether's ability to maintain its peg.
Although US Treasuries are generally considered highly liquid, there could be scenarios where quickly liquidating large amounts of Treasuries to meet redemptions becomes challenging, especially during market stress.
Having such a large portion of reserves in a single asset class (US Treasuries) creates concentration risk. Any issues affecting the US Treasury market could have an outsized impact on Tether's reserves.
Tether's shift towards US Treasuries (and away from riskier assets like commercial paper) has generally been seen as a positive move for improving the stability and transparency of its reserves.
Tether's large Treasury holdings have drawn attention from regulators and policymakers. For example, in February 2024, a US Congressman raised questions about Tether's Treasury holdings during a Congressional hearing.
Given the size of Tether's Treasury holdings any significant changes in Tether's Treasury portfolio could potentially impact the broader US Treasury market.
Other stablecoins strategies to compete with Tether
Token Dispatch view
As Tether continues to dominate the stablecoin market, it faces increasing competition from both crypto natives and traditional financial institutions entering the space.
The company's plan to expand its team and diversify into areas like artificial intelligence and biotechnology signal its ambition to remain at the forefront of financial innovation.
Despite its current success, Tether faces significant challenges.
Regulatory scrutiny is intensifying globally, with governments and financial watchdogs expressing concerns about the potential systemic risks posed by stablecoins.
Tether's size and importance in the crypto ecosystem make it a prime target for regulators.
Navigating an uncertain future
Tether’s stability may be more precarious than it appears, and its fall could have far-reaching consequences.
Crypto promised decentralisation and freedom from traditional financial constraints, but in Tether, we may have created a new centralised behemoth.
One that operates in the shadows of regulatory oversight.
Perhaps it requires increased scrutiny, enhanced transparency, and robust regulation to ensure that Tether's success doesn't come at the cost of financial stability and integrity.
The future of digital money?
Tether's ability to maintain its position will depend on its continued stability, transparency, adaptation to regulatory demands, maintain its peg, and continue its explosive growth.
As the lines between traditional and crypto finance blur, Tether will have profound implications not just for the crypto world, but for the global financial system as a whole.
Week That Was 📆
Saturday: Stablecoins: Can the traditional players beat Tether? 🏋️
Thursday: Hit The Bazooka 🔫
Wednesday: CYA Crypto Crusader? 🤦
Tuesday: Has Ethereum Bottomed Out? 🤔
Monday: Loading for Uptober? ⏳
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