USD Tether (USDT) is a stablecoin that is pegged 1:1 with the US Dollar, providing fast transfers in a currency that is relatively stable compared to existing cryptocurrencies like bitcoin and ether. While Tether provides the benefits of stability it also has the transparency of a public blockchain, where the value of reserves are published daily.
The USDT stablecoin is collateralised by fiat currency, where new Tethers are created by fiat reserves under the control of Tether Limited. Therefore, the Hong Kong-based company acts as a trusted third party. While new Tethers are created through fiat deposits, other stablecoins are crypto-collateralised and backed up by cryptoassets, such as DAI. Tether is burned and minted based on the amount under custody, and the circulation of tokens can be tracked via the protocol.
Created in 2014, Tether was initially known as Realcoin. Later, the company behind the stablecoin, (Tether Limited) rebranded Realcoin to Tether in November 2014. The USD stablecoin started trading on exchanges in November 2015. Between 2015 and early 2017, the issuance and use of Tether wasn’t that significant.
But beginning in 2018, the USD stablecoin started to become a major source of liquidity for bitcoin. The main reason for its rise was that it allowed investors to exchange funds between cryptocurrencies and USD bypassing banks entirely, allowing exchanges to implement the stablecoin instead of having to connect with the traditional finance system.
Many other stablecoins (Gemini Dollar, PAX, TrueUSD, etc.) emerged in response to controversies surrounding Tether. Yet today, Tether remains the most liquid and popular stablecoin, where the USDT token accounts for just over 61% of bitcoin’s liquidity, as shown by the chart below:
The USDT token was originally launched and issued on the Bitcoin blockchain, building on the foundation of Mastercoin. Created by J.R. Willett in 2012, Mastercoin wanted to bring more functionality to Bitcoin. Mastercoin eventually morphed into Omni, a layer 2 protocol to create and trade assets on top of Bitcoin. The first USDT tokens were issued on October 6, 2014.
The issuance of Tether didn’t start to pick up until the bull run of 2017, reaching almost $4 billion in circulation at that point. By mid-2019, most of Tether’s activity moved to the Ethereum blockchain, as shown by the chart below. Tether is also being issued on other blockchains such as Tron, EOS and more recently Solana (the latter two are not shown by the chart). Today almost 16 billion USDT tokens are in existence (accounting for tokens on the Omni, Ethereum and Tron blockchains).
The price of USDT sometimes deviates from the 1:1 peg with the US Dollar and can be used as an indication of market sentiment. For instance, if USDT trades at a premium to $1 then it suggests that more investors are using Tether as an entry into the cryptocurrency market which may be viewed as bullish for BTC and other cryptocurrencies with significant Tether liquidity.
On the other hand, if USDT trades at a discount to $1, then this could indicate selling pressure and that investors are exiting the cryptocurrency market, which is likely to be bearish for BTC and altcoins with significant Tether liquidity.
Deviations from the $1 peg may also be related to a risk premium on USDT, due to the perceived risk of holding USDT compared to US Dollars.
The issuance of new USDT tokens can also have an impact on the price of bitcoin. For instance, a study on stablecoin issuance found that new issuances of Tether tokens (totalling more than $1 million) positively impacts bitcoin returns during the 24-hour period after an issuance event.