On June 15, 2023, Tether (USDT), the largest stablecoin by market capitalization, faced a depeg from the US dollar, with its rate dropping to $0.996. This was caused by the Curve liquidity pool disbalance. Initially, traders bought a significant amount of Tether, but then started selling it, leading to a decrease in its value. Despite a swift recovery, the crypto community is concerned about the potential challenges that USDT can face. So, let’s dive into how this stablecoin can handle the dollar's fluctuations.
What is Tether?
Tether (USDT) is currently the most capitalized stablecoin in the market, with a capitalization of $83 billion. To put it into perspective, Bitcoin's market capitalization stands at $598 billion. However, Tether surpasses Bitcoin in terms of daily trading volume, with $24 billion compared to BTC’s $16 billion.
USDT is pegged to the US dollar, meaning that one Tether is always worth $1. It is a centralized stablecoin issued by Tether Limited. The company launched the token in 2014 and has been solely running the project. Tether’s reserve safety is fully managed by the firm.
The stablecoin undergoes regular audits by independent companies. All the results are available on the project’s website. The most recent check was conducted in March 2023 by BDO, the international audit and consulting firms union.
The USDT value is backed by a basket of assets.
🗃 84.7% cash & cash equivalents & other short-term deposits. There are several assets inside:
76.53% U.S. treasury bills. Those are short-term securities issued by the Ministry of Finance to borrow funds in the domestic market. Treasury Bills always have a maturity date.
10.82% Overnight reverse repurchase agreements. A deal that involves the purchase of securities under the condition of their return within a specified period of time.
1.14% Term reverse repurchase agreements. Same with Overnight Reverse Repurchase Agreements, but for a shorter expiration period.
10.75% Money market funds. Funds that invest in safe, short-term debt securities;
0.69% Cash & bank deposits.
0.07% Non-U.S. treasury bills.
📑 6.54% Secured loans (none to affiliated entities). Means that the borrower is obliged to repay the loan.
🏆 4.14% Precious metals.
🤷 2.61% Other investments (no certain details).
😎 1.83% Bitcoin.
💼 0.17% Corporate bonds. Those are securities corporations issue to get financed.
U.S. Treasury Bills make up the largest portion of Tether’s reserves.
While Tether Limited does not disclose the exact percentage of the reserve that is held in US dollars, it is important to note that Treasury bills, which account for nearly 80% of the collateral, are directly tied to the condition of the US economy. The US government issues these securities, and the terms are predetermined. The approach ensures transparency and minimizes unforeseen risks. Additionally, returns on such investments tend to be higher compared to simply holding assets in dollars.
USDT issues: expected or unexpected?
In 2023, the crypto market faced increased pressure from the US Securities and Exchange Commission (SEC). In February, the SEC filed claims against Binance USD (BUSD), another major dollar-backed stablecoin, asserting that BUSD should be classified as a security. As a result, the BUSD issuer, Paxos, refused to continue issuing the coins.
Tether and BUSD share similarities as both stablecoins are pegged to the US dollar and backed by a basket of reserve assets. Therefore, we should keep in mind the possibility of the SEC putting pressure on USDT. If this happens, investors might start selling off Tether holdings, potentially leading to a loss of parity with the US dollar and also the stablecoin’s value.
The future of the US dollar
The strength of the US dollar can be influenced by three factors:
💸 problems in the US economy;
📉 changes in the Fed's key interest rate;
✊ strengthening of other currencies, resulting in a shift in market dominance away from the dollar.
The interest rate, determined by a country's central bank, affects the cost of loans and the pace of economic growth. The higher the rate, the more expensive the loans, which can slow down the country's economic development. Interest rates are often raised to combat inflation.
Judging by the US Federal Reserve's plans for active rate hikes in the past, the country has overcome the sharpest financial crisis phase. Therefore, it is unlikely that the US economy and the dollar will face serious threats in the future.
We can use the US dollar index to determine the currency's health and strength. The index measures the value of the dollar against a basket of six currencies (euro, yen, pound sterling, Canadian dollar, Swedish krona, and Swiss franc).
In October 2022, the index skyrocketed to 114 points due to the geopolitical crisis and the Fed’s rate hikes. Its all-time high (164 points) was in February 1985, while the lowest (70 points) was in March 2008.
How Tether will react to dollar challenges
Each unit of USDT is intended to maintain a value equal to that of the US dollar. This means that the dollar devaluation can reduce the USDT’s purchasing power globally. Purchasing power refers to the number of goods or services that can be acquired using a specific asset within a given timeframe. When this metric decreases,it signifies the asset’s devaluation.
USDT has faced instances of depegging from the US dollar in the past. For instance, In May 2022, the depegging occurred following the collapse of the Terra crypto project and its dollar-backed stablecoin, TerraUSD (TUSD), which used to be one of the top 10 most capitalized cryptocurrencies. The negative news surrounding Terra led to a mass sell-off of USDT, resulting in a drop of its value to $0.94126.
In May 2021, Tether, on the contrary, experienced a price increase to $1.1. This surge was driven by Tesla's decision to stop selling cars for Bitcoins and the mining market "redistribution" due to the Chinese watchdog's pressure on miners. The growth of USDT’s value can be attributed to the exchange of a large number of Bitcoins into Tether.
The horizontal green lines are Tether's de-correlation with the US dollar.
So should we be worried?
While it is true that the challenges faced by the US dollar can decrease Tether's purchasing power, in the worst-case scenario would be a complete depegging from the US dollar due to massive sell0offs of the stablecoin.
However, Tether’s strength lies in its what traders call “diversified” basket of assets. The diversification allows Tether to adjust its collateral allocation if any individual asset experiences a decline in value. The flexibility helps mitigate investment risks and ensures stability for investors.
It’s important to remember that rumors and speculation surrounding the death of USDT or the US dollar are unfounded. The United States has always had the strongest economy, and the government is committed to keep it going that way. Provocative headlines are often all about likes and views rather than about offering accurate assessments. So, don't fall into panic and stay away from nonsense horror stories.
This article is not an investment recommendation. The financial transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.