Tether, or USDT, became an important player in the cryptocurrency ecosystem in 2014. It is probably the most popular stablecoin by market cap, and crypto traders prefer using these coins to move investments in and out of cryptocurrencies and fiat currencies. Stablecoins are less volatile digital assets that maintain a steady valuation.

The value of Tether and other stablecoins is pegged on stable assets, like the US dollar, gold, and other fiat currencies. Introducing Tether in the crypto ecosystem caused significant ripple effects on other digital assets.

How Does USDT Function as Stablecoin?

USDT functions as a stablecoin in the following ways:

• Asset backing: Tether is backed by fiat currencies and real-world assets. This means the volume of USDT in circulation is backed by equivalent amounts of real-world assets. This explains why you can convert USDT to USD in the ratio of 1:1.

• Issuance and redemption: Tether only issues new USDT tokens if there’s demand and redeems or buys them back where necessary. This controlled process helps stabilize its value.

•  Blockchain technology: Tether is available in various blockchain networks, including Tron-20, ERC-20, and other networks. This allows for easy exchange of USDT tokens.

• Pegged value: USDT strives to maintain the 1:1 pegged value with the US dollar.

The Impact of USDT on the Broader Crypto Ecosystem

Tether certainly has some impact on other cryptocurrencies. Though inconclusive, several analysts suggest that tether issuance is associated with increased crypto prices, especially Bitcoin. The studies suggest that USDT might influence Bitcoin prices in the following ways:

•  Using freshly minted USDT for Bitcoin purchases: Traders use newly released USDT tokens to purchase Bitcoin and other cryptocurrencies. This increases the demand for cryptos, pushing its prices up.

• Arbitrage: Traders use USDT to arbitrage across platforms with price discrepancies. For instance, they use freshly minted USDT to buy bitcoin at a fair price on one platform, transfer USDT/BTC to another, and sell at a profit.

• Collateral for crypto loans: Established traders can also use USDT as crypto collateral.

• Stops market panic: The high volatility of cryptocurrencies means traders should always be ready for sell-offs. Tether stops panic selling as it converts to real assets. Traders use USDT to exit volatile coins.

Unsurprisingly, some dissenters insist that USDT issuance doesn’t influence bitcoin prices. Instead, they argue that USDT only gets issued when bitcoin prices increase.

How Will Tighter Tether Regulation Affect the Crypto Market?

Tighter regulation of USDT tokens means there will be restricted issuance and limited amounts of tether tokens on the market. This reduces the liquidity and trading volumes of cryptocurrencies and increases crypto volatility. Strict regulations will also push for the adoption of other stablecoins as traders try to find better alternatives to USDT.

On the other hand, strict USDT oversight might boost investor confidence and make it a more legitimate stablecoin. Relevant authorities should implement prudent but balanced regulations that mitigate tether risk without causing notable disruption in the crypto market.

Is Tether a Good Investment?

Tether and other stablecoins aren’t perfect investments because they don’t change in value. However, they are perfect for storing value because 1 USDT equals 1 USD. Besides holding value, Tether provides a simpler way of conducting business than Bitcoin and other cryptocurrencies. Generally, you should consider buying Tether to keep your money in crypto without the volatility risks.

Endnote

USDT certainly has a significant influence on the crypto ecosystem. However, lingering concerns surrounding its reserves and effect on prices have impaired wider adoption. As cryptocurrencies increasingly become mainstream assets, Tether should evolve or risk being displaced by regulated competition.