Investing in cryptocurrencies isn’t risk-free. In fact, cryptocurrencies are very volatile assets – their prices constantly fluctuate up and down and some of these price changes can be quite drastic.
The most popular coins and tokens can have a price change of 10 or 20 percent in just a couple of days, while numerous low cap altcoins can surge several hundred percent in a matter of hours and crash the same percentage in a couple of hours later. The price of Bitcoin or Ethereum can rapidly change and no one can predict the magnitude.
For this reason, a special class of non-volatile crypto assets has been invented. These cryptos are called stablecoins, because their price only fluctuates between 0.01 and 0.1%. Crypto enthusiasts can rely on these coins as a stable currency similar to real-world fiat money that isn’t volatile at all.
Users mainly use stablecoins as a secure investment medium to store their money in a form ready for more risky crypto investments or as a means for storing cash when they want to cash out profits from crypto trading.
In this guide, we’re going to take a detailed look at stablecoins, share which types of these coins are available on the market, and help you learn how the most popular stablecoin Tether (USDT) works and make money.
Stablecoins: Not Your Typical Cryptocurrencies
The need for stablecoins arose precisely because cryptos are such volatile assets in general, which means you can lose a lot of money really quickly if the coins you’re investing in start rapidly crashing. These coins are a very successful attempt at linking fiat currencies such as US dollars or Euros with digital currencies. Stablecoins have a fixed value per coin, which is usually 1 USD. This price changes very little, even during the most volatile market cycles.
Before stablecoins were invented, crypto traders that used crypto exchange platforms for buying, selling, and exchanging assets, needed to deposit fiat money into their exchange account and then exchange it directly into a highly volatile crypto like Bitcoin (BTC) or Ethereum (ETH). BTC and ETH are the most popular cryptos on the market, but they also serve as intermediary coins, because many exchanges don’t support direct purchases with fiat money and you have to buy assets with an intermediary crypto. Stablecoins changed this situation drastically.
With the appearance of these new, non-volatile cryptos, traders could buy stablecoins with fiat money and then keep those coins in their exchange account or crypto wallet, ready to invest portions of the coins in regular cryptos really fast. Also, if users manage to profit from trading cryptocurrencies, they don’t need to exchange their profits into fiat money at once in order to save those profits. Now, users can exchange profits for stablecoins and keep their money in that form without fear of a crypto crash that could suddenly take those profits away from them.
This is a huge game-changer for crypto traders because before stablecoins appeared, you could either risk your profits by keeping them in the form of a volatile crypto that suddenly surged let’s say 100 percent, or cash out those gains into fiat immediately. Today you can turn your funds into stablecoins and store them in your wallet without fearing a sudden price crash.
Stablecoins tend to imitate the stability of fiat money, which is known to fluctuate in price very little on a daily basis. When you’re converting USD to let’s say EUR or GBP, you know that the conversion rate is stable and there won’t be any huge changes in the price of these currencies.
This is exactly the stability that stablecoins offer their users because if you keep your crypto gains in the form of Bitcoin or Ethereum for example, no one can guarantee you that the market value of your assets won’t just suddenly drop 5-6%, which is quite common for these cryptos. The price change can, of course, also go the other way around – you could see your funds drastically increase over a short period of time but if you’re not willing to take the risk and want to have some safe profits at your disposal, it’s best to convert a portion of your profits into stablecoins.
There are three types of stablecoins on the market, depending on the assets they are collateralized by. A stablecoin can be collateralized with fiat money, another cryptocurrency, or it can be without collateral, maintaining its stability thanks to a programming algorithm.
Fiat Money Collateralized Stablecoins
Stablecoins that use fiat money as collateral are the most popular stablecoins on the market and Tether (USDT) is the most popular of these stablecoins. Other fiat collateralized stablecoins include USD Coin (USDC), Paxos Standard (PAX), True USD (TUSD), Gemini Dollar (GUSD), and numerous other stablecoins.
What all these coins have in common is that the companies that issue them claim that every one of their coins is redeemable in the form of US dollars at any time, because they keep the same amount of USD as the number of their stablecoins in market circulation, in a secure bank account.
Some of these stablecoins are subject to regular third-party audits by auditing companies, while others such as Tether have a bit of a shady auditing policy followed by legal controversy which we’ll discuss in detail in a bit.
The bottom line regarding fiat collateralized stablecoins is that they are very useful for liquidity on the crypto market because traders have a sense of security when keeping a portion of their assets in the form of stablecoins. The value of their coins always stays the same and it’s directly backed by fiat money.
Cryptocurrency Collateralized Stablecoins
Stablecoins can also be collateralized by other digital assets and this means that the company that issues a stablecoin has secured enough other cryptocurrencies such as BTC or ETH to back the value of their stablecoin. The thing with these stablecoins is that the companies that issue them need to hold a considerably larger amount of other cryptos than the fiat money value of their stablecoins in order to compensate for possible price fluctuations due to crypto volatility.
The cryptos that are used as collateral for these stablecoins are kept in escrow agreements where a third party temporarily holds the cryptos as collateral and the stablecoin issuer can only put coins in circulation that are backed by the number of collateral assets.
Some of the most popular crypto collateralized stablecoins are Maker Dai (DAI), Synthetics (sUSD), and Reserve Tokens (RSV).
The third type of stablecoins are those that aren’t collateralized with any assets such as cryptos or fiat money. Instead, these stablecoins use complex programming algorithms to keep the value of the coin at a fixed price of 1 USD. The algorithm automatically increases the supply of coins in circulation if the demand is rising, while it decreases the circulating number of coins if the demand for the coins is falling. This way, the algorithm manages the inflation of the stablecoin, constantly maintaining a fixed price of the coin.
This class of stablecoins is quite new and some of their examples include the FEI, FRAX, and RAI stablecoins.
Tether is the largest cryptocurrency on the crypto market that’s actually a stablecoin, and if you take a look at Coinmarketcap, you can see that USDT is ranked among the top 10 cryptos by trading volume and market capitalization.
Millions of crypto traders worldwide use Tether to maximize their gains from crypto trading while lowering the risk of their investments, by exchanging cryptos for USDT at the right time, when they want to exit a trading position. Also, when brokers want to open a new trading position, they find that keeping cash in the form of Tether is a great choice because they can start trading cryptos in a matter of minutes and don’t need to transfer cash from their bank accounts first.
All of this wouldn’t be possible if Tether wasn’t the most popular stablecoin in the world, which means it’s listed and available on all major crypto exchange platforms. The story of Tether began in 2014, when it was known by another name, RealCoin. This name was soon changed to Tether, by the parent company called Tether Limited, which is based in Hong Kong.
Before the appearance of USDT there weren’t any stablecoins, so the idea of a cryptocurrency whose value is tied to the US dollar in a 1:1 proportion was very innovative. For crypto traders, the launch of the first stablecoin was great news, as it allowed them to transform crypto trading into a much faster process that no longer faced the risks associated with keeping money in the form of highly volatile assets.
Soon enough, new stablecoins started appearing, trying to imitate the concept behind Tether, but none of them managed to achieve the popularity of USDT as the main stablecoin. This was a huge step in bridging the gap between fiat money and cryptocurrencies.
How Tether Operates
Imagine you bought an ETH coin for 3000 USD and the price rises after a while to 4000 USD but then it quickly falls to 3800 USD. If you quickly convert that ETH coin to Tether, you’ll have 3800 USDT (minus the exchange fee). In case the price of ETH continues falling and reaches the low 2800 USD per coin, you would have profited 800 USD compared to your invested sum of 3000 US dollars if you converted that ETH to Tether on time. If you didn’t convert your ETH to Tether tokens, you would have ultimately lost 200 USD if you just left that money in the form of Ether.
This is how crypto traders use Tether to make serious money on the crypto market. The number of Tether coins that can be in supply doesn’t have any hard cap, because the only requirement for a USDT coin to be issued on the market is that it’s backed by 1 USD coin in the Tether collateral bank account.
When Tether was launched, it first used its Omni Layer network, which was built on the basics of the Bitcoin blockchain. Since then, Tether has evolved and it’s also available on the most popular blockchain networks such as Ethereum (as ERC20 tokens), EOS, Algorana, and Tron.
Tether Profiting Mechanism
Tether is very profitable for its parent company. According to Coinmarketcap, USDT has a market cap of over 60 billion USD. The mechanism through which Tether makes money is the conversion fees from fiat to USDT or crypto to USDT and the other way around.
Also, the company profits from blockchain transaction fees. If you take into account how popular Tether is among crypto traders, then these conversion fees and transaction fees really add up to a huge amount of profits on a yearly basis.
Tether and Bitfinex
When Tether appeared, it was quickly listed as a tradable asset on Bitfinex, a very popular crypto exchange platform. The listing on Bitfinex in 2015 was soon followed by a rapid rise of interest in Tether by Bitfinex users and this surge in popularity had a huge role in Tether’s path to global glory as the main stablecoin on the cryptocurrency market. It wasn’t long before Bitfinex became known as the best exchange for buying and selling Tether.
The fact that Tether’s popularity simply exploded after the listing on Bitfinex was a bit too good to be true for some suspicious crypto enthusiasts that suspected there was some sort of tampering involving Bitfinex and Tether but no one could pinpoint it exactly. Soon enough, in 2017, when the Paradise Papers were published, among the thousands of scandalous financial facts about different companies and public figures, there was also some problematic information about Tether.
The papers revealed that the management of Tether Limited and Bitfinex was almost identical and that the same people who invented the first stablecoin were also behind one of the top cryptocurrency exchanges on the market.
This explained how it was possible that a well-known exchange platform such as Bitfinex immediately listed a totally new cryptocurrency such as Tether in its portfolio of tradable assets, even though some much more popular and well-established cryptos weren’t listed on the exchange. Without the full force of the Bitfinex promotion, Tether probably wouldn’t be able to conquer the crypto market so quickly and achieve widespread popularity.
Lawsuits and Controversy
Apart from the Tether Limited and Bitfinex connection, there’s also a lot of controversy surrounding the claim that Tether backs all USDT coins with US dollars stored in a collateral bank account. The New York Attorney General’s office, headed by Letitia James, filed a lawsuit against iFinex Inc., the company behind Bitfinex and Tether Limited, in 2019. The accusations were quite serious – iFinex was accused of trying to hide an 850 million USD loss of investor funds. The case was settled with an agreement that stipulated Tether Limited and Bitfinex were to pay an 18.5 million USD fine.
This wasn’t the end of legal troubles for Tether. In October of 2021, Tether Limited agreed to pay a 41 million USD fine because the Commodity Futures Trading Commission settled charges against the company for untruthfully claiming that it kept 1 USD of collateral for every 1 USDT in circulation. Tether was ordered to pay the fine for this cover-up and to immediately cease this type of issuance violation, which meant that the Tether reserves needed to contain the exact amount of US dollars as the available amount of USDT coins on the market.
On top of this, Bitfinex was also charged a 1.5 million USD fine for allowing retail transactions by US residents without a license from US regulators.
Why Invest in Tether?
Despite all the controversy, Tether remains the top stablecoin on the crypto market and it remains a good investment opportunity for multiple reasons:
- Keeping USD in the form of Tether is a far quicker solution than having to deposit fiat dollars in an exchange platform account through a bank transfer every time you want to make a purchase of cryptos. You can totally evade slow bank transactions and always be ready to quickly invest your money in crypto trading if you keep a steady amount of USDT in your wallet.
- The fact that USDT is a stablecoin means there’s no volatility and the Tether price will always remain 1 US dollar per coin. This is a huge advantage compared to volatile crypto coins and tokens.
- Tether’s fee policy is great for transferring USDT between exchange platform accounts and crypto wallets because a Tether transaction between two wallet addresses is free of charge. You don’t have to pay any fees for USDT withdrawals and transfers from one wallet to another. You only pay for withdrawals when you want to convert your USDT into fiat money or another cryptocurrency.
A Few Final Words…
Stablecoins have become a key asset in the portfolio of most serious crypto traders who know the importance of keeping a portion of their assets in the form of coins whose value doesn’t fluctuate. Tether is the market leader when it comes to stablecoins and this will hardly change anytime soon, despite the controversy surrounding Tether Limited and Bitfinex. If you’re looking for a reliable exchange platform to buy Tether, you can do it on any major exchange such as Coinbase, Kraken, and Binance.