Is it safe to invest in Tether?

USDT is generally considered safe for investment , especially as a means to hedge against the volatility of other cryptocurrencies. However, like any investment, it comes with risks, and it's essential to consider Tether's efforts to maintain transparency and regulatory compliance.

Is Tether a safe stablecoin?

Tether has faced scrutiny and fines for misleading users about its reserves. Investigations revealed that Tether only held 27.6% of the value of its stablecoin in reserves . In contrast, USDC, despite facing its own challenges such as the Silicon Valley Bank crisis, offers monthly third-party assurances of its reserves.

Should I keep my money in USDT?

As such, we are here to tell you, maybe scream (looks at you with side eyes), that you should consider saving/investing in USDT (Tether) . USDT (Tether) boasts stability, global accessibility and many benefits you won't find in your local banks, and that's just the beauty of this coin here.

Yes. Tether's platform is built to be transparent at all times. All Tether tokens are backed 100% by Tether's reserves .

What is the problem with Tether?

Tether's Compliance Challenges Tether faced penalties for inaccurately representing its reserves and falsely claiming complete backing by U.S. dollars .

Why is Tether in trouble?

Concerns were intensified when Tether and Bitfinex, its corporate sibling, agreed to pay $18.5 million in 2021 to settle allegations from New York state, which said: " Tether's claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. "

Stablecoin Watch: How Safe Is Tether? Still a Good Investment? (2024)

Summary

We find the reserves of Tether (USDT) are not fully in cash equivalents. There is a sizeable allocation to crypto markets.
Stablecoin yields are no longer high compared with yields in traditional markets such as dollar currency pegs and money markets.
With the Fed raising rates, stablecoins could become less attractive.

How Safe Is Tether?

After the TerraUSD/Luna collapse, all eyes have been on whether Tether (USDT) can maintain its peg. And at least over the past week, the answer has been a clear yes. This suggests speculators have moved away from attacking the coin. Nevertheless, the market cap of USDT has fallen by $1bn over the week, suggesting outflows are continuing. In contrast, the USD coin’s (USDC) market cap increased by $0.9bn over the same period. This suggests investors are rotating from USDT to USDC.

One reason for the rotation is ongoing concerns about the quality of the collateral used to back USDT. Tether recently released its quarterly assurance report for 2022Q1. It showed Tether had reduced its commercial paper holdings and increased its holding in safe Treasury bills. But not all the reserves are in cash equivalents. Around $12bn of the $82bn of reserves are held in loans, corporate bonds, precious metals and investments in other crypto markets. The latter category – investments in other crypto – has actually increased from $0.6bn to $5bn today. They now make up 6% of Tether’s reserves.

Therefore, the current market cap of Tether at $79bn is not fully backed by cash equivalents (only $71bn is). That introduces a vulnerability. Meanwhile, USD Coin (USDC) has a market cap of $53bn and holds the same amount in cash equivalents (Chart 1). This suggests there is more peg risk for USDT than USDC, meaning outflows from Tether could continue.

The other challenge for USDT (and stablecoins in general) is that short-term interest rates in traditional finance (TradFi) have been rising. Currently, three-month US T-bills are yielding 1.1%, and commercial paper (A2-rated) is yielding 1.7%. On the currency front, USD pegs like the Saudi riyal and Hong Kong dollar are offering yields of between 0.4% to 2.9%.

Meanwhile, USDT has a yield of 2.1% on Compound, USDC has a yield of 0.9%, and BinanceUSD (BUSD) has a yield of 1.3%. These yields are in the range of those offered in TradFi markets. Yet stablecoins have higher platform, market and regulatory risks. As the Fed and other central banks continue to raise rates, we could see more pressure on stablecoins.

Latest Stablecoin Developments

Market Cap and Peg Risk

Aside from TerraUSD, Frax and Dai have seen the largest declines in their market caps over the past month (-47% and -29%, respectively, Chart 3). Tether has lost 12%. On the flipside, both USD Coin (USDC) and Binance USD (BUSD) have seen their market caps increase by around 5%.

Volatility

Volatility has changed little since our last UST-infused update. If you are unsure why UST de-pegged, rewatch our webinar with crypto specialist Oksana Grinchak. The one-month annualised volatility of Fei USD (FEI) resides near 9% – more than double the next coin (Chart 4). Its three-month annualised volatility is far higher at just shy of 16%, nearly four times the next stablecoin. Competition is tighter for volatility over the past year. The volatility of FRAX is sitting second, just above 8%. Third-placed MIM is around 7%.

Yields

Turning to yields, both lending rates and borrowing rates on the Compound protocol have been converging around 0-2% (Charts 5 and 6). The past week saw USDP rates return closer to zero while a recent turn higher in USDT, USDC, and FEI yields appears to have topped. Overall, USDT has the highest lending (2.1%) and borrowing rates (3.8%) on Compound. Looking across other decentralized finance (DeFi) protocols, we find lending and borrowing rates are mixed across the stablecoins (Tables 2 and 3).

Appendix

In this weekly report, we analyse the latest developments in stablecoins. We focus on the biggest stablecoins by market cap. If you need a refresher on stablecoins in general, read our Explainer ‘What Is a Stablecoin?‘ For this report, we categorise them as follows:

Fiat-backed stablecoins. These aim to be fully collateralised with fiat currency or other assets. The typical collateral includes dollar cash, treasuries and commercial paper. Notable fiat-backed stablecoins include Tether (USDT) and USD Coin (USDC).
Crypto-backed stablecoins. These are also collateralised, but this time with cryptocurrencies such as ethereum. Given the volatility in crypto assets, these stablecoins are over-collateralised. Notable crypto-backed stablecoins include DAI.
Algorithmic stablecoins. These aim to maintain a price peg using an algorithmic process as opposed to collateralisation. They do this through using smart contracts to control the supply of the coins in circulation. Notable algorithmic stablecoins include FEI.
Hybrid stablecoins. These combine elements of both collateralisation and algorithmic rules. Notable hybrid stablecoins include FRAX. The TerraUSD coin could also be classified as hybrid.

Here are details of some of the biggest stablecoins:

USDT: Tether is a fiat-collateralised stablecoin primarily issued on the ethereum and bitcoin blockchains. It aims to be pegged 1:1 against the US dollar. Tether’s reserves are not backed 100% by US dollar deposits. Instead, they are backed by reserves that include cash, cash equivalents, short-term deposits, commercial paper, corporate bonds, funds, precious metals, secured loans, and other investments including digital tokens.

USDC: USD Coin is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is 100% backed by cash and short-dated US treasuries. USDC publishes a monthly public attestation of 100% reserves.

BUSD: Binance USD is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is backed 100% by USD held in Paxos-owned US bank accounts and US treasury bills (including through repurchase agreements and/or money-market funds invested in US treasury bills). Paxos is a New-York-regulated financial institution and publishes a monthly public attestation of 100% reserves.

FAQs

What is USDT backed by?

Around $12bn of the $82bn of reserves are held in loans, corporate bonds, precious metals and investments in other crypto markets. The latter category – investments in other crypto – has actually increased from $0.6bn to $5bn today. The rest is held in cash or cash equivalents.

Is tether a scam?

Tether has been subject to several investigations. US authorities fined Tether last year for falsely saying its token was fully backed by assets, when it was not. And the US DOJ investigated Tether for bank fraud.

What is the tether interest rate?

Interest rates on tether vary according to the platform. As of November 2022, Nexo was offering 12% APY while Midas offered 12.63%.

Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)