Crypto Flight To Tether

When sentiment in nascent Crypto markets turn ugly and people want out there are a few options.

  1. Flight to one of the larger/more stable currencies like bitcoin – unhelpful if entire ecosystem is undergoing a correction, as now.
  2. Flight to Fiat – invariably via a large exchange. Decision wether to keep funds in-situ or withdraw to bank account completely. Withdrawing makes market re-entry down the line much slower and more cumbersome. Keeping fiat in an exchange poses its own risks.
  3. Going short – expensive, non-trivial for newbies.
  4. Convert to Tether.

Tether is a crypto whose supply is backed 1-to-1 with USD held in it’s reserves and pegged 1-to-1 with USD. Effectively a cryptographic dollar. It can be bought and sold instantly at par value. Tether is a simple elegant way to hedge against crypto volatility whilst maintaining rapid ability to re-enter crypto markets. And it’s doing well.

USD reserves have jumped from $50m earlier this year to $290m today. It’s clearly solving a need and with likely volatility a long-term factor in crypto likely to see increasing inbound fund flows. Tether Ltd itself, is a private company and does not have a tradeable token. So outside of using Tether as a hedge, there’s no way to profit from it.

Important to note, there is large counterparty risk to holding Tether. The company could abscond with the USD/funds could be seized etc.

From Tether’s White Paper

Step 1 ­ User deposits fiat currency into Tether Limited’s bank account.

Step 2 ­ Tether Limited generates and credits the user’s tether account. Tethers enter circulation. Amount of fiat currency deposited by user = amount of tethers issued to user (i.e. 10k USD deposited = 10k tetherUSD issued).

Step 3 ­ Users transact with tethers . The user can transfer, exchange, and store tethers via a p2p open­source, pseudo­anonymous, Bitcoin ­based platform.

Step 4 ­ The user deposits tethers with Tether Limited for redemption into fiat currency.

Step 5 ­ Tether Limited destroys the tethers and sends fiat currency to the user’s bank account. Users can obtain tethers outside of the aforementioned process via an exchange or another individual.

Once a tether enters circulation it can be traded freely between any business or individual. For example, users can purchase tethers from Bitfinex, with more exchanges to follow soon. The main concept to be conveyed by the Flow of Funds diagram is that Tether Limited is the only party who can issue tethers into circulation (create them) or take them out of circulation (destroy them). This is the main process by which the system solvency is maintained.