Author: Antoine Cosson
Publication date: 30.04.2024
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Introduced in 2014, Tether operates as a blockchain-based platform to enable the digital utilization of fiat currencies. Its objective is to revolutionize the traditional financial system by introducing a contemporary method of handling money. Tether distinguishes itself by providing users the capability to engage in transactions involving conventional currencies on the blockchain, thus bypassing the usual instability and intricacy linked with digital currencies. Pioneering the concept of utilizing traditional currencies in digital transactions, Tether has broadened access to cross-border transactions via blockchain technology.
Tether tokens are digital assets constructed on various prominent blockchains, including Algorand, Avalanche, Bitcoin Cash’s Simple Ledger Protocol (SLP), Ethereum, EOS, Liquid Network, Omni, Polygon, Tezos, Tron, Solana, and Statemine. These underlying protocols are comprised of open-source software that interfaces with blockchains to enable the creation and redemption of Tether tokens.
Tether tokens function similarly to other digital currencies on the blockchain but maintain a 1-to-1 peg with real-world currencies. Termed as stablecoins, Tether tokens provide price stability by being pegged to a fiat currency, offering traders and merchants a low-volatility option when navigating the market. Each Tether token is pegged at a 1-to-1 ratio with its corresponding fiat currency (e.g., 1 USD₮ = 1 USD) and is fully backed by Tether's reserves.
Tether offers support for several fiat currencies and Gold, represented by corresponding Tether tokens: USD₮, EUR₮, MXN₮, CNH₮, and XAU₮, representing US dollars, euros, Mexican peso, Chinese yuan, and Gold, respectively.
Each Tether token is fully backed by reserves, encompassing traditional currency, cash equivalents, and potentially other assets and receivables from loans extended by Tether to third parties. The Tether platform maintains full reserves when the total value of Tether tokens in circulation does not exceed the value of its reserves. These figures are publicly accessible on their Transparency page. When the article is written, the reserves of collaterals look like this:
You can also check on which blockchain every Tether tokens are and their situation.
Tether on the Ethereum blockchain, is functioning as an ERC20 token and represents a newer transport layer, broadening accessibility to Tether tokens within Ethereum smart contracts or decentralized applications. Being an ERC20 token, it can be sent to any Ethereum address.
Given the availability of Tether tokens across various blockchains, users must be very cautious when sending Tether tokens to ensure they select the appropriate transport protocol for the destination address, otherwise tokens will be lost forever.
USDT, a powerful indicator
USDT has been the most widely used Stablecoin on the cryptocurrency market since 2014. It has suffered only minor de-pegs throughout its history, and has demonstrated its resilience over the years to win the confidence of investors and continue to spread.
Today, the USDT stablecoin is capitalized at over $110B, making it the 3rd most capitalized cryptocurrency, just behind Bitcoin and Ethereum, and well ahead of its main competitor, the USDC, capitalized at around $30B.
USDT is the stablecoin that allows the most cryptos to be bought and sold on centralized exchanges. And being so widely used, it becomes interesting to study some charts about the king of stablecoins to better understand the crypto market and predict underlying trends with greater ease.
The first chart of interest is simply the USDT Market Cap. This chart is available on Tradingview and allows us to measure the evolution of stablecoin issuance:
We observe that the curve is almost exponential: at the beginning of 2020, USDT represented around $5B, compared with $110B today. The meteoric rise in demand for USDT is simply a reflection of investors' attraction to the cryptocurrency market. Indeed, stablecoin is primarily intended for the purchase and exchange of cryptocurrencies. We can therefore measure the evolution and have an idea of the amount of new entrants to the market by looking at this curve.
Keep in mind that if the curve keeps rising, it's because more and more money from the outside world is entering and being injected into the cryptocurrency market.
The second chart is even more relevant, and is important to monitor assiduously. This is the chart of USDT Dominance on the cryptocurrency market.
We understand that USDT is the main gateway to investing in cryptocurrency. But it is also the exit door. Indeed, when a trader or investor has judged it right to take profits on cryptocurrency assets, there's a good chance they'll exchange their cryptos for USDT.
By analyzing this chart and comparing it with the chart of Bitcoin, which is of course the largest cryptocurrency and the one that gives the general direction for all altcoins, we notice that when the dominance of USDT decreases, this means that players present on the market are more inclined to sell their stablecoin to invest it in $BTC or altcoins. Inversely, when USDT dominance rises, this indicates a widespread movement to sell cryptos in favor of USDT. We therefore understand that the performance of the crypto market and the dominance of the USDT are opposite.
This inverse correlation is highlighted on the following charts, with USDT dominance at the top and Bitcoin at the bottom. We can clearly see that every time a bullish move is initiated on USDT dominance, a bearish move is initiated on the Bitcoin price. The reverse is also true:
The good news is that this chart can be analyzed like that of any other asset, and its reading can be simplified and interpreted using technical analysis. It will be an important addition to your general understanding of the crypto market, and will help you spot trend reversals more easily.
In conclusion, we can say that stablecoins, and USDT in particular, are making a major contribution to opening the door for investors to enter the crypto market, offering us an alternative to highly volatile altcoins, and enabling us to take profits efficiently without taking liquidity out of the market and switching back to FIAT currencies.
In addition, analysis of USDT-related charts gives us valuable clues essential to understanding and apprehending the crypto market.
The major challenges for stablecoins will be keeping their values 1:1 with the FIAT currency they are supposed to replicate over the long term, and above all, regulatory issues. Indeed, governments don't necessarily appreciate their currencies being replicated on the blockchain by private companies, which could lead to new challenges for Tether in the years to come.
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