Is Tether (USDT) worth investing in?

Since the Luna & UST crash in May 2022, investor confidence in the cryptocurrency market has been hit hard, along with the prices of other cryptocurrencies. Even the stablecoin leader Tether (USDT) was not immune, and its exchange rate against the US dollar fell sharply to 0.97. Is Tether (USDT) still worth investing in?

Is Tether (USDT) worth investing in?

Since the Luna & UST crash in May 2022, investor confidence in the cryptocurrency market has been hit hard, along with the prices of other cryptocurrencies. Even the stablecoin leader Tether (USDT) was not immune, and its exchange rate against the US dollar fell sharply to 0.97. Is it possible for Tether (USDT) to decouple as badly as UST? Does Tether still have investment value? JPEX will give you an in-depth understanding of the difference between USDT and UST.

What is the difference between USDT and UST?

Many cryptocurrency novices often confuse USDT with UST. In fact, although the names of the two are very similar, the assets and principles behind the support of the currency price are completely different.

The reason why UST is called “Algo stablecoin” is mainly because UST is linked to virtual currency and relies on the burning mechanism with LUNA to stabilize the exchange rate. There is no real value support, which is very different from the stability mechanism of USDT.

As the leader of stablecoins, USDT is supported by assets such as US dollar cash, commercial paper, market funds, and treasury bills. These assets are stable and have real economic value, so their stability is much higher than UST.

How does USDT work?

According to the Tether white paper, USDT is pegged to the U.S. dollar at a ratio of 1:1, and is backed by 100% reserves provided by the Tether issuer. This means that when someone in the market exchanges 1 USDT for 1 USD, Tether will destroy 1 USDT in the smart contract to ensure that the total amount of USDT and USD issued remains the same.

What are the uses of USDT?

Transaction use

Since the currency value of USDT is very stable, many trading currency pairs in the market are settled in USDT, and many newly listed cryptocurrencies will also preferentially choose to quote in USDT, which shows its wide range of trading uses.

Safe use

Since USDT is pegged to the U.S. dollar, it can avoid the impact of volatile market conditions, so when the currency market continues to decline, investors will choose to cash out their cryptocurrencies and switch to USDT to avoid the impact of the bear market.

Unlimited cross-border payment usage

USDT, like other cryptocurrencies, is a “decentralized” digital asset, which can break the restrictions of borders between countries, and can complete cross-border payments in just a few minutes.

Is USDT still worth investing in?

The cryptocurrency market has always been relatively volatile, while the price of USDT is relatively stable. Rather than saying that USDT is an investment tool, it is more a medium of exchange in transactions, with many advantages that other cryptocurrencies cannot match.

Advantage 1: High liquidity

USDT regularly trades in the billions of dollars per day and is sometimes more liquid than Bitcoin, allowing investors to easily trade in the market.

Advantage 2: Transaction fees are cheap

Compared with traditional banks and financial institutions, the transfer process of USDT is very fast, no matter where in the world it is sent, the handling fee is still very low.

Advantage 3: The price is stable

Under normal circumstances, 1 USDT is equal to 1 US dollar, that is, holding USDT is equivalent to holding US dollars. Compared with other cryptocurrencies, the volatility of USDT currency value is very small, which is suitable for investors who want to hedge and stabilize the value of assets.

At present, in the cryptocurrency market, most of the transactions are conducted through USDT. For example, the P2P or C2C of major online exchanges mainly use USDT as the mainstream transaction currency. On the other hand, when the market conditions are uncertain, USDT can be regarded as an ideal hedging tool, which can protect investors’ assets from the impact of the bear market, and minimize the losses caused by fluctuations, so as not to fall into all tragic losses.

Potential risks of investing in USDT

Although USDT is linked to actual assets and its price is more stable than that of general crypto assets, this does not mean that investing in USDT is without any risk. Here are two major areas that you should pay attention to:

Risk 1: Unknown information about the commercial paper company

Commercial paper can indeed be regarded as US dollar assets, but Tether has not yet provided information on the relevant commercial institutions of commercial paper, nor has it provided the term and terms of the relevant commercial paper, which does not rule out the suspicion of fraud.

Risk 2: Assets only account for a small portion of real dollar funds

Of all USDT’s assets, only about 5% is in real dollar cash, with the rest being commercial paper, market funds, and treasury bills. If investors short USDT on a large scale, Tether may not have time to cash out to support the exchange rate. In other words, USDT has the opportunity to decouple under market sniping, leading to the opportunity for stablecoins to experience large-scale ups and downs.

Disclaimer: Investment involves risks. The price of cryptocurrency often fluctuates greatly. The price can go up or down, and even the value will return to zero. Before investing, you must clearly understand the risk tolerance level you are willing to accept.

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