Envisioned as a pure alternative to traditional fiat currencies, Tether is one of the more unique cryptocurrencies available for investors today. It is managed by a company that maintains reserves of physical currencies like the U.S. dollar, Euro, and Yen in a bank account. As such, Tether Limited backs its own digital tokens with traditional currency. Tether utilizes same blockchain technology that is used by Bitcoin to manage its transactions.
The History of Tether
In November of 2015 the company Tether Limited was incorporated in Hong Kong. The company also established offices in the United States. The company was almost immediately connected to Bitfinex, one of the largest cryptocurrency exchanges in the world. This connection has caused some controversy in the cryptocurrency arena with some calling for audits and investigations into the relationship between Tether, Bitfinex, and Bitcoin.
To begin, Tether was based on the same blockchain architecture that powers Bitcoin. This changed in June of 2017 when the company announced that it would change to the Litecoin blockchain platform. Blockchains form their own digital ecosystem and are the driving force behind cryptocurrency transactions. A digital coin is only as stable as its blockchain ecosystem.
Tether is so named because it is pegged or “tethered” to the U.S. dollar. What this means is that Tether is a currency board. The company holds U.S. dollars in reserve and issues a digital token for each dollar held. The exchange rate is always 1:1. Those who purchase Tether can choose to hold the currency as an asset or use it as a medium of exchange.
According to the official Tether website, Tether allows businesses to use fiat-backed tokens on blockchains. The model of the coin demands that each token is backed by real-world currency. This is meant to give the coin its liquidity. Holders of the coin are theoretically able to make withdrawals on demand. The company claims that reports of its holdings are publicly available, but to date there have been no independent audits of these claims. This, and the currency’s relationship with Bitfinex, has created some concern in the cryptocurrency community.
Tether is not considered legal tender currency. This means that the coin is not subject to any audits or federal regulation. Furthermore, those who hold amounts of Tether do not have their investment guaranteed by any form of deposit insurance. The concern of some individuals is that the developers of Tether are misrepresenting the amount of traditional currency they hold in reserve.
It has been revealed that the owners of Bitfinex originally incorporated Tether in the British Virgin Islands in 2014. An offshore law firm assisted with the formation of the company. Those who have concerns about the company claim that it is creating digital tokens out of thin air and that there are no currency reserves to support it. This has led to calls for an investigation into the company’s holdings. Those who choose to invest in this digital coin should maintain awareness of these developments and proceed with the appropriate caution.
There have also been noted security issues with Tether. In November of 2017 it was revealed that 31 million tokens of the cryptocurrency were stolen. This has increased the calls for investigation into Tether Limited and the reserves it claims to hold.
Tether is not mined as many cryptocurrencies are. Mining is a system in which the blockchain of a cryptocurrency is maintained by a network of users. Anyone with the proper equipment can mine coins on an open-source platform. Since Tether Limited claims that all Tether tokens are backed by traditional currency, there is no mining for the token. Tokens are created in direct proportion to the reserves held by the company.
Cryptocurrency mining is not often performed by the small investor or cryptocurrency hobbyist today. The costs are simply prohibitive. Mining requires specialized computer equipment and consumes considerable resources. It is also an endeavor that is fraught with risk. There is no guarantee that the rewards of mining coins will yield a positive return. Additionally, there are many coins like Tether which are not mined.
An alternative for those who have an interest in mining is to join a mining pool such as the one offered by Genesis Mining. This company allows individuals to purchase hash power as a group. The group then shares in the rewards of mining coins. Genesis Mining maintains all of the mining equipment in secure locations around the world and absorbs the costs associated with running it.
Once users purchase a contract from Genesis Mining and mine coins, those digital assets can be traded or exchanged on a number of popular cryptocurrency exchanges. It is possible to trade for Tether on many different exchange platforms.
Tether Use and Acceptance
Because Tether is idealized as a fiat-backed digital asset, one would assume that the coin would have achieved widespread acceptance. The developers of the coin state that they have a secure network, low transaction fees, and fast processing. All of these claims are spelled out in the Tether whitepaper.
Currently, Tether affords the following options for use:
- Can be deposited and withdrawn at digital exchanges and also used to settle fiat balances.
- Can be used by companies which have integrated with the Litecoin blockchain architecture.
- Can be used by traders to move funds from one cryptocurrency wallet to another.
- Can be used for peer-to-peer transfers.
The emergence of many altcoins in the wake of Bitcoin’s success has encouraged individuals to consider cryptocurrencies as a worthy investment. By far the most popular use of Tether and other altcoins is as an investment vehicle.