Tether (USDT) is the most popular stablecoin and the third crypto in the world in market cap, just after Bitcoin (BTC) and Ethereum (ETH). Further to UST crash, USDT temporarily lost its peg to USD, down to $0.92. If USDT collapses like UST did, it will produce a huge shockwave for all the Crypto industry.
How USDT Works
USDT is backed by various assets through Bitfinex company:
About 76% of Tether’s reserves would be backed by “Cash & Cash Equivalents & Other Short-Term Deposits & Commercial Paper”, out of which only 3.87% (i.e., 2.9% of the total) are backed by "Cash" reserves... Only a portion (estimated at 20% of total) of the other assets can be considered as liquid.
Is it safe?
The question is: if there was a huge bank run on USDT, where everyone tries to withdraw USD at once, could Tether pay out? The answer is: as only 20% of their reserves are liquid, they could only pay out 20% in the best case. As most of you already know, it is similar to banks which use a fractional reserve system, with a reserve requirement usually around 10%. The difference is that banks have a safety net, whereas USDT does not. For instance, US banks are supported by FDIC insurance (bank deposit insurance) and in extreme cases the Federal Reserve. USDT is supported by nothing. In case of USDT run, there will be nobody to compensate investors for the losses.
What are the alternatives?
At first, there are other stablecoins, such as USDC - which also comes with some risks. The main question you could ask yourself is: do I believe in the future of Crypto or not? If you believe in the future of Crypto, then why holding stablecoins like USDT or USDC instead of Bitcoin or altcoins? It makes sense only in the short term, in order to survive the bear market. It can indeed be a strategy to swap your BTC or altcoins for USDT/USDC when the market is bearish, and to buy again these volatile coins with your stablecoins once the bull run has resumed. However, the bear market season is also the most dangerous one for USDT, since everyone could try to withdraw USD at once. Furthermore, in the longer term, USDT is a risk for the Crypto industry. There are so many assets, funds and protocols linked to USDT that if it collapses, everything will likely collapse at the same time - similarly to LUNA and UST, but with a much higher amplitude... Therefore, it is crucial that everybody starts to diversify the stablecoins to be used in order to mitigate this risk.
Disclaimer: this article does not contain any financial advice. The information is provided for general informational and educational purposes only.
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