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Why Is Bitcoin The No.1 Choice Of Tether To Back Its Stablecoin?

By June 7, 20234 minute read
Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.

A few days back, stablecoin issuer Tether said they would buy millions of dollars worth of Bitcoin to back the world’s largest stablecoin, USDT. The organization said it would invest a portion of its profits in its stablecoin reserves as a part of its new investment strategy.

We decided to delve further into this to get some interesting facts. Read until the end to discover why Tether chose Bitcoin and no other coin.

Before moving on, here’s a quick introduction to stablecoins and Tether (USDT).

About stablecoins

Stablecoins refer to an asset class in crypto whose value is pegged to some external or reserved asset. This external asset might often be a fiat currency, such as an Indian Rupee or the US Dollar. Stablecoins are very popular alternatives to existing cryptos and can bring about ‘stability,’ as the name suggests, to crypto trading.

Bitcoin has been known to be a notoriously volatile asset. For example, in late March 2020, Bitcoin volatility was as high as 11%, a peak in years of almost always remaining under 8%. 

The inherent volatility of cryptos poses a significant obstacle to their full potential. However, there is a solution that effectively addresses this issue: stablecoins. They play a vital role in bridging the gap between traditional fiat currency and cryptos.

To learn more about stablecoins, click here.

About Tether

Tether is a stablecoin whose value is pegged to 1 US Dollar. Being a stablecoin, it bridges the gap between cryptos and fiat currencies. What makes Tether (as a stablecoin) different from other cryptos is that it has no theoretical value but serves as a medium of exchange and a store of value.

Stablecoins like Tether combine fiat currencies’ stability and security while enabling users to easily transfer money in a decentralized manner like other crypto exchanges. This ensures stability, minimal transaction fees, and transparency to the users.

There are various types of stablecoins, among which Tether is a collateralized stablecoin. Each token is backed by a fiat currency, including the US dollar, the Euro, the Yen, or even INR. Though backed by several fiat currencies, the value of USDT will always be pegged to one US dollar. For instance, USDT to INR will always mirror the exchange rates of USD to INR.

To learn more about the Tether, here’s a comprehensive blog.

The following section will describe why Tether wants to invest in Bitcoin to back its stablecoin.

Tether’s plan

Tether has announced its plan to use a portion of its realized investment profits, approximately 15%, excluding any unrealized price appreciation of reserve assets, to purchase Bitcoin (BTC). These acquired tokens will be added to the company’s reserve surplus. As stated in their announcement, Tether intends to custody the BTC stash independently without relying on any third-party custodians.

This decision follows Tether’s recent disclosure that it holds $1.5 billion worth of BTC and $3.4 billion worth of gold as part of its reserve assets, which support the value of USDT (the largest stablecoin on the market) and other smaller stablecoins. The majority, 85%, of Tether’s reserves consist of cash and cash-like assets, including US Treasury bonds, as confirmed in their 2023 Q1 attestation.

Stablecoins, now a $131 billion asset class, play a vital role in the crypto ecosystem. They facilitate trading and transactions between government-issued fiat currencies and digital tokens by maintaining a price pegged to an external asset, often the US dollar.

Why Bitcoin?

The firm’s press release stated that their BTC purchase campaign aims to strengthen and diversify the reserves of their stablecoin. The intention is to benefit from the price appreciation of Bitcoin as an investment.

According to Paolo Ardoino, the chief technology officer of Tether, Bitcoin has consistently demonstrated resilience and has emerged as a long-term store of value with considerable growth potential. He added that their investment in Bitcoin not only enhances their portfolio’s performance but also aligns them with transformative technology.

Tether clarified that they would use only realized profits from their investment operations to purchase BTC, disregarding unrealized capital gains. The firm focuses on tangible gains from operations, which involve the difference between the purchase price and net proceeds from asset sales, or in the case of maturing assets like Treasury bills, the difference between the purchase price and the reimbursed amount.

Additionally, Tether has directed some of its investments toward developing communication systems, energy infrastructure, and Bitcoin mining infrastructure.

Over the years, Tether has faced criticism within the crypto industry due to a lack of transparency regarding its reserves and controversial investment decisions.

However, Tether’s flagship token, USDT, emerged as a safe haven during the US regional banking crisis in March. During the crisis, Circle’s USDC, the second-largest stablecoin, suffered from frozen cash reserves at Silicon Valley Bank (SVB). In contrast, Tether maintained its price stability due to its perceived detachment from US-based banks. Being incorporated in the British Virgin Islands and Hong Kong, Tether’s USDT circulation has grown by 24% this year, while many other stablecoins experienced significant outflows.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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Shashank is an ETH maximalist who bought his first crypto in 2013. He's also a digital marketing entrepreneur, a cosmology enthusiast, and DJ.

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