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Tether’s USDT is a stablecoin pegged to the U.S. dollar and has become a vital component of the crypto markets. With a market capitalization of almost $118 billion, USDT is the third-largest digital asset and by far the largest stablecoin. For Indian investors, USDT offers an opportunity to gain exposure to the USD, access yields in decentralized finance (DeFi) platforms, purchase other cryptocurrencies or speculate on the INR/USD exchange rate.
However, the value of USDT in Indian rupees terms goes beyond just the day-to-day fluctuations of the crypto market and is instead driven by changes in the domestic, U.S. and international economy.
To cut through the complexity, we spoke to Grzegorz Drozdz, market analyst at Conotoxia, to understand the bull and bear case for Tether’s USDT and whether or not USDT is a good way to get exposure to movements in the INR/USD pair.
Tether’s Price History
When looking at Tether’s price history, there are two critical aspects to consider: the history of the USD/AUD exchange rate and Tether’s ability to maintain its peg with the US dollar.
If USDT’s market price briefly drops to $0.99, traders can buy it at this price and redeem it with Tether for $1, making a small profit. This process helps push the price back to $1. Similarly, if the price rises above $1, traders are incentivized to buy USD, create new USDT, and sell it at the higher price, again pushing the price back to $1. This constant opportunity for arbitrage helps maintain Tether’s peg to the US dollar.
Drozdz notes that Tether “demonstrates high stability relative to the fiat currency it mimics, with fluctuations rarely exceeding 0.2%”. In some brief instances, the peg has been lost due to extreme market volatility.
However, this mechanism has always been robust enough for Tether to return to equilibrium.
Since its launch, Tether has seen significant growth in market presence, Drozdz argues, with Tether’s “supply almost continuously increasing to 120 billion USDT since its debut in 2014″. This growth reflects the increasing adoption of USDT in the cryptocurrency ecosystem. However, it’s important to contextualize this within the broader monetary landscape and the fact that Tether’s market capitalization “constitutes about 0.5% of all U.S. dollars”.
How Will Tether Perform in 2024?
As we look to the remainder of 2024, the performance of the US dollar, and therefore USDT, against the INR will largely be driven by the recent economic developments in the United States.
Over the past two years, many countries have experienced elevated inflammation levels due to currency debasement and economic stimulus undertaken by central banks during the pandemic, as well as supply shocks and wars in the Middle East and Ukraine. This required central banks, like the US Federal Reserve and Reserve Bank of India, to raise interest rates significantly to curb the rising cost of living.
If USDT’s market price briefly drops to $0.99, traders can buy it at this price and redeem it with Tether for $1, making a small profit. This process helps push the price back to $1. Similarly, if the price rises above $1, traders are incentivized to buy USD, create new USDT, and sell it at the higher price, again pushing the price back to $1. This constant opportunity for arbitrage helps maintain Tether’s peg to the U.S. dollar.
However, after 18 months of tightening the monetary policy, inflation has come under control in the US, and some pundits fear the country is showing early signs of a recession, as indicated by recent labor data.
Drozdz says there has been a recent shift in investor sentiment.
“Investors fear that the Fed’s decision not to lower interest rates could lead to a recession in the world’s largest economy,” he says.
Some investors have interpreted the weak labor data as a signal that rates haven’t been cut fast enough. This concern has led to a dramatic change in market expectations regarding the Federal Reserve’s monetary policy.
“The market has shifted its earlier expectation of one 25 basis point rate cut by the end of the year to now anticipating three cuts at each meeting, totaling 100 basis points,” he said.
However, it’s crucial to understand that while these macroeconomic factors may influence the exchange rate, Drodz adds that “changes in currency and economic markets should not affect the stability of Tether.”
This stability is a double-edged sword for Indian investors. On one hand, it provides a reliable proxy for USD exposure. Conversely, it means that any potential gains (or losses) will be solely driven by the INR/USD exchange rate movements, not by Tether’s performance relative to the USD.
It’s important to note that the currency markets are inherently unpredictable and subject to various factors. Drozdz cautioned that “if interest rates in India are cut more than the market expects, or if rates in the United States do not fall as quickly as anticipated, this could lead to an increase in the strength of USD against the INR.” Such scenarios could benefit Indian investors holding Tether as a USD proxy.
Drozdz offers a word of caution for those considering Tether purely as a hedge against INR volatility: “If you do not plan to invest in other cryptocurrencies, it is not recommended to hold Tether even as a means of reducing AUD volatility risk, as it exposes you to unnecessary costs of purchasing the cryptocurrency and potential risks of stablecoin manipulation.”
What Does the Future Hold for Tether?
As we look beyond 2024, the future of Tether is intrinsically linked to the global standing of the U.S. dollar and the evolving regulatory landscape for cryptocurrencies and stablecoins.
“The U.S. dollar constitutes as much as 58% of the global foreign exchange reserves held by central banks worldwide,” says Drozdz. This significant share underscores the vested interest that many central banks have in maintaining the stability and strength of the USD.
While discussions have been about challenging the dollar’s dominance, particularly among BRICS nations (Brazil, Russia, India, China, and South Africa), these efforts are in their early stages.
“Attempts by BRICS countries to challenge the dollar’s dominance by creating a separate reserve currency seem to be in their infancy, especially considering that most BRICS members have increased the amount of dollars in their reserves since the group’s inception,” Drodz says.
“High confidence in the USD benefits Tether, which is largely backed by short-term US Treasury bonds.” This backing provides Tether with a level of stability and credibility that is crucial to its long-term viability.
However, Tether’s future isn’t solely dependent on the strength of the US dollar. Regulatory developments, both in Australia and globally, will also significantly shape its value.
Globally, the regulatory landscape for stablecoins is evolving at different speeds. While the United States has yet to introduce specific stablecoin regulations, the European Union has taken a proactive stance in implementing the markets in crypto-assets (MiCA) regulations. Drozdz says that these regulations have sparked “mixed reactions in the cryptocurrency industry.”
On the one hand, they “bring greater clarity and reduce risk for market participants”. This increased clarity could potentially boost confidence in stablecoins like Tether, making them more attractive to a broader range of investors and users.
On the other hand, these regulations can also introduce significant restrictions, as evidenced by the fact that many stablecoins, including USDT, are unavailable in European markets due to MiCA regulations. This highlights the potential for regulatory actions to limit the availability and use of Tether in certain jurisdictions.
The Bull Case
The bull case for Indian investors holding USDT is intrinsically tied to the strength of the USD against the Indian rupee. Holding Tether is a bet that the INR will weaken against the USD. Several factors could potentially drive this scenario, making Tether an attractive option for those betting on USD appreciation.
“It seems that the factors that could strengthen the U.S. dollar are primarily a decrease in the unemployment rate, a possible rise in inflation, and continued dynamic GDP growth,” Drodz says.
“These factors could reduce the risk of a recession in the United States, which in turn could delay or slow down the Fed’s cycle of interest rate cuts.
It’s worth noting that while Tether’s growing adoption in various financial use cases is a positive sign, it’s unlikely to be a primary driver of exchange rate movements.
“A potential increase in Tether’s popularity in international trade and remittances is unlikely to have a significant impact on the exchange rate due to the still marginal size of the cryptocurrency market,” Drodz says.
However, Tether’s role as a digital representation of the US dollar could become particularly valuable during times of market turbulence. “In times of great uncertainty or crises, investors often exchange currencies from less stable countries for the US dollar, making Tether a potential “safe-haven” during periods of high market volatility,” he adds.
This “safe haven” status could make Tether an attractive option for Indian investors looking to protect their wealth during economic downturns or periods of heightened global uncertainty. By holding Tether, investors could potentially benefit from the flight to quality that typically favors the US dollar during such times.
The Bear Case
While Tether’s USDT offers Indian investors a unique way to gain USD exposure, it’s crucial to consider the potential risks and challenges that could impact its value and utility. The bear case for Tether encompasses both macroeconomic factors affecting the INR/USD exchange rate and risks specific to the stablecoin itself.
A significant concern for Tether holders is the potential for a U.S. economic downturn, Drodz argues.
“In the face of a recession in the United States, the U.S. dollar could weaken because the Fed would be forced to lower interest rates sooner and more rapidly,” he says. Such a scenario could lead to a depreciation of the USD against the INR, potentially eroding the value of Tether holdings for Indian investors.
Regulatory challenges present another substantial risk for Tether and its users. “If India adopts regulations similar to those in the European Union, legal trading of Tether will be restricted until the company offering the stablecoin meets regulatory requirements.” While specific regulations in India are yet to be defined, the potential for stricter oversight could significantly impact Tether’s availability and use in India’s market.
Despite Tether’s current market dominance, with USDT accounting for around 69% of the total market capitalization of all stablecoins, the stablecoin landscape is evolving. The emergence of new competitors, including central bank digital currencies (CBDCs), could potentially challenge Tether’s position in the future. However, Drozdz observes that CBDCs “have yet to gain significant popularity or scale,” suggesting that while competition is a factor to consider, it may not threaten Tether’s market position.
Perhaps the greatest risk factor for Tether investors is the potential for issues with its 1:1 dollar backing.
“The worst-case scenario that every stablecoin investor should consider is the potential loss of all funds,” Drozdz says.
“Until companies offering stablecoins are regulated and integrated into a system of strict regulatory oversight, there is a risk that the backing of these cryptocurrencies may prove to be fictitious or insufficient.”
Additionally, like other cryptocurrencies, Tether can be subject to liquidity issues and market volatility. During periods of market stress, converting large amounts of USDT to fiat currency without impacting its price could be challenging. As a digital asset, Tether is also exposed to technological risks such as smart contract vulnerabilities, hacking attempts, or other security breaches, depending on where you store your holdings.
Is Tether a Good Investment?
While Tether offers unique advantages, it also has significant limitations and risks that need to be carefully considered when considering it as a proxy for US dollar exposure.
Drozdz points to the key differences between stablecoins and the leverage afforded by forex markets.
“The primary difference between trading stablecoins and trading on the Forex market is the inability to use leverage, such as through contracts or contracts for difference (CFDs),” he says.
This limitation is significant for investors accustomed to the flexibility and potential for amplified returns (and risks) that leverage provides in forex trading. Without leverage, the potential for short-term gains from currency fluctuations is considerably reduced. This is because foreign exchange markets are not typically volatile enough to make significant sums without amplifying the volatility through leverage.
Moreover, Drozdz points out practical challenges associated with holding Tether: “With stablecoins, you must have either a cryptocurrency wallet or an account on a crypto exchange, which automatically involves the technical challenges of maintaining and managing such an account.”
These technical requirements may present a barrier for some investors, particularly those less familiar with cryptocurrency ecosystems. It adds a layer of complexity and potential security concerns that are not typically present in traditional currency investments.
The regulatory landscape presents another significant consideration. “If regulations on stablecoins change, you may be forced to sell your USDT holdings, as they might no longer meet legal standards, like in the case for European clients of cryptocurrency brokers,” he says.
The potential for sudden regulatory changes could force unexpected liquidation of holdings at unfavorable times.
Given these factors, Drozdz says: “Unless you intend to hold funds for the purpose of purchasing other digital currencies, it is not recommended to buy and hold stablecoins like Tether.”
This advice underscores an important point: Tether’s primary utility may lie more in its role within the broader cryptocurrency ecosystem rather than as a standalone investment for currency exposure.
Ultimately, investing in Tether should be based on a clear understanding of its limitations, risks, and specific investment goals. As with any investment decision, it’s advisable to consult with a financial professional and thoroughly research all options before committing funds to Tether or any other investment.
This article does not endorse any particular cryptocurrency, broker, or exchange, nor does it constitute a recommendation of cryptocurrency or CFDs as an investment class. Cryptocurrency is unregulated in Australia, and your capital is at risk. Trading in contracts for difference (CFDs) is riskier than conventional share trading, not suitable for the majority of investors, and includes the potential for partial or total loss of capital. You should always consider whether you can afford to lose your money before trading in CFDs or cryptocurrency and seek advice from an authorized financial advisor.
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Frequently Asked Questions (FAQs)
Does Tether coin have a future?
Tether’s USDT is likely to have a future as long as it maintains its peg to the US dollar and continues to play a crucial role as the largest stablecoin in the crypto market. Its future depends on factors such as regulatory developments, market adoption and the ongoing strength of the US dollar.
While challenges exist, including potential competition from other stablecoins and central bank digital currencies, Tether’s current market dominance and widespread use in crypto trading suggest it will remain relevant for the time being.
What will Tether be worth in 2030?
As a stablecoin pegged to the US dollar, Tether’s USDT is designed to maintain a value of $1. Barring any significant changes to its structure or major economic shifts, Tether should still be worth $1 in 2030.
However, its value relative to other currencies, including the Indian rupees, will fluctuate based on foreign exchange rates. The primary consideration for long-term Tether holders should be the relative strength of the U.S. dollar against their local currency rather than Tether’s nominal value.
Is Tether a good investment?
Tether’s USDT is not typically considered an investment in the traditional sense, as it’s designed to maintain a stable value rather than appreciate like other crypto assets. Holding a tether is equivalent to holding US dollars, which may be beneficial for currency diversification or as a hedge against INR volatility.
However, it comes with unique risks, such as regulatory uncertainty and potential issues with its backing. Unless you plan to use Tether for other purposes within the crypto ecosystem, like accessing decentralized finance platforms or trading other cryptocurrencies, traditional forex markets may offer more efficient ways to gain USD exposure.
