Tether has a habit of sharing really huge profit numbers every quarter along with its certification reports, and the numbers are bigger than BlackRock’s.
The company reported net income of $12.72 billion starting in the fourth quarter of 2022, compared to BlackRock’s $9.83 billion.
What is not usually discussed is that, as outlined in one of our blog posts, Tether lumps profits from U.S. Treasuries with mark-to-market gains (potential or unrealized gains) on Bitcoin and gold holdings. That’s what I’m doing. And that’s inflating Tether’s numbers.
Tether’s quarterly certificates list the assets in the reserve pool that give Tether value. As of the latest report, there was almost $118.44 billion in Tether in circulation as of the end of the second quarter, conveniently increasing by over $5 billion.
Read more: Tether reports first-half 2024 net income of $5.2 billion
This means that every tether is properly backed by a reserve asset of equal value, plus a fraction thereof. (Note that certificates are not audits, and Tether has never been “audited” for a reason.)
Short-term U.S. Treasuries account for approximately 68% of Tether reserves, with the next largest categories being reverse repurchase agreements, money market funds, collateralized loans, and Bitcoin.
Tether has been adding Bitcoin to its reserves, increasing from 2% to 4% of its total in the past year.
Bitcoin is cash – no need to sell it
Tether reported a quarterly profit of $1.3 billion at the same time as its second quarter disclosure. This amount is astonishing considering the small number of employees, which appears to be less than 100.
Much of its profits come from the U.S. Treasuries it buys. Considering the interest rate on three-month Treasury bills is currently 4.85% and Tether holds about $81 billion worth, a 10-digit gain sounds about right.
But consider the first quarter of this year. Tether reported a profit of $4.52 billion. At the same time, the price of Bitcoin has increased by almost 70%, and Tether clearly sees it as a free profit.
Read more: Nigeria is experiencing a “real crypto dollarization event”: Nick Carter
When Bitcoin’s price movements weren’t as volatile, Tether typically reported gains of 1.01% to 1.81% of the bond’s value. In the first quarter of 2024, when Bitcoin hit its all-time high, this figure was 4.1%.
The company also reported that its Bitcoin holdings increased by $2.56 billion over the period, from $2.82 billion to $5.37 billion. Tether appears to have purchased 8,888.88 BTC ($513.6 million at current prices) during the quarter, based on its certificates and on-chain history, but it is unclear at what price it purchased those coins. It is.
If you calculate the average price of Bitcoin this quarter, Tether spent $481.5 million on its BTC.
Estimated gains for Bitcoin are orange, US Treasuries are blue, and gold is yellow. Bitcoin price is displayed as an orange line
Subtracting the estimated spending from the increase in the value of the total Bitcoin stash, Tether’s quarterly “Bitcoin profit” was $2.08 billion, or 46% of Tether’s reported total. Otherwise, U.S. Treasuries’ contribution would have been 51%, but gold’s price increase would probably be around 3%.
To be clear, these are just estimates based on average prices during periods of volatile Bitcoin price. Since Tether deposits BTC directly from sister exchange Bitfinex to its reserve address, it is unclear exactly how it obtains the bitcoins it deposits with the Treasury.
Still, this estimate shows that in the first quarter of this year, Bitcoin accounted for less than 5% of Tether’s reserve portfolio, while it accounted for nearly half of its reported quarterly profits. is suggested.
As for its value, Tether said it received $1 billion of its $4.52 billion in the first quarter from the U.S. Treasury, with the rest coming from unrealized Bitcoin and gold gains. This means that BTC accounted for much more of Tether’s total reported profits, up to 75%.
Tether wrote at the time: “The primary contributing (Tether Holdings Limited) entity is the entity responsible for issuing stablecoins (Tether) and managing their respective reserves, and approximately $1 billion of this profit is primarily from U.S. Treasuries. It arises from the net operating income derived from the holding.” The remainder of the reported profit was made up of gains on Bitcoin and gold positions. ”
Tether could technically become ‘unprofitable’ if BTC plummets
This, of course, means that Tether’s profits will decline as Bitcoin and gold prices decline.
Even though Tether owns nearly $6 billion more in U.S. Treasuries, its profit last quarter was just $1.3 billion, nearly 70% lower than the first quarter.
The main reason for this difference is that the value of Tether’s Bitcoin fell by $648 million as the price of Bitcoin fell by 12% quarter on quarter. Also, since Tether did not add any BTC during the period, there was no opportunity for unrealized gains from newly acquired coins to grow significantly as was the case in the previous two quarters.
Had Bitcoin held its value, Tether would have posted about $2 billion in quarterly profits. As was the case for Q2, only Tether’s Q1 2024 disclosure appears to reveal Bitcoin and gold gains from US Treasuries.
So is Tether making more money than BlackRock?
Note that Tether could really blow away BlackRock if it continues to buy large amounts of Bitcoin. Tether previously promised to use 15% of its profits to purchase BTC.
Indeed, Tether is more profitable than BlackRock when you combine the rise in the price of Bitcoin and gold with the gains on U.S. Treasuries. Although Tether must continue to actively buy US Treasuries in order to generate income from them, it does not need to do anything to report gains on Bitcoin and gold, just hold them.
With its system, Tether certainly reports higher profits than BlackRock.
If we count just Tether’s disclosed profits, excluding Bitcoin and gold, Tether would have earned less than $7.7 billion from the U.S. Treasury, according to the rough estimates outlined above.
The difference is about $5 billion. It’s still making huge profits, but it won’t even come close to surpassing the world’s largest asset managers.
In any case, Tether is probably the most profitable company in the cryptocurrency space, and probably one of the most profitable companies outside of cryptocurrencies.
Depending on your definition of profits, it may still take a few years to overtake BlackRock, but it seems inevitable.
A revised version of this article first appeared in the Daily Empire newsletter. Subscribe here so you don’t miss tomorrow’s issue.
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