USDT: Decoding the Mystery

Ritu13

Most people have heard of the terms USDT, Tether, or stablecoins to some extent. If you're still confused about USDT or have used it without a comprehensive understanding, you can read this educational article.

1. How is USDT created?
First, let's understand the history of the US dollar. The US dollar started as a gold standard, meaning that citizens could exchange 1 ounce of gold for one US dollar. USDT, on the other hand, is issued by the Tether company in the United States. For every 1 US dollar they deposit in a bank, they issue one USDT. These stored US dollars are regulated by the U.S. Securities and Exchange Commission (SEC). Holders of USDT can exchange it for US dollars at a 1:1 ratio at Tether, making USDT essentially a voucher for US dollars (whether it is overissued is not within the scope of this discussion).

2. Is USDT a digital currency or a fiat currency? What is the use of USDT?
USDT is a form of digital currency, not a fiat currency, which refers to the currencies of various countries, such as the Japanese yen, South Korean won, US dollar, Chinese yuan, and so on. The advantage of digital currency is that it is globally usable. For example, a Filipino domestic helper in Taiwan can earn New Taiwan Dollars and, if they want to convert it directly to Philippine Pesos to send to their family, the fees can be quite high. However, if they first convert New Taiwan Dollars to USDT and then send USDT to their family's account in the Philippines via blockchain networks, the fees are almost zero, making it very cost-effective. So, the primary function of USDT is for global remittances.

Furthermore, USDT has become an important pricing tool in the cryptocurrency market. Cryptocurrencies like Bitcoin and Ethereum are priced in USDT rather than in fiat currencies like the US dollar or British pound. Therefore, the main use case for USDT is within the cryptocurrency market, where it can be thought of as a specialized version of the US dollar.

3. Is the exchange rate between USDT and USD always 1:1?
As mentioned earlier, USDT is essentially a specialized version of the US dollar used in the cryptocurrency market. Even though USDT is initially issued at a 1:1 ratio with US dollars, its exchange rate with the US dollar can fluctuate slightly, usually ranging between 0.996 and 1.006. When the cryptocurrency market experiences extreme volatility or high trading activity, the value of USDT can rise above the US dollar. Conversely, during periods of market stagnation or low trading activity, the price of USDT can drop below the US dollar.

Regarding the exchange rate between USDT and the Chinese yuan, it is subject to fluctuations. The US dollar's exchange rate with the Chinese yuan is variable, and since USDT is closely related to the US dollar, holding USDT is, in a sense, equivalent to holding US dollars.

4. Does the price of USDT fluctuate?
Based on the information provided earlier, USDT closely follows the value of the US dollar. For example, in the trading pair BTC/USDT, Bitcoin's price is denominated in USDT. Therefore, USDT is not a highly volatile digital currency; its value typically fluctuates within the narrow range of 0.996 to 1.006 against the US dollar.

5. Is it legal to buy and sell USDT?
Outside of China, many countries have cryptocurrency exchanges that are regulated by local regulatory authorities. Buying and selling USDT on these exchanges is legal.

6. Where can you buy USDT, and how do you sell it?
You can typically buy USDT on major cryptocurrency exchanges. When buying, you'll be dealing with professional cryptocurrency traders, whose quality and trustworthiness may vary. The biggest risk when buying is the possibility of a freeze or suspension of your account by the exchange. While this might not be a concern for an occasional transaction, frequent freezes can result in a loss of profits.