Analyzing the Spread Between Tether Price and USD Nominal Value

Tether (USDT) has become one of the most widely used stablecoins in the crypto market. As a stablecoin, Tether aims to maintain a value pegged to the US dollar. However, Tether has not always perfectly maintained its peg to the dollar, which has led to some questions around its stability. In this article, we'll analyze the historical spread between Tether's market price and its supposed 1:1 USD backing to better understand Tether's ability to maintain its peg.

Tracking Tether's Price Over Time

As a stablecoin, Tether is designed to maintain parity with the US dollar, with each Tether token intended to be backed 1:1 by reserves of dollars. However, being traded on the open market means the price of Tether often fluctuates above or below $1 based on supply and demand.

By looking at historical pricing data, we can see when Tether has deviated from its 1:1 peg to the dollar and analyze periods of stability and volatility. While Tether aims to minimize volatility, some fluctuations are to be expected even among stablecoins. The key is whether Tether reliably returns to its $1 peg in a reasonable timeframe.

Examining Periods of Tether Divergence

Although Tether strives to maintain a peg, there have been periods where its market price has substantially diverged from $1. For example, in 2017 Tether saw spikes well above $1 during periods of high volatility and demand across the crypto markets.

However, the most prolonged breakdown in Tether's dollar peg occurred between mid-2018 and mid-2019. During this period, Tether consistently traded below $1, with its discount to $1 widening to as much as $0.92 at points. This raised questions around whether Tether had sufficient dollar reserves to back all Tether tokens at their $1 valuation.

Factors Influencing Tether's Ability to Maintain Its Peg

What factors influence Tether's ability to maintain a stable 1:1 peg to the dollar? The main factors seem to be:

• Dollar reserves - Tether relies on having sufficient dollar reserves to back all Tether tokens and stabilize its peg. Reserves may fall short if redemptions outpace reserves.
• Market demand - High volatility and trading demand can push Tether price above $1 as traders flock to stablecoins. Low demand allows Tether to fall below $1.
• Supply changes - Tether adjusting token supply to meet demand helps maintain peg but too much supply without demand can devalue tokens.
• Trust in backing - Loss of confidence in 1:1 reserves backing can lead to Tether decoupling from its $1 peg either way.

Can We Trust Tether Going Forward?

Tether's ability to maintain its value peg in the face of market volatility and shifts in demand remains an ongoing point of debate in crypto. Here are two perspectives to consider:

Tether Remains Too Uncertain to Trust as a Stable Store of Value

Tether has strayed too far from its $1 peg too frequently to be considered a reliable stablecoin. There remain too many open questions around its dollar reserves and whether all Tethers are fully backed 1:1. Traders should be cautious using USDT as a long-term store of value given its history of instability compared to alternatives.

Tether Has Shown Improving Ability to Regain Its Peg

While not perfect, Tether has demonstrated an overall ability to return to its $1 valuation despite some temporary divergence. As the most liquid stablecoin, Tether retains utility for crypto trading and transferring value. As long as users understand Tether is not immune to volatility, it remains a widely accepted option.

The Path Forward for Tether

Tether remains a work in progress in terms of reaching the idealized vision of a stable cryptocurrency pegged to the US dollar. However, it continues to maintain the most dominant market share of any stablecoin and provides utility for crypto traders and DeFi developers.

Going forward, Tether may aim to improve stability and trust by providing more transparency into its reserves and undergoing periodic audits by independent firms. But as a privately run token without government backing, Tether faces inherent challenges in convincingly demonstrating its stability compared to central bank digital currencies still in development.

For now, the spread between Tether's market price and its $1 peg remains a helpful indicator to monitor. As the crypto market matures, the path to mainstream adoption may depend on minimizing this deviation as much as possible.