5 Things to Know Before You Buy Tether

If Tether is on your radar, this is what you should know about it.

With a market cap of over $60 billion, Tether currently ranks as the third-largest cryptocurrency. It's still far behind market leaders Bitcoin and Ethereum, but it's well ahead of several popular coins, including:

• Cardano
• Dogecoin
• XRP

It's also easy to find, as you can buy it on most of the top cryptocurrency apps and exchanges.

Unlike those other cryptocurrencies, Tether's price usually holds steady at $1. That means investing in Tether isn't like investing in a typical crypto. Here's a full primer with all the important information about it.

1. Tether is a stablecoin tied to the U.S. dollar

A stablecoin is a cryptocurrency that's pegged to another asset. Many stablecoins, including Tether, are pegged to the U.S. dollar. It's intended to have an equal value, with 1 Tether being worth $1.

Since Tether's price is meant to mirror the dollar, it's not the type of cryptocurrency that you buy and hold in hopes of the price going up.

2. It can be used for purchasing crypto, money transfers, or earning interest

Tether may not be right as a cryptocurrency investment, but it has several other uses. Here are the most common reasons to buy it:

• Purchasing other cryptocurrencies: It can take days to transfer money from a bank account to a crypto exchange. If you want to keep funds in your account to buy crypto without waiting around, you can buy Tether. Then, you just use your Tether to make the purchase.
• Transferring money: If you want to send money between exchanges or crypto wallets, Tether is a good option. You could do this to transfer money between your own exchange accounts or to send money to another person. Tether doesn't charge fees for transactions between Tether wallets (although there are standard blockchain fees).
• Earning interest: Some crypto exchanges pay interest if you lend your crypto, and it's possible to earn 25% interest lending out coins. The benefit of doing this with Tether is that its value shouldn't fluctuate. With most cryptocurrencies, you can earn interest, but you could still end up losing money if the price of the crypto you're lending drops.

3. The company behind it, Tether Limited, is controversial

Tether might seem safe since it's a stablecoin, but there's reason to be cautious about it. The company that issues it, Tether Limited, doesn't have the best reputation.

A major issue is its trustworthiness. Tether Limited previously claimed that every Tether was backed by $1. That was later revealed to be a lie. In March 2021, Tether Limited released information on its reserves, which showed that only 2.9% of Tether is backed by cash.

Tether Limited was also the subject of a lawsuit for an alleged cover-up related to a crypto exchange called Bitfinex. Both Tether Limited and Bitfinex are owned by the same company. According to the New York Attorney General, when $850 million went missing from Bitfinex, it drained at least $700 million from Tether's reserves to cover the loss.

The case was settled with the owner of Tether Limited and Bitfinex paying a fine of $18.5 million. The companies didn't admit or deny any wrongdoing.

4. There are allegations Tether has been used to manipulate Bitcoin's price

Critics of Tether have claimed that the stablecoin is used to inflate the price of Bitcoin. To understand how it could do this, it's important to understand how the Tether supply works.

Tether Limited has full control over the Tether supply. Unlike cryptocurrencies like Bitcoin, where new coins need to be mined, Tether Limited can release as many new coins as it wants. It claims it mints coins based on the amount needed. But as we've covered, the company isn't known for being 100% transparent.

It's possible that Tether Limited could mint new coins and then use those coins to buy Bitcoin. This would allow the company to obtain Bitcoin with non-existent money and also pump up Bitcoin's price.

5. The price has fluctuated from $1

Tether's price is intended to be $1. For the most part, it has held that value. However, there have been periods where it was worth more or less.

The reason is supply and demand. If crypto prices are dropping and investors want to sell their more volatile coins, demand for Tether can increase and raise the price. We saw this happen in 2020, when Tether's price briefly went up to $1.06. And negative news about Tether has caused the price to drop in the past; it had a value of $0.90 for a short time in 2018.

In situations like these, Tether Limited can adjust the supply to get the price back in sync. The thing to keep in mind is that legally, there's no guarantee that the Tether you buy will be redeemable for $1.

If you're looking for a stablecoin, Tether is the most popular choice. There have been some concerns with the company that issues it, so that's something to consider before you decide to buy Tether for anything but a quick transfer.

RELATED: Check out the best places to buy Tether.