Tether Limited

Tether Limited is the company that issues the world's most widely used stablecoin, known as Tether (USDT). A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging itself to an external asset, most commonly a major fiat currency. In Tether's case, the company claims that each USDT token is pegged 1-to-1 to the U.S. Dollar. This means, in theory, for every 1 USDT in circulation, Tether Limited holds one U.S. dollar's worth of assets in its reserves. This perceived stability has made USDT the bedrock of the crypto trading world, acting as a digital dollar that allows traders to move in and out of more volatile cryptocurrencies like Bitcoin or Ethereum without having to cash out into traditional banking systems. However, the company and its reserves have been a long-standing subject of intense scrutiny and controversy, making it a critical topic for any investor venturing near the crypto space.

To understand Tether Limited, you first have to grasp the problem it was designed to solve. The wild price swings of most cryptocurrencies make them difficult to use for everyday transactions or as a stable place to park capital. Stablecoins were created to be the solution.

Imagine trying to buy groceries with a currency that could be worth 10% more or 20% less by the time you reach the checkout counter. That's the challenge with assets like Bitcoin. Stablecoins like USDT aim to be the boring, reliable workhorses of the digital economy. They provide:

• A Stable Medium of Exchange: Facilitating trades on crypto exchanges.
• A Temporary Store of Value: Allowing traders to hedge against market volatility.
• A Bridge to Fiat: Connecting the traditional financial world with the crypto ecosystem, often bypassing slower, more regulated banking channels.

USDT's enormous trading volume shows just how essential this function has become. On many days, the value of USDT traded exceeds that of any other cryptocurrency, highlighting its role as the market's primary lubricant.

For a value investor, the story of Tether is less about its utility and more about its risks. The core of the controversy revolves around a single, crucial question: Is every Tether truly backed by a dollar-equivalent asset? For years, the answer has been shrouded in mystery, leading to significant concerns.

Initially, Tether Limited claimed every USDT was backed by one U.S. dollar held in a bank account. Over time, that claim has been watered down. The company now states that its reserves include a mix of assets, not just cash. These reserves have historically included:

• Cash and cash equivalents (like money market funds and U.S. Treasury Bills).
• Commercial paper (short-term corporate debt).
• Corporate bonds.
• Secured loans.
• Other digital tokens.

The problem is the lack of transparency. Tether has famously resisted a full, independent audit from a major accounting firm. Instead, it provides periodic “attestations” which are less rigorous and don't provide a detailed breakdown or quality assessment of the assets. This opacity reached a boiling point in 2021 when Tether and its sister company, Bitfinex, paid an $18.5 million fine to settle a case with the New York Attorney General's office, which found that “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.”

The opaqueness of Tether's reserves creates enormous counterparty risk for anyone holding USDT. If the market were to lose faith in Tether's ability to honor redemptions—a “run on Tether”—it could trigger a catastrophic liquidity crisis. Because USDT is so deeply integrated into the crypto market's plumbing, its failure would cause a domino effect, potentially collapsing exchanges and wiping out portfolios across the board. This is a classic example of systemic risk, where the failure of one entity can bring down an entire system.

From a value investing standpoint, Tether Limited and its product, USDT, represent a textbook example of unquantifiable risk and speculation. The principles of Benjamin Graham and Warren Buffett offer a clear lens through which to view this situation.

Value investing demands that you operate within your circle of competence—investing only in businesses you can understand and analyze. Tether Limited's refusal to provide a transparent, detailed audit of its reserves makes it impossible for an outside investor to truly understand its financial health. You cannot confidently value the assets backing USDT if you don't know exactly what they are or how risky they might be. This directly violates the principle of margin of safety. There is no margin of safety when you cannot verify the value of the underlying collateral. The investment thesis rests entirely on faith in the issuer's claims, which is the domain of speculation, not investment. As Buffett famously said, “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.” An asset whose backing is unknown and has been misrepresented in the past carries an unacceptable risk of a permanent loss of capital.

While Tether (USDT) is an undeniably important tool for high-frequency traders navigating the crypto markets, it is not an investment in the traditional sense. The entity behind it, Tether Limited, operates with a level of opacity that should be a major red flag for any prudent investor. The potential rewards of using USDT for its convenience are, for a long-term value investor, dwarfed by the unquantifiable and potentially systemic risks tied to its mysterious reserves. It's a key piece of the crypto casino's infrastructure, but not a place to build long-term wealth.