The Tether equation for investors: Risk vs. return

There is a very simple reason for Tether's dramatic growth as a cryptocurrency, although its functioning is questioned: the return.

The world's largest so -called stable coin has grown by more than 300 percent in the past 12 months, with almost $ 71 billion in funds in the digital area. In the past 30 days alone, she has pulled around $ 1.5 billion in funds.

stable coins are bound to other assets such as mainstream currencies, so that they can act as a bridge between the crypto and traditional financial world. Dealers use traditional currencies to purchase stablecoins and then buy other crypto-assets or borrow their stocks for a fee.

tether dominates this market after it quickly expanded for cryptocurrency despite intensive regulatory and media control over the asset protection.

This month, the company agreed to pay a penalty of $ 41 million in order to clarify the claims of a US regulatory authority that it had incorrectly shown that their digital tokens were completely covered by dollars. This month, claims also appeared that the company even spent new stable coins in exchange for cryptocurrency -covered loans.

But Tether continues to grow because it is an important lubricant of the rapidly growing industry for lending and borrowing digital assets. It is also used as security for transactions and for loans that are on other cryptocurrencies.

The demand for this is so great that Tether pays the owners a nice return when they give their tokens.

"StableCoin returns on established platforms are usually around 5 percent-such as ten times the returns available for insured bank deposits," said analysts from Goldman Sachs in a report at the beginning of this month. "And these returns can be increased in different ways (also by leverage)."

In a world of low interest rates, such returns drive the growth of the crypto-wholesale “money markets”, on which large investors lend and lend these assets profitably. Some crypto companies that advertise juicy returns from cryptocurrencies on private customers simply lend stable coins on the wholesale markets.

Max Boonen, CEO one of the largest cryptocurrency trading companies, B2C2, says that there is also a rapidly growing derivative market for cryptocurrencies, which is powered by the total of $ 100 billion parked in stable coins.

"We are about to have an institutional market for return products. This is a market that is now relatively large," adds Boons.

Investors are willing to pay a premium for the loan of stable coins for several reasons. One of them is to place bets and benefit from the difference between futures and cash prices. Brokers such as Robinhood and Etoro also use stable coins to secure themselves against price volatility during trade.

This young digital money market is still relatively small compared to the activities worth the value of trillion dollars, which take place in traditional assets such as stocks and bonds. But there was hardly this market a year ago. Now companies are writing deposit certificates, agree on short -term loans and issue commercial papers.

"The next step will be the asset management and stable coins themselves could be converted into a fund. Crypto bonds that are paid out in stablecoins are also in sight," says Boons.

This market is still full of risks. Now the regulatory authorities are circulating.

On Thursday, a global standard settlement committee for decentralized financial markets determined a large part of lending and recording. According to industry sources, further regulations are also to be followed, which are specifically aimed at stable coins. The rating agency Fitch has already warned that stable coins could lead to infection on the credit markets.

In general, crypto trade itself has not yet regulated and there is no scope of investor protection measures that are associated with traditional asset classes. And the debate about what the inherent value of crypto-assets actually is still raging.

Despite their quick growth last year, cryptocurrencies have many critics who believe that the inherent value of digital coins is zero. Jan Kregel, economist and research director at the Levy Economics Institute of Bard College in New York, says that cryptocurrencies are nothing more than a video game and warns that the sector also increases the risks of the financial system.

"There is the potential that the crypto world explodes and causes a larger crisis as a subprime. It is not that big now, but it could happen in the future," he says.

eva.szalay@ft.com