How Tether is fuelling the Bitcoin price rally

The Bitcoin (CRYTPO: BTC) price is up 2.7% over the past 24 hours. One Bitcoin is currently worth US$58,009 (AU$75,336).

That’s still down 10.5% from the all-time high of US$64,829, which the Bitcoin price hit last month. But longer-term holders won’t be complaining. The Bitcoin price is up 100% so far in 2021, and it’s gained 550% since this time last year.

In a gauge of its use, CoinMarketCap tells me that US$41.8 billion of Bitcoin have changed virtual hands over the last 24 hours.

CoinMarketCap also tells me that during this same time there were US$87 billion Tether transactions.

That’s right.

Tether, with a market cap of only US$52 billion, has seen twice as much volume over the past 24 hours as Bitcoin, which has a market cap of US$1.1 trillion.

How Tether is fuelling the Bitcoin price

The Tether price is… stable today. Tether has gained 0.01% over the past 7 days.

Which is all as its designers intended.

Tether, if you’re not familiar, is what’s commonly referred to as a stablecoin. A coin that’s generally backed by fiat currencies.

And if you look at Tether’s long-term price chart, you’ll see it’s lived up to its stable billing. With the exception of a brief dip to 91 US cents followed by a short-lived spike to US$1.04 back in 2017, Tether has broadly traded within 1–2 cents of US$1 since inception.

So how did this humble stablecoin become the most traded cryptocurrency on Earth? And how is it helping fuel the Bitcoin price rally?

That’s largely thanks to its inherent lack of volatility, which makes it an attractive crypto to own if you want to avoid the big price swings witnessed by most digital tokens.

It also has become the preferred method to buy and sell Bitcoin, with CryptoCompare estimating that Tether is used to buy some 66% of Bitcoin.

Nic Carter is the co-founder of Coin Metrics. According to Carter (quoted by Bloomberg):

At those offshore exchanges, Tether is the main collateral and margin type. Exchange volumes are way up and Binance volume is way up.

For traders to get access to these crypto-only exchanges, they often prefer a stablecoin like Tether. You can think of the supply of Tether as a transparent proxy for the balance sheet of both the crypto-only exchanges as well as the funds trading crypto on those exchanges.

So while your Tether holdings are unlikely to yield any more than your short-term savings account, Tether could be setting us up for the next rally in the Bitcoin price.

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Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Bitcoin. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.