Stablecoins and Tether (USDT): how a coin pegged to $1 works

As the name suggests, a stablecoin is a coin designed to keep its price “stable.” Most are pegged to the value of a particular currency, such as 1 coin = $1, with the goal of avoiding the large price swings of coins like bitcoin or Ethereum.

Such coins exist because of the volatility of the crypto market. When someone exits a coin and wants to hold the proceeds like cash for a while, moving them into a stablecoin whose value barely changes is more convenient than withdrawing to KRW or dollars at a bank every time. That is why stablecoins play the role of a “digital dollar” within the crypto market.

There are several ways to hold the peg. The most widely used is for the issuer to hold an equal amount of dollars, government bonds and similar assets as reserves (fiat-backed), and other approaches use other coins as collateral or adjust supply by algorithm.

Tether (USDT) is the oldest and most widely used stablecoin, and 1 USDT aims to be worth $1. A large share of crypto trading worldwide uses USDT as its base currency, so USDT effectively holds the place of the crypto market's reserve currency.

On overseas exchanges, “the bitcoin price” usually means BTC/USDT, the price in Tether. When calculating the kimchi premium covered in the kimchi premium guide (the gap by which coin prices on Korean exchanges run above overseas prices), the overseas price is also often this USDT-based price converted at the exchange rate. That is how much USDT serves as the market's price reference point.

Because USDT's trading volume and market cap are so large, its condition can also serve as a clue for reading money flows across the market as a whole.

The USDT premium is how far Tether trades above (+) or below $1. It is supposed to be pegged at $1, but when demand to move dollars into the crypto market surges, USDT can trade slightly above $1, and when the pull to leave the market is strong, slightly below. Small changes in the premium are therefore read as a reference signal of the temperature of supply and demand in the market.

USDT dominance is Tether's share of total crypto market cap. Dominance tends to rise when investors avoid risk by exiting coins and moving into stablecoins, and to fall when they take on risk and move back into coins. That is why dominance is used as a reference indicator of how much the market is currently avoiding risk.

Both indicators are current-state figures that describe “the market is in this state now,” not values that forecast future prices.

Being “stable” does not make a stablecoin risk-free. There has been ongoing controversy over whether issuers actually hold the reserves they promise and how safe those reserve assets are, and in the past some algorithmic stablecoins lost their peg (depegging) and saw their value collapse.

Tether, too, has faced repeated controversy over the makeup and transparency of its reserves. It is important to understand that the $1 peg is a “design goal,” not an “assurance,” and that the issuer's credibility is directly tied to the coin's stability.

Jupick provides the USDT premium and dominance only as reference indicators of the market's current state and gives no trading advice on any coin. This content is for information only and is not investment advice.