Beginners studying how to trade and invest in cryptocurrency will inevitably encounter the terms USD and USDT, especially while they are learning how to buy and sell crypto for the first time.
How is USD different from USDT?
The main difference between USD and USDT is seen in their usage as currency. The United States Dollar is a fiat currency issued by the US Government as the country’s legal tender. Meanwhile, USDT – or Tether – is a type of stablecoin used exclusively for cryptocurrency trading; its main function is to remain at the same value, or be “pegged,” to the actual US Dollar.
What is USD?
USD is the three-letter code set by the International Organization for Standardization (ISO) for the United States Dollar ($).
As the country’s legal tender, the USD is used to settle debts, pay for goods and services, and fulfil other monetary obligations, such as taxes, fines and contracts.
Since its separation from the gold standard in 1971, the USD has been a fiat currency, which means that its value is not backed by any physical commodity, such as precious metals, but rather the faith that its people and other nations have on the strength and reliability of the United States government.
The USD is also more cost-efficient to create and circulate as fiat money compared to gold or other commodities.
Virtually all other countries use the US Dollar as the world’s primary reserve currency.
What is USDT?
USDT is a type of cryptocurrency known as a “stablecoin;” it is designed so that its trading price stays as closely to the actual USD price as possible. The “T” in “USDT” stands for Tether, reflecting how the coin is “tethered” to the USD.
Tether’s reserves store a US dollar for each Tether token, meaning that a user can exchange fiat USD for an equivalent amount of Tether; conversely, USDT can be exchanged 1:1 with USD at any time through cryptocurrency exchanges.
Crypto traders commonly deposit USD for USDT to engage in crypto transactions, such as buying other crypto tokens using Tether and staking Tether to earn passive income.
Differences between USD and USDT
Tether is pegged to the US Dollar. Its value aims to closely mirror that of the USD at any given time; as such, the price rises when the USD rises, and vice versa.
Because Tether’s mission is to remain 100% backed by USD reserves, crypto traders can trade Tether for USD at a 1:1 ratio.
In contrast, the USD has not been pegged to any other currency or commodity since US President Nixon removed it from the gold standard in 1971. Its value in the present-day is maintained in good faith by the US government, and the faith that people have in the strength of the US economy.
Due to its peg, Tether can be redeemed at any time for its equivalent value in USD at any given moment. Meanwhile, the USD cannot be redeemed for gold, silver, copper or other commodities directly.
The USD holds the status as the sole official legal tender across all of the United States’ territories, including:
- All fifty U.S. states
- Puerto Rico
- American Samoa
- Northern Mariana Islands
- The Virgin Islands
Other independent countries that adopted the USD:
- El Salvador
- Marshall Islands
Tether is currently the most popular stablecoin across all cryptocurrency exchanges (CEXs). A list of CEXs where users can buy or sell Tether include:
Cryptocurrencies have historically been more volatile, as a whole, compared to fiat currencies. Prices can fluctuate greatly over a single day or week due to various factors, such as user hype, supply and demand, and investor-trader sentiments.
As a stablecoin, Tether is designed to avoid as much of this volatility as possible. Its price stays anchored to that of the USD because of its 1:1 US Dollar reserves and the faith of its investors.
However, Tether’s stability is ultimately relative to how stable the USD currently is by itself.
Compared to the devaluations and market failures that other countries’ currencies have encountered, the USD is incredibly stable, which makes it a safe and attractive currency for investors to use. This is why the USD enjoys primacy as the reserve currency for most of the world.
The Federal Reserve Board currently issues seven denominations of the US Dollar:
- $1, featuring George Washington
- $2, featuring Thomas Jefferson
- $5, featuring Abraham Lincoln
- $10, featuring Alexander Hamilton
- $20, featuring Andrew Jackson
- $50, featuring Ulysses Grant
- $100, featuring Benjamin Franklin
Tether does not have any denominations. However, traders may have decimal values of Tether in their wallets.
The United States Federal Reserve acts as a central bank and primary authority over the USD. It controls and manages the supply of USD in US territory, and determines the quota of bills printed annually by the Treasury Department.
Meanwhile, Tether is overseen by Tether Limited, Inc., which launched the token in 2014. The firm is responsible for maintaining Tether’s USD reserves. Its parent company is iFinex Inc., which is based in Hong Kong.
While the Federal Reserve dictates the annually printed amount of USD, it is the Department of the Treasury that oversees the actual printing and distribution of US Dollars.
The Treasury calls upon a particular sub-agency, the Bureau of Engraving and Printing (BEP), to produce paper notes and mint coins.
On the other hand, a Tether token is produced when a user “buys” USDT with fiat currency, whether through a merchant or CEX. Tether’s reserves receive the fiat money and issue an equal amount of Tether to the user.
Comparison Chart: USD Vs USDT
|1:1 with the US Dollar
|Can be redeemed as USD
|US territories; legal tender in 16 other countries
|Cryptocurrency exchanges (CEXs)
|Stable, relative to other crypto tokens
|U.S. Federal Reserve
|Tether Limited, Inc.
|Produced by the Bureau of Engraving and Printing
|Issued by exchanging fiat
How are USD and USDT similar?
The biggest similarity between USD and USDT is that they share virtually the same price at all times. For USDT to remain the most popular stablecoin, it must maintain this 1:1 value with the US Dollar.
Just as USD acts as the world’s primary reserve currency, USDT is popular as a stablecoin as it allows users to exchange other tokens to Tether to prevent any gains made after a trading session from being eliminated by volatility. Many users even convert a portion of their fiat savings into USDT and stake the amount in CEXs for high yields.
When did the US Dollar become the world’s reserve currency?
During the 1944 Bretton Woods Conference, 44 countries agreed to position the US Dollar as the world reserve currency as part of their agenda to shape the economic future of the world following the devastation of the Second World War.
The Conference provided an exchange rate system that pegged the currency of a particular nation to the dollar. In effect, the participating countries sought to use the stability of the US Dollar as a solid foundation that prevented nations from simply devaluing their currency to compete with other countries.
What is a stablecoin?
Not all stablecoins are pegged to the US dollar, as Tether is. At its simplest form, any stablecoin maintains a steady price relative to other, highly volatile crypto tokens.
Three categories of stablecoins can be observed:
- Algorithmic stablecoins. The supply of these tokens are managed by programs called smart contracts, which burn tokens if prices decrease, and circulate new tokens if prices rise, regulating the tokens’ overall value.
- Crypto-backed stablecoins. These coins are pegged to other cryptocurrencies.
- Fiat-backed stablecoins. These tokens are backed by actual reserves of USD or other fiat currencies, such as EUR (Euro).
The key differences between USD and USDT are seen in how the value of each currency is backed up; whether they have a peg; whether they can be redeemed; and how they are created and controlled.
USD is a fiat currency, backed up by the confidence people have in the US Government’s ability to pay debts and the strength of the nation’s economy. After being removed from the gold standard by Nixon in 1971, a person can no longer redeem USD for its price in gold.
The Federal Reserve oversees the supply of USD, while the Bureau of Engraving and Printing under the Treasury department manages the actual creation of US Dollars.
USDT is a stablecoin pegged to the USD, mirroring its value identically. Users can deposit fiat to purchase Tether, and conversely redeem USDT for its worth in actual US Dollars.
Tether’s USD reserves are maintained by its company, Tether Limited, Inc.