$5B in Profit with only 100 employees, Tether's money machine
Lex Sokolin
Managing Partner @Generative Ventures | ex Consensys Chief Economist & CMO | Fintech, AI, Web3
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$5.2B in profit with only 100 employees
Let's talk about Tether, the largest stablecoin with about 70% market share.
Earlier this month, Tether released its Q2 attestation report . While the report's primary purpose is to provide insight into the reserves backing the company's stablecoins, it also includes high-level performance metrics. This time, the report presented some truly staggering numbers.
Tether reported a record $5.2 billion in first-half profits. For context, U.S. Bancorp (the fifth largest U.S. bank) and PNC (the sixth largest U.S. bank) reported first-half earnings of $2.92 billion and $2.79 billion, respectively.
The numbers become even more impressive when you compare the earnings to the number of employees at each firm.
While the earnings grab the headlines, perhaps most impressive is the number of U.S. treasuries owned by the company. With $97.6 billion worth of treasuries in their reserves, if Tether were a country, it would rank as the 20th largest holder of U.S. debt.
Remember the "money printer go brrr " meme from a few years back in response to the Federal Reserve printing trillions of new money supply during Covid? It featured a banker or government official frantically printing money, with the meme critiquing the Fed's aggressive monetary policy. Those were the days when printing cash seemed limitless and money was cheap. Now, with the Fed reversing course and tightening its economic policy, that meme feels like a relic of a bygone era.
But with higher rates, we can revive it in a new context — the broader stablecoin industry.
We’ve previously covered stablecoins in detail but, as a quick refresher, stablecoins are crypto cash equivalents designed to maintain a stable value, typically pegged to a reserve asset like the US dollar. There are three main types of stablecoins: (1) fiat-backed, (2) crypto-backed, and (3) algorithmic. However, fiat-backed stablecoins dominate the market. Traditional cash and cash equivalents back these coins on a one-to-one basis.
When you get one stablecoin, the issuing company deposits one dollar into their reserve. When you redeem one stablecoin, the company withdraws one dollar from its reserve and gives it to you. Pretty simple.
While the fiat-backed model has existed for a while, recent economic conditions have made this space incredibly profitable for providers. How?
Stablecoin issuers generate most revenue by investing their cash reserves in short-term, interest-bearing instruments. Although the specific instruments may vary between issuers, they generally allow issuers to earn an essentially risk-free return. This revenue model is particularly favorable in a high-interest-rate environment. Before 2022, such an environment did not exist. However, in 2022, the U.S. began a contractionary policy, raising rates. Europe also increased interest rates for the first time in 11 years, ending a six-year negative interest rate policy. Since then, several additional rate hikes have occurred. While indicators suggest a possible rate cut on the horizon, the overall yield curve still shows a favorable near to medium-term environment.
So, what does all this mean for Tether, other players in the space, and the overall industry??At a surface level, things look great for Tether ("money printer go brrr," right?). While there is a lot of truth to that, Tether does face some risks that could impact its business.
For starters, they have long faced scrutiny and criticism over transparency . While Tether claims to be fully backed by reserves to maintain its 1:1 peg with the U.S. dollar, many have raised concerns about the adequacy and accessibility of these reserves. The company has made strides — periodic attestations discussed earlier — but critics still argue that Tether's disclosures lack the comprehensive audits necessary to instill complete confidence. That said, we’ve had Tether on the podcast previously, and the current shape of the business makes sense.
Then there is MiCA (Markets in Crypto-Assets), recently passed in the E.U. While the regulation is far from perfect, Tether has stated that, in its current form, it will not be comply with it. As a result, USDT has been delisted as a trading pair for European users on several exchanges.
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Meanwhile, competition is heating up. While Tether and Circle currently dominate the stablecoin market, controlling about 90% of it, the industry's profitability has not gone unnoticed, attracting new participants on a seemingly daily basis.
And this begs the question — what will the future makeup of the stablecoin market look like? Will it resemble the credit card industry, with power consolidating to a few providers (Visa, Mastercard, Amex, Discover)? Or will the market support many players, perhaps hundreds, where every bank has its own stablecoin?
Either way, Tether seems to have taken a page from Google's book, using some of its massive profits to invest proactively beyond its core stablecoin business. This diversification strategy, if successful, could position them well in a future where their business model becomes impacted by any of the numerous threats they could face. You don’t get to make $50MM per employee in perpetuity.
Long Take
We discuss the recent market volatility triggered by Japan's interest rate hike, which led to significant market reactions including a 25% drop in the Japanese stock market and a 10% rise in the Yen's value against the dollar.
This volatility was exacerbated by the unraveling of the yen carry trade, where investors borrow yen at low rates to invest in higher-yielding currencies like the USD. The resulting deleveraging caused widespread sell-offs in risk assets like tech stocks and cryptocurrencies. Despite the temporary shock, the long-term outlook for fintech, AI, and crypto remains positive, with potential catalysts from US macroeconomic easing and ETF demand.
Curated Updates
Here are the rest of the updates hitting our radar.
Paytech
Neobanks
Lending
Regulation & Policy
Digital Investing
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Enterprise Sales Director at Zoho | Enabling Business Success with Scalable CRM & Digital Transformation Solutions
3 个月Tether's ability to outperform industry giants with a lean team is a masterclass in efficiency and innovation. Excited to dive into ur analysis and see what we can learn from their strategy!
4x Founder | Generalist | Goal - Inspire 1M everyday people to start their biz | Always building… having the most fun.
3 个月It’s wild how a company with just 100 employees can completely outpace huge banks. Tether must have some seriously sharp minds and innovative tactics behind the scenes.
CEO & Founder at Actalink | Ex-Consensys, BNYM, Citi
3 个月Perhaps by: 1. Finding a product-market-fit 2. Seamless Execution 3. Selling shovel(stablecoin) when everyone is digging gold(defi) What are your thoughts? Lex Sokolin Among us; you are the #Wikipedia of finance
Healer/Adviser at Think God Foundation
3 个月To all entrepreneurs: Do you want to be involved with a company that is trademarked all over the world? E: [email protected]