When Tether No Longer Clings to the US Dollar...

Author: Prathik Desai

Original Title: Gold, Bills, Thrills

Compiled and Translated by: BitpushNews

When I think of stablecoins, I often see them merely as a bridge between the US dollar and the blockchain—nothing more. They can serve as powerful infrastructure components, quietly underpinning on-chain products in ways that are often overlooked.

As a business model, stablecoin issuers’ revenues are direct and tied to the interest rates announced by the US Federal Reserve. The higher the rates, the more income issuers earn from US Treasuries backing their stablecoin circulation.

However, in recent years, the world’s largest stablecoin issuer by circulation has adjusted its reserve strategy to better align with macroeconomic conditions.

In this quantitative analysis, I’ll dive deep into why and how Tether has partially replaced its massive yield engine with gold and Bitcoin to prepare for the upcoming shift in the interest rate cycle.

Let’s get started.

The Treasury Machine

A glance at Tether’s US Treasury reserves shows how it became a profit machine when rates were high.

For the past few years, USDT holders earned 0% yield, while Tether was making 5% returns on around $100 billion in US Treasuries.

Even if the average interest rate for most of 2025 is lower, around 4.25%, Tether still reported net profits of over $10 billion for the year ending September 30, 2025. In contrast, the second-largest stablecoin issuer, Circle, reported a net loss of $202 million in the same period.

For most of the past three years, Tether’s business model fit perfectly with the macroeconomic backdrop. The Fed kept rates between 4.5% and 5.5%, Tether held over $100 billion in Treasuries, and each percentage point in yield translated to about $1 billion in annual revenue.

While most crypto companies were struggling with operating losses, Tether raked in billions in surplus simply by going long on short-term government debt.

But what happens when the rate cycle turns and rate cuts are expected in the coming years?

The Interest Rate Cycle Problem

CME FedWatch data shows that by December 2026, there’s over a 75% chance the federal funds rate will drop from the current 3.75-4% range to between 2.75-3% and 3.25-3.50%. That’s already a sharp drop from the 5% level Tether profited from in 2024.

Lower rates could squeeze Tether’s interest income from its Treasury holdings.

A one-point drop in overall US economic liquidity could cut Tether’s annual income by at least $1.5 billion. That’s more than 10% of its annualized net profit for 2025.

So how will Tether protect its profitability in this scenario? After Jerome Powell’s term ends in 2026, a new Fed chair is more likely to follow President Donald Trump’s expected policy of faster and larger rate cuts.

This is where Tether’s reserve strategy diverges most sharply from every other stablecoin issuer.

Diversification Strategy

Between September 2021 and October 2022, Tether reduced its reliance on commercial paper (unsecured short-term debt issued by large corporations) by over 99%, cutting it from over $30 billion in September 2021 to nearly zero.

It replaced these assets with US-backed Treasuries to increase investor transparency.

During the same period, Tether’s Treasury reserves grew from under $25 billion to $40 billion.

Between Q3 2023 and Q3 2025, the composition of Tether’s reserve assets shifted, introducing asset classes you rarely see on other stablecoin issuers’ balance sheets.

As of September 2025, Tether had accumulated over 100 tons of gold, worth about $13 billion. It also held more than 90,000 BTC, valued at nearly $10 billion. Together, these make up about 12-13% of its reserves.

In contrast, its competitor Circle holds only 74 BTC, worth about $8 million.

Why the shift now?

The increased allocation to gold and Bitcoin coincided with a period when the forward rate curve no longer predicted further rate hikes.

To combat rising inflation, rates jumped from under 1% to over 5% between May 2022 and August 2023. During that time, maximizing income via Treasuries made economic sense. But once rates peaked in 2023 and further hikes were not expected, Tether saw it as time to start preparing for a turn in the rate cycle.

Why choose gold and Bitcoin when yields fall?

When Treasury yields fall, gold often performs well. This is driven by expectations of rising inflation and the reduced opportunity cost of holding gold over low-yielding Treasuries.

We saw this play out this year: when the Fed cut rates by 50 basis points, gold prices surged over 30% between August and November.

Even during the COVID-19 pandemic, when the Fed cut rates by 1.5 points to inject liquidity, gold prices rose 40% in the subsequent five months.

Recently, Bitcoin has exhibited the same macro behavior. As monetary policy loosens and liquidity expands, Bitcoin often responds like a high-beta asset.

So while high-rate environments maximize income via Treasuries, allocating to Bitcoin and gold can offer potential upside in low-rate environments.

This enables Tether to account for unrealized gains, and even realize some of those gains by selling gold or Bitcoin from its vault—especially during periods of lower rates and squeezed income.

But not everyone welcomes Tether’s increased exposure to gold and Bitcoin on its balance sheet.

The Peg Problem

Although Treasuries still make up 63% of Tether’s reserves, the increased exposure to riskier assets like Bitcoin and unsecured loans has raised concerns among ratings agencies.

Two weeks ago, S&P Global Ratings downgraded Tether’s ability to maintain its USDT peg from level 4 (limited) to level 5 (weak). It cited the increased exposure to corporate bonds, precious metals, Bitcoin, and secured loans.

The agency noted that these assets now make up almost 24% of total reserves. More troubling, despite Treasuries backing most reserves, USDT issuers provide limited transparency and disclosure regarding these higher-risk asset categories.

Additionally, there are concerns about breaking the USDT token’s dollar peg.

S&P stated in its report: “Bitcoin now accounts for about 5.6% of USDT circulation, more than the 3.9% of overcollateralization, indicating that reserves can no longer fully absorb the impact of a value decline. Therefore, a drop in Bitcoin’s value combined with declines in other high-risk assets could reduce reserve coverage and lead to USDT undercollateralization.”

On one hand, Tether’s shift in reserve strategy seems like a reasonable move to prepare for an impending low-rate environment. When rate cuts arrive—and they inevitably will—this $13 billion profit engine will struggle to keep running at full speed. The upside potential of gold and Bitcoin holdings could help offset some income loss.

On the other hand, this shift has understandably made ratings agencies uneasy. The primary mission of a stablecoin issuer is to maintain its peg to the underlying currency (in this case, the US dollar). Everything else—including revenue generation, reserve diversification, and unrealized gains—becomes secondary. If the peg fails, the business collapses.

When circulating tokens are backed by volatile assets, the risk profile of their peg changes. A sufficiently large drop in Bitcoin’s value—which we’ve seen repeatedly in the past two months—won’t necessarily break the USDT peg, but it does shrink the buffer between the two.

Tether’s story will unfold as the coming wave of monetary easing arrives. This week’s rate cut decision will be the first test of whether this stablecoin giant can defend its peg and foreshadow its future trajectory.

Let’s wait and see.