Federal Reserve expected to cut interest rates, Tether quarterly earnings may decrease by 200 million yuan, how will the leading stablecoin respond?

The Federal Reserve is set to announce its interest rate decision next week on 9/18. The market widely expects the Fed to cut rates by 0.25%, and there may be a total of four rate cuts by the end of the year. Tether, a stablecoin issuer that relies on U.S. Treasury bonds as a key source of income, is estimated to potentially lose $200 million in revenue per quarter. How will Tether respond to this situation?

Tether Empire Continues to Expand

Tether, originally known for its stablecoin, has firmly secured its position as a market leader, accounting for nearly 70% of the stablecoin market. This year, Tether announced the establishment of four new business divisions to venture beyond stablecoins into the financial and technological ecosystem, offering a range of new decentralized infrastructure solutions to fulfill a broader mission.

Expanding its territory, Tether launches four initiatives to build decentralized infrastructure.

Starting from the quarterly audit report in 2024, there have been updates in the report format to align with its expansion beyond stablecoins. The report is now divided into three main entities as follows:

• Tether International Limited & Tether Limited: Companies registered in BVI and Hong Kong responsible for stablecoin issuance, including USDt, EURt, CNHt, and MXNt, serving as the core entities of Tether.
• Tether Investments Limited: Responsible for investments in sustainable energy, Bitcoin mining, data centers, AI infrastructure, and other ventures.
• Other reported group entities: Includes companies like Tether Operation Limited.

Diversifying Stablecoin Returns with Tether

The new report not only segregates the net profits of each entity but also introduces items such as "Dividend Distributions" and "Capital injections." It is speculated that these are primarily used to reinvest stablecoin returns into other ventures.

As shown in the above table for the first half of the year, the stablecoin issuance entities Tether International Limited & Tether Limited distributed 97% of their net profit of $51.1 billion, totaling $49.8 billion, as dividends, with $58.57 billion invested in Tether Investments Limited and $1.18 billion in Other reported group entities.

Reportedly, Tether's investments this year include $100 million in Bitdeer and $18.75 million in the XREX Group, among others.

How is Tether's Stablecoin Income?

In the era of high interest rates, stablecoin issuers have been investing a significant amount of USD in the U.S. bond market, earning over 5% risk-free profits. Unlike banks that need to pay interest to depositors, this seems to be a lucrative business.

Tether's recent quarterly reports show the amounts held in short-term U.S. Treasury bonds and cash as follows:

• 2023Q4: $82.1 billion
• 2024Q1: $92.7 billion
• 2024Q2: $99.8 billion

The primary investment is in three-month U.S. Treasury bonds with yields of over 5.4% in the first half of this year, generating stable income of over $1 billion per quarter for Tether.

How Profitable is Tether?

In the second quarter report, Tether reported a record high profit of $5.2 billion for the first half of 2024, with operating profit reaching $1.3 billion, marking a significant milestone. However, is this truly the case?

The presentation of $5.2 billion in net profit in the second quarter report is intentional, as the first quarter already saw a high net profit of $4.5 billion, while the second quarter only earned $670 million. Among the entities, Tether International Limited, the stablecoin entity, only achieved a net profit of $808 million, while the other two entities showed losses. The summarized data is as follows:

Despite the increasing amount of U.S. Treasury bonds invested by Tether, why did the net profit reach only $808 million in the second quarter? Tether cited the main reason as the unrealized losses of $653 million from holding Bitcoin at market value assessment each quarter, although the second quarter also saw unrealized gains of $165 million from gold.

Impact of Unrealized Gains and Losses on Tether's Financials

Previously reported, Tether announced that starting from May 2023, it would allocate 15% of realized net operating profits, such as realized USD benefits from U.S. Treasury bonds, to purchase Bitcoin monthly. The quantity of Bitcoin held by Tether in the past three quarters and prices at the end of each quarter, according to Tradingview, are as follows:

• 2023Q4: Approximately 58,000 BTC estimated in the Arkham chart to thousands, with an end-of-quarter Bitcoin price of $42,258
• 2024Q1: 66,466 BTC with an end-of-quarter Bitcoin price of $71,285
• 2024Q2: 75,354 BTC with an end-of-quarter Bitcoin price of $62,676

The estimated unrealized gains and losses from Bitcoin were $1.7 billion in the first quarter and -$653 million in the second quarter.

How will Tether Respond to the Upcoming Fed Rate Cut?

The Federal Reserve is set to announce its interest rate decision next week on 9/18, with market expectations leaning towards a preemptive rate cut of one basis point, adjusting the benchmark interest rate to 5% to 5.25%. The bond market has already reacted in advance, with the yield on three-month U.S. Treasury bonds declining from 5.48% at the end of June to 5.06%, which will inevitably impact Tether's stable income.

Based on the amount of $99.8 billion in the second quarter, a one-basis-point rate cut will affect quarterly earnings by $62 million, while the market anticipates a potential four-basis-point cut by the year-end, estimating an impact of $200 million in the fourth quarter.

Perhaps Tether has already foreseen this situation and has been actively expanding its business since the beginning of this year. Initial investments may face challenges in fast capital recovery, even encountering the dilemma of burning money in the early stages of startups. Besides investments in new ventures like AI data centers, Tether recently invested $100 million in shares of South American agricultural giant Adecoagro, stock code: AGRO. Tether stated that land is also a significant asset, but it is speculated that considering Adecoagro's stable dividend income as a listed company on the New York Stock Exchange is also a factor. As the era of interest rate cuts approaches, how far will Tether expand its industrial footprint? Let's wait and see!