Deconstructing a Forbes Report: Tether's Declining Profits, Confusing with Different Metrics

The well-known American media Forbes published an article about the world's largest stablecoin Tether, questioning the continuous growth of Tether while its profits seem to be declining. The article also mentioned that the indicators used in its reports are inconsistent, maintaining its consistent style of confusing the audience. Let's break it down step by step!

Each Report Uses Different Metrics

The world's largest stablecoin issuer Tether released its USDT Q2 reserve report at the end of July, claiming on its website that the second quarter's "Operational profits" exceeded $1 billion, a 30% increase from the previous quarter. Its first-quarter report stated a "Net profits" of $1.48 billion.

Forbes reminds that Operational profits are typically higher than Net profits as companies have to deduct non-operating expenses including taxes and interest before arriving at Net profits. In this scenario, Tether's claimed significant profit increase seems less impressive than portrayed.

Forbes notes that consistent with Tether's confusing practices, the company did not define Operational profits in its disclosure and did not explain why it no longer reports Net profits as it did in the previous two quarters (reporting $700 million in profits for Q4 2022).

Profits from Bitcoin Valuation Increase and Interest Income?

In a subsequent comment to Forbes, Tether stated that operational metrics represent recurring profits generated by the group's activities in the second quarter of this year, and from a financial perspective, Q1 2023 was a very strong quarter.

The $1.5 billion Net profits include exceptional performance such as adjustments to the valuation of its Bitcoin holdings.

In the first three months of 2023, Bitcoin's price rose by 70%. However, Tether did not respond to Forbes' follow-up questions, including why the change in reporting metrics and how much Bitcoin the company held at the beginning of the year.

Forbes believes that Tether's profits largely stem from its unique business model. Tether mints stablecoins and issues them directly to holders, pledging to provide liquid assets of equal value for every stablecoin pegged to the US dollar. While most of its assets are in the form of secure US Treasury bonds and money market funds, Tether also holds Bitcoin and secured loans in its reserves. Unlike bank deposits, Tether's cost of funds is nearly zero as it does not pay interest on the billions of dollars' worth of tokens it mints. Therefore, as interest rates rise, Tether's reserves exceeding $80 billion are likely generating significant passive income.

Actual Calculations and Analysis

Different Metrics in Each Quarter

Upon reviewing Tether's published reports, it was found that different metrics were used each quarter, ranging from "Profits" in Q4 2022, to "Net profits" in Q1 2023, and then "Operational profits" in Q2 2023. However, the reports did not explain the origin of these figures. If we calculate that the increase in excess reserves comes from Net profits, the estimated Net profits for Q2 this year should be $850 million, significantly lower than Tether's claimed $1 billion in operational profits, and it should be a decrease rather than the stated 30% increase!

Investment in US Treasury Bonds Yield

Attempting to estimate Tether's income based on existing data, if we use a simple calculation, with $80 billion in reserves invested in US Treasury bonds yielding over 4%, the returns from US Treasury bonds alone could bring Tether $800 million in interest income each quarter.

Bitcoin Reserve Appreciation

Since Tether only disclosed its Bitcoin reserves in the first quarter of this year, audit reports only have data from Q1 and Q2 to reference. Based on previous estimates, Tether holds approximately 54,600 Bitcoins. Tether purchased 1,529 Bitcoins in Q2 2023, estimating that it held 53,071 Bitcoins in Q1. The appreciation of Bitcoin between the two quarters, estimated at 28,400 at the end of March and 30,700 at the end of June, would bring Tether an increase of $120 million in book value.

Where Did the $14.8 Billion in Q1 Come From?

Thus, an increase of $850 million in excess reserves seems like a reasonable figure, although we hold doubts about whether the appreciation of Bitcoin holdings can be counted as a source of profit, as this is not an actual profit figure. Looking back at the $14.8 billion Net profits in the first quarter now seems excessive! To reach this number, Tether must have transaction fees or other undisclosed sources of profit to achieve such a astronomical figure.

It's All Up to Tether's Interpretation!

Tether mentioned stock buybacks and other investments funded by this quarter's profits as explanations for the differences between disclosed profits and actual profits. However, Tether is not a publicly traded company and is not required to comply with regular financial reporting requirements. Although Tether engages one of the Big Five accounting firms, BDO, to issue quarterly assurance opinions, which is different from an audit, the reports are only used to confirm the accuracy of Tether's comprehensive reserve report and do not disclose its financial statements. The financial numbers released each time are mostly from their CTO Paolo Ardoino's tweets or quotes in the report. It can be said that in the case of offshore companies, Tether calls all the shots!