Tether's Dilemma: What Risks Are Hidden Behind the Shift of Billions of Dollars in Asset Allocation?

As the largest stablecoin issuer in the crypto world, Tether has always operated on a simple yet powerful model—earning interest spreads by holding large-scale U.S. Treasuries. However, this business model, which relies on Federal Reserve interest rate policies, is facing unprecedented challenges.

From Earning Spreads to Risk Hedging

In a high-interest-rate era, Tether’s financial performance has been remarkable. Data shows that the company’s net profit before September 30, 2025, has exceeded $10 billion. In contrast, its competitor Circle incurred a loss of $202 million during the same period—the gap is striking.

The root of this huge difference lies in asset allocation. Behind the approximately $1 trillion USDT circulating supply, Tether once locked about $1 trillion in U.S. Treasuries. When the Federal Reserve maintained interest rates between 4.5% and 5.5%, each 1 percentage point increase in yield could bring Tether about $1 billion in annual returns. Users cannot earn yields from stablecoins, but Tether earned substantial interest income by holding short-term U.S. Treasuries.

However, from September 2021 to October 2022, Tether’s strategy underwent a significant shift. The company completely cleared its commercial paper exposure, which once reached $30 billion, and shifted focus entirely to U.S. Treasury securities. While this move increased transparency, it also planted the seeds for future risks.

Reserve Diversification: Hedging or Gambling?

When the Federal Reserve announced the start of a rate-cutting cycle, Tether’s management began pondering a dangerous question: what if interest rates continue to fall?

CME Fed Funds futures data indicates that by December 2026, there is over a 75% probability that the Federal Reserve will cut the federal funds rate from the current 3.75%-4% to 2.75%-3.5%. This means Tether’s interest income, which is vital for its survival, could shrink by at least $15 billion annually—about 15% of its 2025 net profit.

To address this challenge, Tether adopted a bold diversification strategy. As of September 2025, the company’s reserves included:

• Over 100 tons of gold, valued at approximately $13 billion
• Over 90,000 Bitcoin, valued close to $10 billion
• These two asset classes together account for about 12%-13% of its reserves

In comparison, Circle holds only 74 Bitcoin, worth about $8 million.

This shift is not coincidental in timing. From Q3 2023 to Q3 2025, Tether began accumulating these volatile assets on a large scale, coinciding with a period when the interest rate curve stopped rising. Historical performance of gold offers a reference—after the Fed cut rates by 50 basis points this year, gold prices rose over 30% from August to November. Bitcoin, as a high-beta asset, also tends to perform well in liquidity expansion environments.

The Fragility of the Anchor

However, this aggressive diversification strategy has raised alarms among rating agencies. Two weeks ago, S&P Global Ratings downgraded Tether’s ability to maintain its USDT peg from Level 4 (restricted) to Level 5 (weak). Their core concern is that Bitcoin and other high-risk assets now make up about 24% of Tether’s reserves.

Even more worrying is the lack of detailed disclosure. Although U.S. Treasuries still account for 63% of reserves, Tether provides limited information about holdings involving corporate bonds, precious metals, crypto assets, and collateralized loans.

S&P pointed out a critical mathematical issue: Bitcoin currently accounts for about 5.6% of USDT circulation, exceeding the 3.9% over-collateralization ratio. This means that if Bitcoin depreciates sharply, reserves may not fully absorb the shock. The volatility of Bitcoin over the past two months has already put this buffer under pressure.

A Dilemma

From one perspective, Tether’s shift appears prudent. Preparing for a low-interest-rate environment is a rational risk management move. The potential upside of gold and Bitcoin could offset losses from declining interest income.

But from another perspective, the primary responsibility of a stablecoin issuer is to maintain a 1:1 peg with the dollar. All other considerations—including profit maximization, reserve diversification, and even unrealized gains—must serve this ultimate goal. Once the peg collapses, the entire business model unravels.

When reserves are filled with highly volatile assets, this risk shifts from theory to reality. Significant depreciation of Bitcoin or gold, combined with declines in other asset values, could directly threaten the USDT collateral ratio. This is not a hypothetical scenario—it is already beginning to happen.

The coming months will be critical. This week’s Federal Reserve decision will be the first signal to observe how well this stablecoin giant can respond to the challenges. History will ultimately prove whether Tether has made wise strategic adjustments or has embarked on a risky path.