Tether (USDT) is the number one stablecoin in the crypto market, and according to CoinMarketCap data, Tether (USDT) is currently in the top three cryptocurrency markets in terms of market capitalization, behind Bitcoin (BTC) and Ethereum (ETH). However, shortly after hitting an all-time high of over $80 billion in May, USDT’s market capitalization has been on a continuous downward trend, and its total market capitalization is currently around $66 billion, the lowest since October 2021.
On May 19, Tether made available its latest quarterly assurance opinion demonstrating the strength of its reserves and revealing significant reductions in commercial paper investments.
Today, the company is excited to share an update on its progress to further reduce its commercial paper portfolio. Currently, Tether has 8.4B of these holdings, of which 5B will expire on July 31. This will result in a significant reduction in commercial paper assets to a low of 3.5B, which is on track with Tether’s commitment to the community. The goal remains to bring the figure down to zero. While both commercial paper and treasury reserves are commonly held liquid assets and cash equivalents, U.S. treasuries will now make up an even larger percentage of Tether’s reserves.
Why has Tether (USDT), the number one stablecoin in the cryptocurrency market, been “shrinking” in market value? What impact does this have on the stablecoin market landscape? Will the market cap “shrinkage” make USDT’s growth healthier from a risk perspective?
Behind the “shrinking” of USDT market capitalization
The recent sharp drop in crypto asset prices in the short term has triggered a series of liquidations and market chain reactions. First, TerraUSD (UST), the largest decentralized algorithmic stable coin, suffered a “death spiral” with LUNA, and later, Celsius, a CeFi lending platform, suspended withdrawals and transfers due to a user run on stETH off-anchor, and then Three Arrows Capital, a well-known investment institution and market maker, was exposed as having “The market continues to go down. The continued market downturn has led to a decrease in cryptocurrency investors’ confidence in the market, which in part has led to the “shrinking” of Tether’s (USDT) market cap.
The intense market volatility caused by market panic and media misinformation led to USDt prices below $1 on exchanges such as Coin, FTX, and Kraken. This does not mean that USDt is decoupled from the US dollar, but only that the exchange’s order book is insufficient to meet liquidity needs. Since USDt is fully collateralized, it stays pegged to the value of the US dollar and every USDt can be exchanged for US dollars via Tether, so any time the USDt price falls below $1, investors, arbitrageurs, and traders can get a discount by buying USDt and make a profit by exchanging it via Tether, so for a short time, the exchange’s USDt price is re-anchored to $1.
Even after being tested by market volatility and over $10 billion worth of USDt redemptions, Tether never turned down a request for USDt redemptions. Tether’s emergency measures balanced the supply and demand for USDt in a timely manner, and showed the market that Tether is the most resilient company in cryptocurrency and traditional finance, with few banks able to process The ability of Tether to redeem $10 billion in a short period of time is a demonstration of its strength, which on the one hand boosts the crypto market’s confidence in USDt, and on the other hand, the continued redemptions mean that the destruction of the corresponding amount of USDt in Tether’s treasury is ongoing, which is another important reason for the continued decline in USDt’s market value. on June 20, according to Whale Alert data, a total of $6.6 billion worth of USDt was destroyed.
And Paolo Ardoino, Tether’s CTO, retweeted the tweet and said that this partial destruction was only of the TRC20 USDT that was in the Treasury wallet at the time of the previous redemption and also destroyed $4.5 billion worth of ERC20 USDT that was in the Treasury wallet at the time of the redemption, stating that this was the result of redemptions over time.
The impact of the stablecoin market landscape
Tether’s (USDT) biggest competitor is Circle-backed USDC – currently, the second largest stablecoin pegged to the U.S. dollar. USDC’s market cap has been on the rise so far this year, with USDC’s total market cap rising from about $48 billion in mid-May to its current $56 billion, according to CoinMarketCap data, though it has never surpassed Tether’s (USDT) market cap to date.
While USDC has taken a portion of Tether’s market share from a market cap perspective, there are still far more Tether pairs than USDC pairs on cryptocurrency exchanges from a trading perspective.
According to Coingecko’s trading volume data, Tether (USDT) has a 24-hour trading volume of about $28 billion, while USDc has a 24-hour trading volume of about $3 billion, which is more than 9 times the latter’s. From this perspective, we can see that USDC is currently more useful than USDT.
data source: Coingecko.com
Tether’s (USDT) market cap “shrinkage” has had an impact on the stablecoin market landscape, but USDT’s dominant status quo cannot be shaken for now.
Why would a “shrinking” market cap make Tether (USDT) healthier?
The market has been deeply concerned about Tether (USDT) as sentiment in the crypto market has cooled over the past period of time and the willingness to invest has diminished, does the company behind Tether, the largest stablecoin in the crypto market, have enough reserves to meet the demand for liquidity redemptions? If Tether (USDT) crashes, will it create a more serious and irreversible crisis for the market? There are also rumors swirling about Tether’s reserves.
In response, Tether has been actively releasing statements to assure investors that Tether and USDT are not affected by the current crisis in the cryptocurrency market and that the problems with the crypto lending platform Celsius have nothing to do with Tether and will not affect USDT’s reserves. tether has also drawn a line between itself and Three Arrows Capital, stating “No loans have ever been made to Three Arrows Capital. tether has been working hard to reach a consensus with its creditors and be protected from the risk of liquidation.” Tether co-founder Reeve Collins said that Tether holders should feel very safe because Tether will remain pegged to the U.S. dollar and will not be affected by market turmoil.
In September 2021, Tether received widespread market attention for investing a large portion of its cash reserves in commercial paper. During periods of USDt volatility, it is common to discuss (and criticize) Tether’s margin reserves. tether continues to adjust its reserve strategy and has published several reports showing the composition of Tether’s reserves, with the vast majority of USDt margin reserves being in cash and common cash equivalents. In Tether’s most recent Margin Opinion, over 55% of USDt Margin Reserves are currently in U.S. Treasuries, with commercial paper currently representing less than 29% of USDt Margin Reserves. While both commercial paper and Treasury reserves are typically cash equivalents, U.S. Treasuries currently represent a much larger percentage of Tether’s reserves. tether has also committed to further reducing commercial paper as part of its reserves and increasing its holdings of U.S. Treasuries.
Tether does not want to cater to the traditional banking industry, but rather wants to focus on being a liberalized tool for P2P trading, remittances, and inflation hedging, so the cash redemption impact is also a big reason why Tether’s (USDT) market cap has declined over the past few weeks. At this point in time, the redemption of commercial paper, bonds, and cash by destroying USDT fully satisfies liquidity redemption needs, and further reduces structural risk to reserves, giving Tether a healthier reserve layout and avoiding USDT run risk at the root.
Summary
The challenges faced by other agreements and banks are the result of a system that is not fully margined, has low resilience and may face a crisis of system collapse. USDt has proven itself to be more resilient than other protocols or banks in the past with one market volatility, crash, and redemption test after another because USDt is 100% margin reserve and as long as there is $1 worth of collateral for every $1 of outstanding debt, the worst that could happen is to redeem all the debt of the underlying collateral.
Tether holds a large amount of fiat capital and a large reserve of U.S. debt, and its own capital is strong enough to hedge the risk and liquidity can be guaranteed. Even if investors want to withdraw their capital and convert USDt to USD, Tether will be able to sell off its large holdings of US debt to complete the redemption, which will result in a shrinkage of USDt’s market value, but this will not affect the stability of the system. On the contrary, the “shrinking” of Tether’s (USDt) market capitalization is a sign that it is going along with the market and preparing for a healthy future in the face of a depressed market and declining liquidity.
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