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Key facts:
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A capital flow is observed that went from USDT to other stablecoins.
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Tether burned part of the USDT circulating to, apparently, manage to stabilize its price.
Tether (USDT) has recently had a 10% drop in its market capitalization. The reason is that the company behind this stablecoin has burned of more than 8 billion USDT at the end of last week, apparently to manage to maintain its parity with the US dollar.
As CriptoNoticias reported, on May 12, each USDT became worth USD 0.95. The fall of the algorithmic stablecoin terra USD (UST), also put in check the confidence about USDT and its users went massively towards other stablecoins that had slight spikes in their price during those days.
Just as the market capitalization (that is, the value of all its coins in circulation) of USDT decreased, that of stablecoins such as USD coin (USDC) and Binance USD (BUSD) increased. It can be thought that the money of USDT users migrated to those other currencies.
USDC, a currency developed by the Circle company, experience one of the largest increases, close to 10%. It went from USD 48 billion in capitalization to more than USD 52 billion.
BUSD, developed by the company Paxos and financed by the Binance exchange, also experienced an uptick in its capitalization from USD 17 billion to USD 18 billion (almost a 6% increase).
It is worth contextualizing that the increases and decreases in capitalization occur within a market that has been lateralized in the last 3 month.
It is worth contextualizing that the increases and decreases in capitalization occur within a market that has been lateralized in the last 3 month.
How the capitalization oscillates in the stablecoin market
In traditional cryptocurrency market, such as bitcoin (BTC), the market capitalization oscillates depending on the price of the cryptoasset. For stablecoins, where their price is always “stable” (usually equivalent to USD 1) it varies depending on the issuance or burning of coins.
In the case of coins like USDT, the company behind this cryptocurrency, Tether, is the one that issues new coins and puts them into circulation. In turn, it is also who decides to burn, or take out of circulation a certain amount.
The issuance and burning of coins, among other things, responds to the law of supply and demand in order to maintain parity. If demand drops, the company can burn coins to avoid an oversupply that causes its price to drop. If demand increases, more coins should be issued to avoid a price rise above the dollar.
The recent case of USDT, in which about 8 billion coins were burned, is not the first time it has happened. In the past, the company has used this same strategy to maintain parity with the US dollar, a fact that was reported at the time by Criptonews.
In the case of USDC, the price increase responds to an over-demand, therefore, new coins had to be issued to reduce the price and bring it back to the dollar.
A distrustful market
The synchronicity between the UST debacle and the loss of USDT parity, produced shortly after, points to something in common: distrust.
The case of UST marked a before and after in the stablecoin market. It was proved that the algorithmic system that was looking for UST to stay at USD 1 was not effective. A downward spiral ensued, with investors selling their coins to avoid further losses, causing the price to drop further.
USDT, meanwhile, also has a questioned reputation. It has been involved in several controversies that led to Tether even being sued by the New York Prosecutor’s Office, for its reservations. Even a Republican congressman from the United States has called USDT a “ticking time bomb”, not being able to clear the doubts about their reservations.
Under shows the portal of Tether.to, only 4.25% of all USDT reserves (over USD 74 billion) are deposited in cash. This means that only a small part of the entire USDT issue can be converted 1:1 in US dollars directly. The rest is deposited in bonds and other types of financial assets, including other tokens as well.
Tether is not the only one using this backup method. As reported by Criptonews, USDC also does not have a backing that allows 100% convertibility in dollars in cash. According to this medium, about 60% of the reserves of this stablecoin were deposited in cash. Quite a big difference about 4.25% of USDT. This type of doubts generated by the backups, has made the Tether market wobble.
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