The Mystery of USDT Issuance. Does the USDT Market Cap Decrease as the Cryptocurrency Market Shrinks

Background Info

“When examining the market cap of cryptocurrencies, the market cap of most coins tends to decrease as the overall market shrinks. However, it is worth noting that while the overall cryptocurrency market has experienced significant shrinkage, the market cap of USDT seems to have remained largely unaffected. This phenomenon raises the question of why the market cap of USDT can maintain stability?”

Tether USD (USDT) is a stablecoin designed to maintain a relatively stable value. According to the Tether whitepaper, “Each circulating USDT is backed 1:1 by US dollars, held in our reserves. Tether Limited is headquartered in Hong Kong and is owned by iFinex Inc.” Tether Limited publishes its reserve value daily. However, Tether’s issuance and reserves have been subject to controversy, primarily focusing on whether the USD reserves supporting USDT are sufficient and whether they could potentially negatively affect the cryptocurrency market, such as market manipulation or financial risks.

Unlike the total supply of USDT, there is no explicit upper limit to the issuance of USDT. According to Tether’s operational policies, the issuance and redemption of USDT are primarily carried out by authorized partners, such as exchanges. The issuance and redemption of USDT can be seen as a relationship that changes based on the demand in the cryptocurrency market. When there is an increased demand for USDT in the market, Tether collaborates with authorized partners to increase the supply of USDT to meet the market demand. Conversely, when the market demand decreases, users may choose to redeem or destroy USDT, thereby reducing the issuance.

Possible Reasons for the Decrease in USDT Issuance

The issuance and reserves of USDT are confidential, so this article will discuss USDT issuance-related issues based on market observations and assumptions. Analyzing the issuance of USDT may involve factors such as the Tether Treasury, USDT market cap, market confidence index, liquidity issues, regulatory pressure, etc.

Tether Treasury

The creation of “authorized but not issued” USDT is a security measure adopted by Tether to ensure the safety of the creation and issuance process. This restricts the number of times Tether’s signers need to access their authorized private keys, thereby reducing security threats. This process ensures that Tether can issue USDT immediately upon receiving customer funds, maintaining its 100% reserve. Paolo Ardoino, the Chief Technology Officer of Tether, mentioned that $1 billion worth of USDT on the Tron network is authorized for inventory replenishment. This means that the authorized amount will be used for upcoming issuance requests and chain swaps.

USDT Reserve Distribution Across Chains

Image source:https://tether.to/en/transparency/#usdt

Tether Market Cap

The circulating market cap of USDT is $83.4 billion (as of 08/10/2023). This indicates the popularity and demand for USDT in the blockchain. Tether’s market cap has shown continuous growth, and since January of this year, Tether has created approximately $16 billion of dollar-pegged cryptocurrency, with USDT distributed across different networks. This indicates that there is still demand for USDT in the market.

90-Day USDT MarketCap

Image source: Coingecko

But compared to the slope of the USDT market cap from 2020-2022 (as shown in the graph), it can be seen that the market cap growth in 2023 is slowing down. This reflects a decline in market demand due to a bearish market environment, which may also result in a decrease in the issuance of USDT.

1-Year USDT MarketCap

Image source: Coingecko

Based on the figure below, it is evident that, influenced by the overall market environment, the USDT market value experienced significant fluctuations during the decline phase of the cryptocurrency market’s total market value. However, it quickly returned to a relatively stable level.

All-time Cryptocurrency MarketCap

Image Source: CoinMarketCap

All-time USDT MarketCap

Image Source: CoinMarketCap

USDT VS. Other Stablecoins

Compared to stablecoins like USDC, BUSD, and DAI, Tether’s market capitalization remains strong while the market capitalization of other stablecoins has declined. This is related to market demand and the overall environment. The market capitalization of USDC has decreased from $45 billion at the beginning of 2023 to $5 billion at the time of this article’s publication. The collapse of Silicon Valley Bank is considered an important factor that influenced the decrease in market capitalization, as Circle held a significant amount of funds in this bank.

Stablecoin Market Cap Comparison

Image Source: CoinGecko

Market Confidence Index

Although there has been a visible recovery since the FTX collapse at the end of 2022, the global adoption of cryptocurrencies remains below historical highs and shows a downward trend. The cryptocurrency market confidence index is in the middle position. The market’s health affects investor confidence, and a decrease in market confidence may lead to a decrease in demand for USDT issuance. Therefore, caution should be exercised if there is a sustained decrease in demand for USDT from traders and the market, as it may indicate a less healthy level for the cryptocurrency market.

Global Cryptocurrency Adoption Index

Image source: Chainalysis

Crypto Fear and Greed Index

Image source: Alternative

Liquidity Issues

USDT serves as a liquidity tool widely used in the cryptocurrency market. With the continuous increase in trading pairs based on USDT, a significant decrease in its issuance would inevitably affect the liquidity of various cryptocurrency trading pairs. Currently, Tron USDT has the most active status, with approximately 50% of USDT trades occurring on the Tron blockchain. Tron plays an important role in stablecoin trading. Tron has shown excellent performance in terms of daily active addresses, surpassing Ethereum and BNB, with over 1.9 million daily active addresses. Therefore, it can be said that Tron USDT is in a good state within the cryptocurrency industry.

Regulatory Pressure

The regulatory environment is becoming increasingly complex, with more and more countries tightening regulations on cryptocurrency exchanges. This could also lead to a decrease in the circulation of USDT. Market sentiment and risk assets, as analyzed by Bloomberg Intelligence’s Jamie Coutts and other analysts, suggest that tightening cycles, unemployment, and banking pressures could impact risk assets like Bitcoin. Monitoring market sentiment and external factors is crucial for understanding the potential impact on the issuance of USDT.

USDT Adoption in the Payment Field

Currently, there is a global push to implement USDT payments due to its stable value, which is also reflected in the Web2 world. BTC, known for its security, convenience, inflation protection, and investment advantages, is recognized as legal tender in Serbia for various everyday scenarios and cross-border payments. The global adoption of USDT is also on the rise, particularly in the fields of cryptocurrency market trading and cross-border remittances. Furthermore, the adoption of USDT serves as a reference for promoting global financial inclusion. According to a 2023 World Bank report, approximately 1.7 billion adults worldwide do not have access to a bank account. For those without bank access, stablecoins can be used for transactions through smartphones and the Internet, thereby expanding the economic opportunities for this segment of the population.

Everyday Scenarios

The adoption of USDT in life scenarios is also quite extensive in the United States, Europe, and other Asian countries. Many cryptocurrency exchanges and digital payment platforms support USDT as a payment option. Taking Gate.io exchange as an example, in the Gate App, USDT can be used to purchase game points, multi-platform gift cards, plane tickets, and cellphone prepaid cards.

Cross-Border Remittances

USDT provides a fast, secure, and low-cost solution for cross-border payments. Since the value of USDT is pegged to the US dollar, using USDT for cross-border remittances can avoid unnecessary risks caused by exchange rate fluctuations. Supported by blockchain technology, this capability of fast verification and settlement can significantly improve the speed and efficiency of cross-border transactions compared to traditional remittances. Additionally, stablecoin transaction records have the characteristics of transparency and immutability, enhancing the security and transparency of the entire transaction experience. Many people choose to use USDT for cross-border remittances to conveniently transfer funds to other countries.

Security

In the past, USDT has experienced several instances of inexplicable issuance, but Tether company has always taken proactive measures whenever there is a decoupling and panic run on the currency.

• On March 2, 2015, USDT dropped to a historical low of $0.57, deviating $0.43 from the peg to the US dollar. This significant deviation raised concerns among investors, leading to panic selling.
• In April 2017, Wells Fargo stopped acting as an intermediary for Tether. The banking relationship between Tether and its affiliated exchange Bitfinex was interrupted. This event raised concerns about the support of USDT reserves, causing a brief fluctuation in price below $1, but it quickly recovered its peg to the US dollar.
• In 2018, USDT reached a historical high of $1.32, deviating $0.32 from the peg. In October of the same year, during rumors of Bitfinex’s bankruptcy, the value of USDT briefly fell below $0.9. These deviations raised doubts about the credibility of USDT as a stablecoin.
• In April 2019, the New York Attorney General’s Office made accusations. The office stated that Bitfinex had lost $850 million, and Tether secretly used funds to cover the shortfall. This discovery also led to a temporary decoupling of USDT.
• In March 2021, Tether and Bitfinex reached a settlement with the New York Attorney General’s Office, agreeing to pay a $18.5 million fine. As part of the settlement, Tether committed to improving the transparency of its reserve assets. Both companies neither admitted nor denied any wrongdoing.
• Since 2021, Tether has published detailed reserve asset breakdowns and regularly releases reserve asset audit reports to inject more confidence into the stablecoin market.

Each time USDT experienced decoupling, Tether responded actively, resolved the situation immediately, and made efforts to maintain price stability. Starting in August 2022, Tether announced a comprehensive audit. Although Tether has not publicly disclosed a timeline for USDT issuance, transparency reports can be found on the Tether official website, providing detailed information on the reserve amounts and proportions. These reports demonstrate that each USDT is backed by sufficient reserve assets.

The reserve assets of USDT include cash and cash equivalents, U.S. Treasury bonds, overnight repurchase agreements, corporate bonds, bank deposits, precious metals, Bitcoin, other investments, and mortgage loans. According to Tether’s latest (6/30/2023) audit report, the total reserve assets amount to $86,499,251,218, while the market capitalization of USDT is $84,287,513,801, resulting in a reserve ratio of 1.026240392, indicating sufficient reserves.

USDT Reserves Breakdown

source: https://tether.to/en/transparency/#reports

USDT Reserves Breakdown

source: https://tether.to/en/transparency/#reports

At the same time, the application of USDT also faces challenges because USDT has not obtained a clear and consistent definition and classification from regulatory agencies or policymakers. Additionally, the regulatory framework for maintaining the stability of the financial system and the market does not provide complete supervision and evaluation. Therefore, there is still room for improvement in clarifying the legal status of stablecoins and ensuring financial stability.

Conclusion

In conclusion, USDT has significant potential in everyday payments and cross-border remittances, thanks to its ability to provide faster, more transparent, and secure solutions. However, the application of USDT also faces challenges that require collaboration between regulatory agencies and the blockchain industry. This collaboration is necessary to establish a clear regulatory framework, ensuring the sustainable development of the stablecoin industry and the stable operation of the financial system. Based on the available information, it is difficult to conclude that USDT issuance will decrease. The recent authorization of 1 billion USDT issuance from the Tether treasury, along with the strong market demand, indicates that the demand for USDT remains robust.

However, it is important to consider that existing market conditions and external factors can impact the demand for stablecoins like USDT. Stablecoins play a crucial role in the cryptocurrency ecosystem. Changes in the issuance strategies of mainstream stablecoins like USDT may affect other stablecoins or the broader cryptocurrency market. A decrease in the supply of USDT can stimulate changes in the demand and issuance of other stablecoins such as USDC, TUSD, or DAI. Currently, Tether’s market capitalization continues to grow, and USDT still holds the largest market share among stablecoins. Although the market confidence index has been maintained at a moderate level, which is not favorable for the growth of USDT demand, its demand will also follow the market’s pace as the most important liquidity tool.

During periods of high volatility and market turmoil in the cryptocurrency market, investors also seek refuge in stablecoins that offer more transparency and lower risks. Stablecoins like USDT are becoming increasingly transparent in terms of their reserves, which makes them more popular. Although the increase in the supply of USDT has raised concerns and panic among users, the growing comprehensive transparency reports and audits are gradually alleviating people’s worries.