Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
The biggest crash in crypto history is starting to rearrange stablecoin dominance. In the last two months, the global cryptocurrency market cap lost $1.2 trillion in value. Under such extreme market fear conditions, even stablecoins are scrutinized for their potential to destabilize.
USDT’s Market Cap Falls Below $70B, 20% from ATH
For the first time since October 2021, the market cap of Tether (USDT) fell under the $70 billion threshold. This is a -20% drop from USDT’s ATH circulation of $83.2 billion in May.
However, Tether (USDT) is still the third-largest cryptocurrency by market cap size, just below Ethereum, which lost nearly 40% of its market cap in the last week.
Closing in on USDT at fourth place is another classically-backed stablecoin, USD Coin (USDC). Unlike USDT which lost its ATH last month, USDC gained a new high at $55.2 billion in circulation, a +14% market cap increase since May.
When one considers rumors that have been following Tether’s redeemable reserve allocation, this is not that surprising.
Is USDC Poised to Dethrone USDT as Biggest Stablecoin?
No doubt, the Federal Reserve’s interest rate hikes started the market downturn avalanche. This is evident by the -23.4% year-to-date decline of the blue-chip S&P 500 index alone. Combined with a 40-year-high inflation rate of 8.6%, supply chain disruptions, and gas prices soaring above $5 per gallon, this created a historic market crescendo.
The first domino to fall in the crypto market was Terra’s algorithmic stablecoin UST. Unable to maintain the peg under market stress and panic, the stablecoin wiped out at least $44 billion in wealth. This exacerbated an already negative market sentiment and triggered a DeFi contagion.
The selloff/withdrawal was so strong that Tether (USDT), as the largest regular stablecoin backed by “cash and cash equivalents”, suffered a notable depegging in May. On some exchanges, it went as low as $0.97. At the time, social media was abuzz with speculation about Tether’s true collateral if most traders decide to redeem their USDT for USD.
However, this proved to be unfounded. Despite $10 billion pressure in redemptions, the peg went back to normal. On June 15th, Tether issued a further statement to quell rumors that 85% of its reserve is backed by Asian commercial papers at a -30% discount. According to the MHA Cayman independent accountant report, USDT is more than ready to provide 100% redeemability:
The Group’s consolidated total liabilities amount to USD 82,262,430,079of which USD 82,188,190,813 relates to digital tokens issued.
The Group’s consolidated reserves held for its digital assets issued exceeds the amount required to redeem the digital asset tokens issued.
Nonetheless, the atmosphere of extreme fear, exacerbated by depegging, turned the traders toward USD Coin (USDC).
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Is USDC More Robust and Transparent than USDT?
Managed by the Centre consortium which includes Circle, Bitmain, and Coinbase, USDC is closer to home than Tether’s incorporation in Hong Kong. This also means that USDC is regulated under a licensed financial institution framework.
However, that doesn’t mean that USDC is insured by the government, as either FDIC or SPIC. Instead, the consortium has to report its reserves every month to make sure that each USDC is redeemable by one USD.
Last month, Circle CEO Jeremy Allaire noted that USDC will improve its transparency further, by issuing weekly reserve attestation reports.
Expanding further, Circle announced yesterday that it is launching Euro Coin (EUROC), fully backed by euros in a custodial partnership with Silvergate Bank. Thanks to the bank’s Euro SEN network, businesses can take advantage of the new stablecoin starting on June 30th.
Overall, without having major depegging incidents under its belt, and because it is more regulated and transparent, USDC is looking better for investors with each passing day.
The same cannot be said of another Terra-like algorithmic stablecoin USDD, run by the TRON network. This week, USDD required an urgent $2 billion boost to maintain its peg to the dollar. At press time, its 1:1 peg still remains elusive, as it trades at $0.97, -`1.13% lower than USDC.
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Will you ever trust another algorithmic stablecoin collateralized by a network’s native token instead of USD cash reserves? Let us know in the comments below.
About the author
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.