As Tether Faces Billions in Redemptions, Circle's USDC Is Gaining Ground

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Decrypt
6d ago2022-06-21

During a Crypto Winter, investors tend to stash a portion of their bull market gains in stablecoins to wait out the downturn.

But over the past two months—through Terra's UST stablecoin collapse, panic over a potential bank run at crypto lending company Celsius, and insolvency for crypto hedge fund Three Arrows Capital—that bearish behavior has played out very differently for the two largest stablecoins by market capitalization: Tether (USDT) and US Dollar Coin (USDC).

While Tether’s market cap has lost 19% since the start of May, when it set a new all-time high of $83 billion, USDC has gained 5% and hit an all-time high of $56 billion, according to a Decrypt analysis using CoinGecko data. This means that Tether's supply has been rapidly shrinking since May—a sign that large investors have been cashing out their USDT positions since the market crash—while USDC's supply has increased, suggesting increased demand.

It’s been a remarkably strong run for USDC. Over the past 50 days, Circle’s stablecoin has set a new all-time high 28 times. In fact, it’s done so every day from June 15 until yesterday. On Tuesday afternoon, the gap between USDC and Tether had shrunk to about $12 billion. That’s the smallest it’s been since the fall of 2020.

Now, USDC could pull even with Tether if its market cap grows by roughly 21%—sooner, if Tether continues to lose ground. But this all carries a very serious caveat: It is hazardous, especially now, to assume that an asset’s past performance guarantees what it’ll do in the future.

Stablecoins such as Tether and USDC are generally used by traders to enter and exit trades for other cryptocurrencies, particularly in situations where U.S. dollars are inaccessible and on decentralized exchanges, such as Uniswap. These stablecoins account for a significant percentage of daily trading volume in the crypto market, often surpassing combined volumes for Bitcoin, Ethereum, and the rest of the top 10 coins by market cap.

But since early May, Tether has seen its circulating supply—the coins available to the general public, excluding private sales or coins held by the company—drop by 15 billion. The second week of May, when things were really coming apart for Terra and stablecoins of all kinds were taking heat, Tether holders purportedly redeemed $7 billion worth of the stablecoin for cash after USDT briefly lost its dollar peg.

It could be a sign that investors have lost so much faith in crypto to recover that even stablecoins have started to seem like a risky investment.

Tether Chief Technology Officer Paolo Ardoino, however, had said it demonstrates that the company is able to handle these kinds of redemptions “without the blink of an eye.” Tether appears to have paid out another $8 billion in redemptions since then. But there has been some controversy over whether $4.5 billion sent to crypto exchange Bitfinex yesterday was burned, meaning it was taken out of circulation because it was redeemed for cash, or simply moved to Tether’s sister company.