Tether dollar peg lost and found

Tether has a market capitalization of about $83 billion, compared to $50 billion for the second-largest, USDC. Tether’s peg has also been at risk these days, fluctuating between $0.95 and $1. 

Tether (USDT) is the top stablecoin: the importance of the peg

It is by far the most traded token in the crypto markets, with daily volume well over twice that of Bitcoin. 

Since it is a stablecoin fully collateralized in dollars, should it lose its $1 market value it would not only fail in its specific and sole purpose, but could crash the entire crypto market. 

After the collapse of UST, Terra’s algorithmic stablecoin, which has been well below $1 for days now, as of yesterday, some fear began to surface that other stablecoins might also suffer a similar fate. 

For example, today the price of USDT fell from $1 to $0.98, which is a loss of 2% in just a few hours. 

This descent was enough to trigger a new wave of panic, which dissipated in a short time since after less than half an hour the value was back to $1. 

As a matter of fact, after recovering so quickly from the peg with the dollar, the price of USDT fell below parity again, but only slightly. 

It is possible that many among those who operate in the crypto markets are unaware of the fact that the issuer and manager of USDT, namely Tether, allows on its website for anyone to return USDT tokens in exchange always and only for $1 each. 

According to Tether’s CTO, Paolo Ardoino, more than 300 million USDT have already been returned in the last 24 hours using this procedure, obviously in exchange for an equal amount of dollars. 

GM
Reminder that tether is honouring USDt redemptions at 1$ via https://t.co/fB12xESSvB .
>300M redeemed in last 24h without a sweat drop.

— Paolo Ardoino (@paoloardoino) May 12, 2022

Arbitrage on stablecoins

Since it has always been possible until now to return USDT in exchange for dollars, with a 1:1 ratio, when on the crypto markets the price of USDT falls below the dollar there is always someone who actually buys them at a discount, and immediately sells them back to Tether at full price. 

It is precisely because of this very low-risk profitable arbitrage activity that USDT can hardly deviate from the $1 value. Only in the event that this is no longer possible would the value of USDT be truly at risk. 

It is worth noting that some of the other major stablecoins, such as USDC and BUSD, but also DAI, TUSD, and Pax Dollar, are worth more than $1 in the markets today. This is because their demand is clearly exceeding their supply in the market, perhaps partly because of the small flight from USDT that is taking place. 

Until yesterday, USDT‘s market capitalization was about $83.3 billion, while this morning it has fallen to $82.3 billion. It is therefore a small flight, perhaps due to those who fear that Tether will not be able to continue to repay $1 all USDT that should be returned to the issuer. 

Then again, it is quite obvious that there has been a lot of irrationality in the financial markets for a few days now, and combined with panic it makes it so that even strange things can happen such as selling USDT on the crypto markets at $0.98 instead of directly on Tether’s site at $1.