USDT rises again and USDC loses ground

After collapsing in May, the market capitalization of USDT (Tether) has risen again, at the expense of that of USDC.

The showdown between USDT and USDC continues

In fact, when the Terra ecosystem was imploding on 12 May, and more importantly imploding its UST algorithmic stablecoin, USDT’s market capitalization was also the loser. 

Although USDT’s average daily price never fell below $0.99, its market capitalization instead fell significantly. 

It is worth noting that as early as 10 May, the price of UST had fallen below $0.8, thus beginning its implosion a full two days before USDT’s problems began. 

The fact that while UST collapsed, USDT instead was holding, and did not create panic in the crypto markets towards Tether. The problem arose in the following days when some of the usual doubts that have plagued Tether’s reputation for years began to spread. 

Because of these doubts, connected to a hypothesized loss in value of USDT that did not then occur, many USDT holders sold them either in exchange for US dollars or in exchange for other stablecoins, primarily USDC. 

In the span of just 10 days, Tether was forced to withdraw as many as ten billion USDT tokens from the market, giving back ten billion USD to their holders. 

Given Tether’s demonstrated ability in those days to smoothly repay anyone willing to give back their USDT in exchange for USD, the decline eventually stopped. At that point, it was clear that the management of USDT was not having any real major concrete problems. 

To be fair, in mid-June another very similar dynamic was triggered, related no longer to the implosion of Terra, but to the failure of Celsius and 3AC. Within a week, Tether was forced to withdraw another 5 billion USDT tokens from the market, giving back $5 billion USD with apparently no problem. 

The decline in USDT’s market capitalization went on until mid-July when it hit $65.7 billion, or the lowest point in all of 2022. 

Tether’s strength

It is worth mentioning that throughout this period of decline, in which nearly 20 billion USDT was returned to Tether, its price never deviated significantly from $1. 

This is precisely because Tether demonstrated that it had no significant problem pulling out nearly $20 billion within two months to repay in USD all those who had decided to give back their USDT. 

This was a real show of strength, perhaps sweeping away many of the doubts that had been hovering over the company. 

Indeed, beginning on 9 August, a small but steady rise began. 

On that day, USDT’s market capitalization returned above $66 billion, while $67 billion was surpassed on 13 August. On 19 September, the 68 billion was also exceeded, and it is now at 68.4. 

Thus, between mid-May and mid-July 2022, USDT lost more than 21% of its market capitalization in about two months, without its price ever deviating from $1, while from mid-July to mid-September it recovered more than 4% of its capitalization, again in about two months. 

It is worth mentioning, however, that at the beginning of the year USDT’s market capitalization was $78 billion, so even after the recent recovery, it is still significantly below its levels at the beginning of the year. To find a capitalization of $68.4 billion it is necessary to go back as far as 8 September of last year. 

The evolution of USDC’s market cap

It is very interesting to compare this dynamic with that of USDC, which is the world’s second-largest stablecoin by market capitalization. 

On 11 May 2022, USDC capitalized just over $48 billion. When USDT began to lose capitalization, USDC benefited, because a portion of USDT holders preferred to convert them to USDC rather than US dollars. 

And so USDC came close to $54 billion at the end of May, which then rose to $56 billion on 20 June, by which time USDT’s sharp decline had stopped. 

This comparison clearly shows that the problem in those days was precisely the fear that USDT might not hold. Indeed, the doubts that have gripped Tether for years have hardly touched Circle, which is the company that runs USDC. 

What is more interesting is to analyze what happened to USDC after the end of June. 

In fact, starting on 7 July it began to lose market capitalization. Ten days later it had already fallen below $55 billion, and on 11 August it also fell below $54 billion. 

The biggest drop, however, was triggered starting on 18 August, and it seems not to have stopped yet. As of today, USDC’s market capitalization is below $45 billion, which is a similar level as in mid-January. 

The loss of $12 billion in capitalization over the past three and a half months cannot be explained solely by USDT’s $3 billion growth. 

In fact, adding together the market capitalizations of USDT and USDC at the beginning of the year and to date, we find that in nine and a half months it has collectively fallen from $120 billion to $112 billion. 

BUSD gains market share, while DAI gives it up

In the same period, the third-largest stablecoin by market capitalization, BUSD, has grown from $14 billion to $21 billion, or about $7 billion. This growth almost completely offsets the $8 billion lost by USDT and USDC. 

Hence, the sum of the current market capitalizations of the three major stablecoins is perfectly in line with what it was at the beginning of the year. In contrast, the fourth, DAI, has lost $3 billion since the beginning of the year. 

However, it is worth noting that UST started the year at about $10 billion in capitalization, and now instead is worth almost nothing. But UST was used almost exclusively within the Terra ecosystem. 

These dynamics show that overall the stablecoin market has remained fairly stable in 2022. While this is to be expected in terms of prices, it is by no means obvious in terms of market capitalizations. In fact, over the course of the year, the latter moved significantly, although the cumulative movements eventually balanced each other out. 

It is worth noting that 2022 was the year in which the US dollar appreciated the most in recent decades. 

The Dollar Index rose from 89 points in May 2021 to 114 points at the end of September 2022, an increase of 28% in one year and four months. 

Something similar had already happened between July 2014 and March 2015, when it grew 24% in less than a year from 80 to 99 points. 

To find a greater increase one has to go back to 1995-2000, when it rose from 81 to 120 points. But in fact, it took five years, not just one. 

That the market capitalization of stablecoins pegged to the dollar did not move more as a whole during 2022 rather clearly indicates that stablecoin holders per se do not care about the real value of the dollar. They most likely care more about the usability of stablecoins in crypto markets, where the use of fiat currencies carries a whole host of disadvantages that crypto stablecoins do not.