Market deep dive: Tether’s market cap continues to shrink; USD coin grows amid turbulent market conditions

This week, the crypto market recovered after a turbulent weekend. BTC$ saw a sell-off and was trading below 18k on Saturday night, but quickly regained all losses, and is currently trading 2% higher at 20.9k. ETH$ dropped below 900, and is now priced 5.6% higher at 1.14k compared to a week ago.

Macro headlines were scarce this week. May UK CPI printed in line with expectations at 9.1%. Manufacturing PMIs for June came in much lower than expected – in Germany, France, the Euro Zone, and the US – but still remain in growth territory. Equity markets rebounded nicely; the Nasdaq future is currently trading 5.2% higher vs. last week’s levels.

Since the beginning of May, the market cap of tether (USDT) started to decline from over 83bn$ to currently under 67bn$ (-16bn$). It is most likely not a coincidence that the tether redemptions started to accelerate right after the failure of Terra USD (UST). At the same time, USD Coin (USDC) market cap began to turn around, and increased from 48bn$ to 56bn$ (+8bn$). Tether has been around for as long as the rumors that question the quality (and existence) of its holdings. What can be said is that it is general market consensus that USDC is the safer and more trustworthy option when it comes to stablecoins.

Tether has provided a breakdown of their holdings (without audit): only 85.64% are in cash and cash equivalents; the rest is invested in corporate bonds, funds, precious metals, secured loans, and digital tokens. A death spiral as seen for UST (or rather a bank run-like scenario because of the duration mismatch) is therefore a scenario that cannot be ruled out completely.

The apparent switch occurring from USDT to USDC might be explained in the light of market participants getting more risk averse given the events of the recent past. It might also be the beginning of USDC becoming the dominant player in the stablecoin market. At the moment, the only advantage USDT has is its high adoption in the market.

The higher interest rate environment is also challenging for stablecoins: on the one hand, it makes it easier for stablecoin issuers to hold a liquid portfolio while generating income. On the other hand, market participants will become more reluctant holding USD stablecoins if USD deposit rates increase further and the total stablecoin market cap continues to decrease.

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