Tether dominance approaches all-time high as crypto crash

The market dominance of leading stablecoin tether (USDT) is nearing all-time highs as crypto markets suffer from the apparent collapse of FTX.

Nearly $70 billion in USDT is currently circulating in the crypto ecosystem, accounting for nearly 9% of the entire digital asset market cap.

Although just shy of the record high of 9.49%, USDT’s dominance is up 25 percentage points from last Friday. That was just before Binance CEO Changpeng Zhao fired shots at rival crypto billionaire Sam Bankman-Fried.

Zhao said on Saturday that he would soon dump millions of dollars into FTX’s native token FTT, culminating in yesterday’s shock offer to buy Bankman-Fried’s FTX.com exchange outright.

USDT boasted higher bids back in April, a few months before the historic Tether bank run in the wake of failed algorithmic competitor Terra earlier this year. But USDT back then only made up half as much of the crypto space, around 4.5%.

It is clear that investors are fleeing to the safety of US dollar-denominated tokens. Bitcoin, the largest cryptocurrency by market capitalization, has fallen 20% over the past five days and 15% in just the past 24 hours, representing $49.1 billion in nominal losses.

BTC’s market cap is now $327 billion, the lowest point in more than two years; the dominance is just under 41%. In December 2020, this figure was as high as 71%.

Ether number two has fared a little worse, as it often does, down almost 30% in the same period. ETH makes up less than 18% of the digital asset market, roughly the year-to-date average.

The market dominance of tether’s direct rival USDC has also jumped 25 percentage points since the weekend – moving from just over 4% to nearly 5.3%. There is now $42.7 billion USDC in circulation – more than $11 billion lower than at the start of August, when the supply hovered around an all-time high of nearly $56 billion.

USDC growth reversed

USDC’s market share had also greatly benefited from Terra’s demise. In a few weeks during May and June, stablecoin junkies cashed in their tethers to the tune of $16 billion, the largest dollar-denominated reduction in USDT supply in history.

All this while the USDC’s supply increased by a similar amount, equal to about 15% growth in one month. Those trends have now reversed, with USDT adding nearly $5 billion in supply over the past three months.

Like all stablecoins, USDC and USDT issue more tokens as demand grows from major players – players such as market makers and other frequent traders, including FTX sister firm Alameda Research. Conversely, they burn tokens when these entities redeem stablecoins for raw dollars, with issuers’ rush handling abilities key to consumer confidence.

The reason for USDC’s shrinking supply of late may come down to recent moves made by leading centralized exchange Binance in favor of its own branded offering, BUSD. The platform in September began consolidating various stablecoin order books under the BUSD umbrella, while delisting the USDC trading pairs.

Binance also nixed trading fees for bitcoin and ether, which appears to have boosted the exchange’s market share, along with BUSD. While USDC was busy burning its supply, as customers redeemed tokens for cash, BUSD issued another $5.1 billion, representing nearly 30% growth in three months.

BUSD’s market dominance – while still much smaller than USDT and USDC – has jumped 31 percentage points over that time, from around 2% to 2.6% today. But Clara Medalie, head of research at Kaiko, believes that a slowdown in activity across decentralized finance (DeFi) protocols this year is more responsible for slowing USDC’s growth.

Medalie explained that USDC is the most widely used stablecoin in DeFi, with a larger amount of total value locked than both tether and BUSD.

“USDC has historically never had high volumes on centralized exchanges, so the impact of Binance’s decision to eliminate trading fees and automatically convert USDC deposits has likely had a limited impact on overall market capitalization,” Medalie said.

Tether, a greedy crypto veteran ready for stablecoin war

Regardless, USDT remains the largest stable coin. And in light of the current crypto market crash, tether dominance is practically as high as ever (not to mention its share of the stablecoin market, where supply is more than 48% of all stablecoins in circulation).

Tether’s continued success comes despite shifting goalposts on support, flaking on promised audits, settling lawsuits with the New York Attorney General, along with a myriad of operational red flags stretching back years.

Traders still use USDT more than any other stablecoin: Of the $173.5 billion in stablecoin volume in the last 24 hours, USDT accounts for 75%; BUSD 17%; and USDC 6.5%, although BUSD’s volume has increased significantly in recent months.

Vivek Raman, head of proof of stake at research unit BitOoda, told Blockworks that USDT continues to grow in supply versus USDC because in the face of “endless FUD campaigns against it, Tether published collateral holding reports and has survived this summer’s washout.”

“This, combined with a reshuffling of underlying security into safer yielding instruments [US Treasurys]meaning that USDT is likely to be seen as significantly safer than USDC and continues to gain traction overseas,” Raman said, adding that BUSD inherently bears Binance’s credit risk.

To that end, Binance promised in August to begin offering monthly splits of its reserves via BUSD’s actual issuer, Paxos. According to its latest disclosure, BUSD is fully backed by US Treasury bills and US government debt, the latter in the form of reverse repurchase agreements. Treasurys are also heavy in USDT and USDC reserves.

Raman expressed that the fierce competition in the stablecoin market boils down to major crypto operators realizing that stablecoins offer an excellent business model. Winning stablecoins will have a huge advantage both in the crypto ecosystem (with DeFi adoption) and in the traditional ecosystem as companies, merchants and funds trade stablecoins.

“Therefore, we envision an era of ‘stablecoin wars’ where there is a healthy competition for stablecoin dominance,” Raman said.

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