Over the past two months, the crypto market has been showing signs that are undermining investors’ beliefs: the collapse of Terra stablecoin UST, the run on cryptocurrency lending platform Celsius, the liquidation crisis of crypto hedge fund Three Arrows Capital, and more.

With the plummeting prices of various Tokens, cryptocurrencies are entering a new round of winter. Under the general bearish sentiment, in order to avoid losses, investors are more willing to exchange part of their gains from the bull market into stable coins to survive this difficult crypto bear market. At this time, the two major stable coins in the crypto market, Tether (USDT ) and US Dollar Coin (USDC ), are performing very differently.

USDC is catching up with USDT

According to CoinGecko, since the beginning of May, Tether’s market capitalization has dropped 19% from its historical high of $83 billion, while USDC has risen 5% over the same period, and its market capitalization once exceeded $56 billion, a new all-time high. It is easy to see from this data that Tether supply is continuing to shrink and large investors have been liquidating their USDT positions since the market crash, while USDC supply continues to expand as demand increases.

Admittedly, USDC has been a strong performer during the bear market, breaking new issue highs 28 times in the last 50 days. On June 15, the gap between USDC and Tether’s market capitalization had narrowed to about $12 billion, the closest it had been since the fall of 2020.

With Tether’s market capitalization on the decline, USDC only needs to grow 21% more to surpass Tether, and that growth doesn’t seem too difficult for USDC. If Tether continues its downward trend, then USDC will catch up even faster. All of this seems to be a very serious warning that in the current crypto bear market, no asset can maintain its dominance forever, even if it is good.

USDC is catching up with USDT, and the landscape of the stablecoin market is quietly changing

What went wrong with Tether?

Typically, investors use stablecoins like Tether and USDC as a medium of exchange with other cryptocurrencies, especially when the US dollar is unavailable or when trading on a DEX like Uniswap. Frankly, stablecoin trading tends to account for a large portion of crypto market volume, and if measured by market cap, it currently exceeds the total trading volume of BTC, ETH, and even the top 10 other Tokens.

However, since the beginning of May, Tether’s circulating supply (a metric that only counts USDT in circulation among regular investors and does not include private sales or tokens held by companies) has dropped by nearly $15 billion. Especially in the second week of May, when Terra began to crash, various stablecoins were hit, and USDT was once decoupled from the US dollar, there was widespread panic in the market, resulting in Tether holders cashing out nearly $7 billion worth of stablecoins.

In fact, the run on investors seems to indicate a loss of confidence in the recovery of the cryptocurrency market, and even investments in assets like stablecoins look like a risk. However, Paolo Ardoino, Tether’s chief technology officer, explained the market situation from a different perspective, saying publicly that the run showed that the company was capable of handling such redemptions on the other hand. And since then, Tether has paid out about $8 billion in additional funds to investors.

USDC is catching up with USDT, and the landscape of the stablecoin market is quietly changing

Of course, there is still some controversy surrounding Tether. For example, Tether recently transferred $4.5 billion to its affiliated trading platform Bitfinex, but it remains doubtful that the corresponding Tether stablecoins were destroyed, and it is unclear whether they were converted to cash and removed from circulation, or transferred directly to Bitfinex.

A Tether spokesperson said that in the first 24 hours of June 22, Tether’s stablecoin trading volume was $48 billion, while USDC trading volume was only about $5 billion, which makes Tether more useful from this perspective, and despite the drop in market value, it actually proves that Tether’s reserve proximity is fully capable of meeting liquidity redemptions. The spokesperson also said that Tether does not want to cater to the traditional banking industry, but rather wants to focus on being a liberalized tool for P2P transactions, remittances, and inflation hedging, which is why Tether’s market cap has fallen in the past few weeks due to cash redemptions. Overall, even though USDT’s market value has fallen, 24-hour trading volume is still more than nine times higher than USDC.

Will USDT and USDC be de-anchored from the US dollar?

The long-standing rivalry between USDT and USDC has not prevented them from firmly dominating the market in the stablecoin ranks. According to CoinGecko historical data, on June 15, these two major stablecoins had a combined market cap of 79% of the total stablecoin market cap ($155 billion), with the third largest stablecoin by market cap, Binance USD (BUSD), having a market cap of $17 billion.

At the beginning of 2022, Tether had a market cap of about $78 billion, which was almost twice the market cap of USDC at the time, but then the gap between the market caps of USDT and USDC started to narrow and in terms of market cap, these two stablecoins are now the third and fourth largest cryptocurrencies after BTC and ETH.

In early May, when Terra’s stablecoin UST decoupled from the U.S. dollar, there was a rush to draw a line between algorithmic stablecoins (such as UST) and centralized stablecoins (backed by cash or cash equivalent reserves, such as USDT and USDC). At the time, Tether co-founder Reeve Collins had said that Tether holders should feel very safe because Tether would remain pegged to the U.S. dollar and would not be affected by market turmoil. In addition, Reeve Collins said he wouldn’t be surprised to see holders of algorithmic stablecoins start to move to asset-backed tokens like Tether.

But even so, USDT still seems to have been affected by the UST crash. Just two days after the UST crash, market panic increased and Tether fell to $0.95 before completing a 1:1 peg to the dollar. That same day, Circle’s Chief Strategy Officer Dante Disparte published a blog post that seemed to take a sarcastic jab at the fact that Tether was “masquerading as a stablecoin” but was not actually stable, writing this.

“If you want to retain buyers by having a 1:1 anchor price to the USD, then you have to hold high quality liquid assets (called HQLA in banking terms) that are denominated and regulated in USD”.

As it turns out, USDC did not fall below $0.99 and was very lucky to survive the Terra-induced stablecoin crisis. But according to CoinGecko, USDC actually had a brief dollar decoupling problem last Monday (June 13), the day after Celsius announced it was freezing user accounts, when the price dropped to $0.97.

Also last week, Tether issued a “hard-hitting” statement refuting so-called “reserve rumors,” or allegations that it had invested its cash reserves in commercial paper. In September 2021, Tether raised a lot of eyebrows by investing a large portion of its cash reserves in commercial paper (real estate developers Evergrande and Goodwill were rumored to be at risk of not being able to pay their U.S. dollar bonds last year – $30.6 billion of Tether’s $69 billion in cash reserves were invested in such bonds).

But since then, Tether has decided to adjust its reserve strategy and has said it will further reduce its commercial paper holdings. The company’s accounting firm said in a report that as of March 31, 2022, only about a quarter of Tether’s $82 billion in reserves were in commercial paper and bonds.

Not only that, but Tether’s statement released last week sought to draw a line between Celsius and Three Arrows Capital. The statement said that Tether “has no interest in Celsius and has not made any loans to Three Arrows Capital other than small investments with the company’s net worth. tether has also been working to reach a consensus with its creditors to insulate itself from the risk of liquidation.”

(As an aside: Three Arrows Capital co-founders Kyle Davies and Su Zhu have said they lost $200 million when Terra crashed in May. (In its heyday, Three Arrows Capital had about $10 billion under management, yet as of April, its funds under management had shrunk to about $3 billion.)

The rapidly changing market has been warning USDT and USDC

According to CoinGecko data, as of May 17, 2021, the gap between Tether and USDC market capitalization reached its highest since 2020, when USDT’s market capitalization was $59 billion, almost four times that of USDC ($17 billion).

However, starting in May 2021, the crypto market began a long period of turmoil, especially on May 23, 2021, when the global crypto market dropped 9% in 24 hours.

To add insult to injury, the cryptocurrency price was further devastated by a string of bad news that followed: Tesla CEO Elon Musk announced that the company would stop accepting bitcoin payments; top cryptocurrency exchanges, including Binance and Coinbase, suffered service disruptions; and domestic regulators began shutting down BTC mining operations across the board.

When we go back to the week after May 17, 2021, which was May 23, 2021, we see that Tether’s market cap has barely changed, but USDC’s market cap has increased by $4 billion. Even though Tether is still the #1 stablecoin, the market cap ratio of USDC to USDDT has dropped from 4x to 3x in just one week.

There is no doubt that Tether has always been ahead of USDC in terms of market cap, but the crypto market is ever-changing and no one can guarantee that they will always win, and the current reversal is indeed showing and will likely continue.


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