It seems that the crypto asset industry can’t go a week without talking about Tether (USDT), and for good reason. Whether it be thus-far-unsubstantiated claims of Tether facilitating Bitcoin price manipulation, the New York Attorney General’s investigation into the stablecoin for alleged fraud, or its use as a means to flee capital controls, one cannot understate the importance of $9B+ stablecoin as well as its controversy. Tether has been systematically important to the industry for years but its growth since the start of the year has been unprecedented. This article will explain that growth in 8 charts.
Tether has grown by $4.9B in market capitalization to $9.66B
Since the start of 2020, Tether’s market capitalization has grown by around $4.9B from $4.7B on January 1 2020 to $9.66B on June 9 2020. When compared to the rest of the stablecoin market, Tether has grown to represent a massive 83% to now representing 87% — driving largely by growth on Ethereum and Tron, according to our own data. In comparison USDC, Tether’s nearest competitor, has grown by around $200M with other promising stablecoins such as BUSD and DAI filing separate niches, unlikely to really compete in the medium term.
Tether's growth in trading volumes
A keen reader may ask the question: why has Tether grown so much? The answer can be partially attributed to the fact that, as unregulated derivative exchanges have continued to grow around the world and as non-US investors have sought US dollars during flights-to-liquidity, the use case of Tether as digital eurodollar has become increasingly clear. Its growth has been fueled by its need on exchanges like Binance and FTX which, due to its already existing network effects, has helped it partially replace Bitcoin as the defacto medium of exchange for trading. Using Messari’s “Real Trading Volume” data for both Bitcoin and Tether, we see that Tether’s volumes have consistently outpaced Bitcoin’s. In 2020, Bitcoin’s average daily trading volumes according to Messari have been $2.15B compared to $3.65 for Tether. In fact, there have been no days this year that Bitcoin’s spot trading volume has been greater than Tether’s.
Tether as a medium of exchange
As we’ve mentioned already, Tether has overtaken Bitcoin as the native medium of exchange for crypto asset markets — this is even becoming the case for the derivatives market which to date have used Bitcoin for margin. The reasons for this are obvious. Traders and investors generally already priced their investments in US dollars; in addition, the greatly reduced volatility of Tether compared to Bitcoin undoubtedly reduces hassle for traders who would rather not worry about convexity.
Tether has become a primarily Ethereum-based stablecoin over the last year and as such, we see that the vast majority of net inflows into Tether have led to creations of the Ethereum-based USDT token. Ethereum has seen 3.44B net USDT token inflows compared to 1.77B for Tron, and 2.20B outflows for the Omni protocol. Tether has truly become a platform-agnostic stablecoin but Ethereum’s relatively low block time and relatively cheap fees have driven growth on its blockchain for Tether.
Stablecoins’ efficacy comes from their ability to remain stable, as one can expect. All the most popular stablecoins have similarly low volatility when defined as a 30-day moving average of their daily returns, with the exception of GUSD and DAI. Tether is kept pegged closely to a value of $1 and therefore exhibits low volatility due to its create-and-redeem function. As long as users continue to have the ability to create and redeem, and therefore as long as arbitrage is possible through that function, its volatility will stay low. This exceptionally low volatility has not been shaken even after it was discovered that Tether was no longer fully collateralized by US dollars — undercollateralized by a tune of $850M which has since reduced by $200M. This fact is probably a testament to traders being willing to live with a non-zero percentage risk that they, at some point, would not be able to redeem their USDT for dollars due to the benefits USDT gives them. This fact does not prevent a future “bank run” if the market ever loses faith in Tether due to the under-collateralization or other similar issues.
Basis measures the extent to which USDT deviates from its $1 peg and the graph below compares USDT’s basis to that of USDC and TUSD. While deviation in general has been minimal for all of the top stablecoins, Tether has seen a higher level of deviation than the others. Interestingly, on the day of the largest basis shock — March 12 where Bitcoin’s price dropped by nearly 50% — Tether’s basis hit 1% which means that its price increased as demand for USDT saw an uptick as crypto asset traders underwent a flight to safety. While any amount of basis may be seen as bad, it is very telling that during flight-to-safety environments USDT is the only of the most popular stablecoins that saw a large uptick in demand. This speaks volumes of the structural use case Tether has as a flight-to-safety asset compared to even other stablecoins.
Gas prices on Ethereum
There have been claims made that Tether has contributed to large increases in network congestion on Ethereum alongside the growth in various types of games and Ponzi schemes on the platform, however the data does not totally corroborate that claim. The average transaction fee paid for USDT is currently lower than both the average ERC-20 token transaction and all Ethereum transactions in general — though USDT could be claimed to have pushed up gas prices around June 6 when the average gas price for USDT hit $3.39 compared to a yearly average of $0.78. While, due to USDT’s ubiquity on Ethereum, a large number of transactions on Ethereum are undoubtedly USDT-dominated, USDT transfers in-of-themselves don’t seem to be bidding gas prices up aside from its effect of driving popularity for Ethereum.
USDT perpetual swap funding rate
Funding rates are the fees that those long a perpetual swap pay those that are short the contract if the rate is positive and vice versa if the rate is negative. As we can see, USDT's perpetual swap funding rate (from FTX) normally moves in the opposite direction of BTC’s rate especially during periods where the absolute value is high — such as on March 12 or Black Thursday. When a funding rate is high that means that the price of the USDT perpetual swap has increased higher than the USDT spot price. Looking at March 12, this is a sign that traders were attempting to reduce their exposure to Bitcoin and increase their exposure to USDT as a flight to safety.
Despite 2019 being a controversial year for Tether due to a variety of legal issues and claims, 2020 has only cemented Tether as of systemic importance to the industry. All the signs point to Tether to continue to be a systemically important piece of the industry as long as the market doesn’t lose faith in the ability of Tether to facilitate the redemption of USDT for US dollars. It’ll likely be harder for Tether to remain a profitable enterprise due to the costs of their ongoing legal battle with the NYAG and zero-or-negative interest rates meaning that their client dollar deposits generate little to no revenue — or even begin to cost Tether money in the case of negative rates.
It wouldn’t be surprising if such macroeconomic conditions continue that Tether may begin to experiment with securities lending and re-hypothecation, as is common in the ETF world. At first glance, such an idea is blatantly antithetical to the Austrian economics core of Bitcoin but the market seemed unperturbed to Tether’s under collateralization so such an idea could prove to be viable, if not dangerous.