Tether (USDT), the #1 stablecoin with a market cap in excess of USD 2 billion, has been struggling recently due to banking problems at Bitfinex, and its price has dropped below parity with the USD. Simultaneously other stablecoins including the Gemini Dollar (USDG), True USD (TUSD), USD//Coin (USDC), and Paxos Standard Token (PAX) have surged above parity with the USD, indicating that people are exchanging their USDT for other stablecoins.
Through early October 2018, USDT maintained parity with the USD, and there were roughly 2.8 billion USDT in circulation. Then the USDT gradually declined to about USD 0.99, before 320 million USDT were redeemed and taken out of circulation. This perhaps caused a run on Tether Limited, possibly making redemption temporarily impossible and removing the backing of USD cash reserves, which is the primary mechanism that keeps USDT at parity with the USD.
The price of USDT crashed on 15 October 2018 to USD 0.925, and temporarily went as low as USD 0.87 on at least one exchange. The drastic price movement serves as strong evidence that there was no USD backing USDT at that time due to banking troubles. In general, people should be able to redeem USDT at parity for USD through Tether Limited, and would not sell USDT for less than 1 USD unless Tether Limited’s redemption process stopped working. The price of USDT recovered to USD 0.98 within a day of this crash, but then another 250 million USDT were redeemed and taken out of circulation, and now as of this writing on 17 October USDT’s price is slowly declining and approaching USD 0.97. Since the Tether crisis began, the USDT market cap has declined USD 600 million from USD 2.8 billion to USD 2.2 billion.
Traders and investors have clearly been shifting their holdings from USDT to several other major stablecoins that are available. The USDG which is run by the Gemini exchange briefly surged to a high of USD 1.19 on 16 October, TUSD spiked to USD 1.08, USDC run by Circle hit USD 1.11, and PAX reached USD 1.08. Since then these stablecoins have declined to a consensus of USD 1.02 to USD 1.03 as of 17 October. It is interesting to note that as of this writing these stablecoins are 2-3 cents above parity with the USD, while Tether is 2-3 cents below parity with the USD.
While people who were holding TUSD, USDC, PAX, and USDG before the stablecoin rally began might have made some profits, it is probably not a good thing that these stablecoins are not at parity with the USD, and is just as bad as USDT being below parity with the USD but for different reasons. First off, stablecoins are backed by cash reserves stored with the company that runs them, so any excess above parity with USD is not redeemable for cash. Therefore, if someone buys a stablecoin that is above parity with the USD, long term they will lose that excess above parity as the stablecoin heads back to parity. For this reason, traders and investors would be cautious to invest in a stablecoin for any price above USD 1, since they know they would end up losing some money long term once the stablecoin market stabilizes.
For the time being, as USDT continues to struggle and decline further from parity, traders and investors will be shifting money from USDT to other stablecoins in rapid fashion, lifting those stablecoins above parity with USD. Traders are probably directly trading their USDT for other stablecoins, and there is far more USDT in circulation than the supply of all the other stablecoins combined. Long-term, stablecoins will go back to being at parity with the USD, whether that comes from Tether regaining its footing and going back to parity or completely unwinding to zero remains to be seen.
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