The loss of its U.S. dollar peg isn’t the only thing driving down the market cap of tether (USDT), the cryptocurrency market’s largest “stablecoin.”
Tether Falls Below Dollar Parity
The USD-backed token, which as recently as late August had a circulating valuation of nearly $2.9 billion, is now worth just $2.2 billion, representing a two-month decline of nearly 25 percent.
A portion of that decline is a direct result of USDT’s price falling below the $1.00 in assets that are supposedly backing each token. As CCN reported, the USDT/USD peg slipped away heading into Monday morning, throwing uncertainty into a market that relies on billions of dollars worth of tether trading on a daily basis on exchanges that do not support physical USD.
According to CoinMarketCap, tether’s global average traded as low as $0.92 on Monday but has since climbed back to $0.98. On Kraken, which offers a thinly-traded USDT/USD market, the tether price dropped as low as $0.85 before recovering to a present value near $0.95.
$560 Million in USDT Yanked from Circulation
However, given the current USDT/USD discount, the loss of dollar parity only accounts for about $50 million in lost market cap. The remaining decline is the result of Tether pulling hundreds of millions of dollars out of circulation during the first half of October.
Early this morning, Tether yanked 250 million USDT out of circulation after Bitfinex sent payments of 50 million USDT and 200 million USDT to the token’s treasury address, and it wasn’t the first time this month that tethers had exited the market.
CCN reported yesterday that Tether had pulled $300 million in USDT out of the cryptocurrency market through two transactions executed on Oct. 9 and Oct. 14. Altogether, 560 million tether tokens have been yanked out of circulation in October, and none have been issued since Sept. 21.
As of Tuesday morning, the Tether treasury is holding more than 736 million USDT, funds that the company’s website state have been authorized but not issued.
USDT Arbitrage or Waning Consumer Confidence?
Assuming Tether and Bitfinex are operating above-board in their handling of USDT, the massive withdrawals could be connected to stablecoin arbitrage.
For professional traders who are confident in their ability to redeem tethers for USD at a 1:1 ratio on Bitfinex or — for large-scale holders — directly at Tether, the USDT/USD spread should represent an opportunity to generate easy, low-risk profit. Simply acquire USDT, deposit it at Bitfinex — where it is treated as USD — and then withdraw the funds to an external bank account.
Traders can continue to engage in USDT arbitrage as long as the exchange continues to process withdrawals (and though fiat deposits were temporarily paused in recent days the company said that withdrawals continued to process normally). Barring any unforeseen disruptions, arbitrage should eventually restore the tether price to dollar parity.
On the other hand, the withdrawals could be the result of large USDT holder seeking to diversify into other stablecoins, including the highly-touted new offerings from Paxos, Gemini, and Circle. While still much smaller than tether in terms of market cap and liquidity, these tokens — particularly Paxos Standard (PAX) — have been making significant gains in the weeks following their launches.
Notably, Bitfinex announced a new “distributed banking solution” on Tuesday, enabling it to resume fiat deposits following nearly a week of fiat deposit downtime. At the same time, The Block published a report citing anonymous sources who say that Tether has opened an account with Nassau-based financial institution Deltec Bank.
It remains to be seen whether this news will be sufficient to thrust the Tether price back to dollar parity.