Crypto Demand-Side Dynamics Healthier Amid Tether Supply Surge

VYSYN Ventures Weekly Insights #5

Stablecoin activity has exploded this year. The dominant stablecoin, Tether (USDT), has overtaken Ripple (XRP) as the third-largest digital asset by market capitalization and will surpass Ethereum if its recent growth rate continues.

Other stablecoins have also been on a rapid growth trajectory. DAI stablecoins have a market cap of roughly $124 million with over $500 million in collateral backing their value.

The proliferation and adoption of stablecoins have important ramifications for the demand-side of digital assets. These stablecoins facilitate speculation in digital assets and represent the majority of Bitcoin trading volume. They also have increased in popularity as a medium of exchange.

In the latest VYSYN Ventures release, we present the latest data on the growth and state of stablecoins. We focus on USDT and DAI. USDT’s market share of stablecoins is roughly 85% and warrants the majority of investigation.

We also investigate DAI which maintains its value through an entirely different mechanism than USDT. DAI and the underlying protocol it is issued on, MakerDAO, are a shining success story for the Ethereum network. Given the recent positive momentum behind Ethereum, we also present the latest developments in the DAI stablecoin. Furthermore, we analyse the key drivers of the increase in stablecoin issuance and the impact supply increases may have on price movements.

March Spike in Stablecoins

(Source: Coinmetrics.io)

Aggregate stablecoin market cap currently rests at roughly $11 billion. USDT represents the lion’s share of this with a market cap of ~$9.1 billion.

Stablecoin growth accelerated in March 2020. At the start of March, the total stablecoin market remained under $6 billion. A likely catalyst for the rapid growth in stablecoins was the sharp price declines in both equity and cryptocurrency markets in mid-March.

From March 11th to 12th, the S&P500 declined roughly 12% sparking widespread panic across global markets. This was followed by a >50% price decline in Bitcoin from March 12th to 13th.

The growth in stablecoins was likely driven by several factors:

• Cryptocurrency investors seeking stability amid volatile price movements
• Global market investors seeking a decentralized alternative given the shortage of dollars in relation to debt
• Margin calls on collateralized loans forcing investors to convert their digital assets into USDT

A recent report from Beijing-based Sino Capital has also highlighted that speculation from Chinese investors has been one factor fueling the surge in Tether issuance. With Bitcoin trading being a legal grey area in China, investors are reportedly turning to USDT in the OTC markets as a means to speculate on price movements.

Sun Xiaoxiao, a professional who runs an OTC desk in China, recently noted that there is a growing trend to use USDT to transfer high-risk capital within China. Chinese authorities are beginning to crack down by freezing bank accounts which may have been associated with illicit OTC trades.

King Tether — Demand-Side Dynamics

(Source: Tradingview.com)

In reality, there are likely several reasons driving the explosion in USDT usage and supply. Regardless, the increase has important ramifications for demand-side dynamics. USDT is a centralized stablecoin that is backed 1:1 by USD in a bank account. If the supply of USDT increases by 1 billion, the amount of USD backing the value of the stablecoin also increases by 1 billion.

The increase in issuance represents new capital coming into the digital asset ecosystem which should act as a bullish driver for price. Kraken CEO and co-founder Jesse Powell previously stated that he believes increased Tether supply is “reflective of actual dollars coming into the system”.

Analyst FilbFilb also statistically analysed the relationship between Tether issuance and bitcoin price movements in a Decentrader newsletter release. FilbFilb found a strong positive relationship between Tether issuance and Bitcoin appreciation.

However, the study only covered data spanning 236 days. Increases in issuance over the past two months have been accompanied by a phenomenal recovery from March lows but the exact relationship between Tether issuance and BTC price movement remains uncertain.

(Source: Tradingview.com)

DAI Developments & Ethereum

Tether is the centralized approach to procuring a stablecoin. Each USDT is theoretically backed by a dollar in a bank account but this is not the only way to issue a stablecoin.

The DAI stablecoin is a dollar-pegged digital asset which exists on Ethereum’s Maker protocol. The value of Dai is backed by the collateralization of various assets which includes Ether, USDC, and WBTC.

The supply of DAI has also been increasing. Supply recently surpassed 122 million, a level not observed since the sharp price declines in the crypto market in March. The increased usage may particularly support the bullish narrative which has recently been building around Ethereum. Furthermore, it is worthwhile noting that the majority of USDT is issued on Ethereum.

Stablecoin Supply Growth Summary

Stablecoin issuance and usage have significantly spiked this year. Several reasons have driven the increases with the price drop in March likely acting as one catalyst.

Bitcoin demand-side dynamics have become healthier amid the recent growth in stablecoins. Analysts and exchange CEOs have both noted that stablecoin issuance tends to represent demand coming into the ecosystem in the form of fresh capital.

We will continue to closely monitor stablecoin supply increases. Subscribe to keep updated with the most important developments.

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