To most people’s surprise, the large-cap digital currency with the most rapidly-growing market cap this year is Tether (USDT), not Bitcoin or Ethereum.
In 2020, the total market value of digital currencies has increased by 106.74 % according to CoinMarketCap. Among the top five digital currencies by market cap, Tether has grown the most. Its year-to-date (YTD) growth rate is nearly 300%, making it the world's third-largest cryptocurrency, with a valuation of over $16 billion USD.
Tether is running a “stable” niche business in an unstable market.
1. Strong Demand Comes From Derivatives Trading and Emerging Markets
Tether (USDT) is a digital currency pegged to the US dollar. It was created to stabilize the exchange rates in digital currency transactions. Ever since its advent, the stablecoin has played a very important role in the market.
Trading has become the major source of demand for USDT. According to data from Chainalysis, nearly 97.9% issued USDT were directly distributed from the Tether treasury to exchanges based on 180-day average.
According to USDT exchange flow data from Chainalysis, the flow of Tether to derivatives-only exchanges is currently growing the most, with a weekly vs 180-day average growth rate of 248.1%, indicating recent growing demand in Tether from derivatives exchange.
In 2020, with the involvement of hedge funds and traditional financial institutions, the demand for derivative products is also increasing. In the market structure of crypto derivatives, the most popular type of product is the “inverse swap contract” (with BTC as the base currency). But with the rise of emerging derivatives trading platforms (such as FTX, Binance Futures), focus has shifted to the issuance of “USDT linear derivatives” and these products have won retail traders’ recognition gradually.
On a trading platform, both market makers and traders need huge sums of USDT to gain exposure. According to BTC derivatives open interest data from Coingecko, open interest of USDT-based BTC perpetual swaps on the Binance Futures platform has increased by over 300% from the beginning of 2020 to date, while the world's largest inverse derivatives platform BitMEX's aggregate open interest decreased by approximately 38% YTD according to TheBlockData. The USDT-denominated derivatives market is becoming more and more vigorous.
The heavy users of digital currencies come from EM countries, many of whom typically are from the emerging markets of Eastern Europe, Africa, South America and East Asia. According to the Chainalysis Global Cryptocurrency Adoption Index, the three countries with the highest crypto adoption rates are Ukraine, Russia, and Venezuela.
Perhaps due to the uncertainties of 2020, the global market's attention to Tether has increased by over 2x in the past year, and the demand for offshore finance has risen rapidly.
According to Chainalysis, the biggest usage of Tether (over 5 billion US dollars) is classified as non-liquid. In addition to being a medium for transactions, it is also considered by the market a way to store value.
2. Multi-chain Issuance Can Lower Costs
Most Tether tokens currently sit on the Ethereum network. In recent years, USDT is also issued on more other public chains (TRON, EOS, Algorand,etc.) sidechains (liquid) and layer-2 scaling networks (OMG).
Paolo Ardoino, Tether's CTO, stated that migrating USDT to OMG will greatly reduce Ethereum congestion and gas fees with improved transaction speeds.
Ethereum is the public chain that currently holds the most USDT. It has become popular for different blockchains to integrate with stablecoins. The Tether ecosystem is becoming more and more diversified, meeting different segmented needs, and giving users more options when they want to try to avoid high fees.
3. Market Competition and Compliance
USDT’s biggest competitors are USDC and DAI. USDC has the largest scale among alternative stablecoins, while DAI is a decentralized stablecoin used for over-collateralization. At present, alternative stablecoins add up to over 32%of USDT's circulating market value according to SKEW, and that number is still rising. Although there is no real rival to Tether, the participants in the stablecoin field are becoming more and more diversified.
With the expansion of the stablecoin landscape, the biggest challenge faced by stablecoins may be compliance and cross-border supervision. After the “Paradise Papers” Leakage and hacker attacks in 2017, some might call USDT the biggest “black swan” in the crypto industry. In 2019, New York State prosecutors took Tether’s parent companies Ifinex Inc. and Bitfinex to court.
In September 2020, the New York Attorney General's Office continued to conduct an in-depth investigation into the case of Ifinex using Tether to compensate for Bitfinex's loss of $850 million in 2019. While the stablecoin has developed into a cornerstone of the blockchain industry, it also faces many challenges.
Updated 11/15 to remove a line stating that Bitfinex created Tether. The two are separate companies, although they do share shareholders.