Stablecoins Rise, Threatening Tether’s Dominance
Stablecoins are meant to serve as bridges between fiat currency and cryptocurrency. They are, in essence, a “safe” coin where investors can park their money without taking fiat gains or losses while they wait for the right moment to invest in another cryptocurrency.
If we compare the crypto market to traditional financial markets, you can understand it like this: the regular crypto market is like the stock market; the stablecoin market is more like the money market. The stock market is there so investors can earn returns by taking risks in a market that fluctuates constantly. The money market is more about providing liquidity. It works similarly in crypto, which means that for stablecoins to be useful, they need sufficient liquidity.
Tether, USDT, is currently the largest stablecoin by market cap, but not everyone considers it stable. Rumors about Tether have spread rampantly, with critics citing its opaque auditing, suspected additional issuances, and manipulation of BTC prices as causes for concern. These rumors hit fever pitch on October 15, when the market panicked and “stable” Tether dropped by nearly 8% compared to the USD.
In a previous article, How to Assess Tether's Risk, and Make Money Along the Way, we suggested thinking of Tether as a dollar bond issued by Bitfinex and assessing the company’s ability to pay it back based on available data when assessing Tether’s price. But there’s a bigger question to be asked here, too: can Tether really hold its spot as the top stablecoin after the high-profile crash?
It has no shortage of competitors. In the past few months, four new stablecoins pegged to US dollar having emerged in the market, and each seems to pose a significant threat to Tether. GUSD, USDC, TrueUSD and PAX, are all built on Ethereum, auditable and compliant. And they have big, trusted brand names behind them: GUSD is backed by crypto exchange Gemini, USDC is backed by the Goldman Sachs-funded unicorn Circle, TrueUSD is backed by Andreessen Horowitz-funded TrustToken, and PAX is backed by Paxos. These 4 stablecoins all have been endorsed by financial institutions. At the same time, major exchanges have listed trading pairs of these 4 stablecoins, providing them with liquidity.
On paper, that makes all four of them a serious threat to USDT. But what does the data about their real-world market performance say?
First, we looked at the amount of USDT in circulation according to LongHash Live Charts. As you can see in the chart below, the amount of USDT in circulation has been declining since October 15, dropping from 2.4 billion to the roughly 1.8 billion as of this writing.. This suggests lower investors confidence in USDT and a resultant decline in demand.
How do the new stablecoins compare? GUSD, USDC, TrueUSD and PAX are all ERC20-compliant, so it’s not difficult to look at their circulation amounts and trading activity, which can reflect their overall market liquidity to some extent.
The figure below shows the changes in the circulation of these four stablecoins. All four have shown steady increases, and three of the four have really taken off. We can see that demand for USDC and PAX in particular spiked after October 15, the day of the Tether price crash. Among these 4 stablecoins, TrueUSD has the highest liquidity of around 180 million, since it was launched earliest (in March of this year).
Now, let’s take a look at their daily trading volumes according to the blockchain. After October 15th, the trading volume of these 4 stablecoins all increased significantly, with TrueUSD and PAX both hitting all-time daily transaction highs following the Tether crash.
In general, these four new stablecoins still fall far behind USDT in terms of trading volume, but with them trending upwards and Tether on the downswing, it’s clear the market is becoming more diverse. As the liquidity of each stablecoin increases steadily, we should see a real “money market” of stablecoins in the near future.