USDC and Binance stablecoin

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USDC and Binance stablecoin

Key facts:
  • A flow of capital is observed that went from USDT to other stablecoins.

  • Tether burned some of USDT’s currency in order to apparently stabilize its price.

Tether (USDT) has recently had a 10% drop in its market capitalization. The reason is that the company behind this stablecoin has burned more than 8 billion USDT at the end of last week, apparently to maintain its parity with the US dollar.

As CriptoNoticias reported, on May 12 each USDT was worth USD 0.95. The fall of the algorithmic stablecoin terra USD (UST) also put confidence in USDT in check and its users went massively towards other stablecoins that had slight rises in their price in those days.

Just as the market capitalization (i.e., the value of all its coins in circulation) of USDT decreased, that of stablecoins such as USD coin (USDC) and Binance USD (BUSD) increased. It can be thought that the money of USDT users migrated towards those other currencies.

USDC, currency developed by the company Circle, experiences one of the largest increases, close to 10%. It went from USD 48 billion in capitalization to more than USD 52 billion.

BUSD, developed by the company Paxos and financed by the Binance exchange, also saw its capitalization rebound from USD 17 billion to USD 18 billion (almost a 6% increase).

It is worth contextualizing that capitalization rises and falls occur within a market that has been lateralized in the last 3 months.

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Stablecoin market capitalization.
The market cap of stablecoins is around $164 billion, with USDT holding the largest share at $74 billion. Source: CoinGecko.

It is worth contextualizing that capitalization rises and falls occur within a market that has been lateralized in the last 3 months.

How the market capitalization of stablecoins oscillates

In the traditional cryptocurrency market, such as bitcoin (BTC), the market capitalization fluctuates according to the price of the crypto asset. For stablecoins, where their price is always “stable” (usually equal to $1), it varies depending on the issuance or burning of coins.

In the case of coins like USDT, the company behind this cryptocurrency, Tether, is the one who issues new coins and puts them into circulation. At the same time, it is also the one who decides to burn, or remove from circulation a certain amount.

The issuance and burning of coins, among other things, responds to the law of supply and demand to maintain parity. If demand drops, the company can burn coins to avoid an oversupply that causes its price to drop.. If demand increases, more coins must be issued to avoid a price rise above the dollar.

The recent USDT case, in which close to 8 billion coins were burned, is not the first time it has happened. In the past, the company has used this same strategy to maintain parity with the US dollar, a fact that was reported at the time by CriptoNoticias.

In the case of USDC, the price increase responds to an overdemand, therefore, new coins had to be issued to reduce the price and bring it back to the dollar.

a distrustful market

The synchrony between the debacle of UST and the loss of parity of USDT, produced shortly after, points to something in common: mistrust.

The UST case marked a before and after in the stablecoin market. It was shown that the algorithmic system that sought to keep UST at USD 1 was not effective. A downward spiral ensued, with investors selling their coins to avoid further losses, causing the price to drop further.

USDT, meanwhile, also has a questionable reputation. It has been involved in several controversies that led Tether to even be sued by the New York Prosecutor’s Office, for its reservations. A US Republican Congressman has even called USDT a “ticking time bomb”, by not being able to clear the doubts about their reservations.

As shown by the Tether.to portal, only 4.25% of all USDT reserves (more than USD 74 billion) are deposited in cash. This means that only a small part of all USDT issuance can be converted 1:1 in US dollars directly. The rest is deposited in bonds and other types of financial assets, including other tokens as well.

Tether is not alone in using this backup method. As reported by CriptoNoticias, USDC also does not have a backing that allows 100% convertibility into cash dollars. As reported by this medium, about 60% of the reserves of this stablecoin were deposited in cash. Quite a big difference over USDT’s 4.25%. This type of doubt generated by backups has caused the Tether market to falter.

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