Competition in the stablecoin market is heating up, and every pundit has their own theory on what's driving it. Tether invented the concept of a stablecoin and for many years USD₮ commanded almost the entire stablecoin market. However, like any vital innovation, success brings copycats.
Many other companies have developed their own stablecoins using Tether’s model (full-reserve stablecoins); some of these have even gained a meaningful amount of traction. Other companies have tried to develop algorithmic stablecoins (UST/Luna) which have almost failed.
Recently market observers have noted that Tether’s competitors have narrowed the gap in total marketcap between their stablecoins and USD₮. While it is true that as a percentage of the total circulating supply of stablecoins USD₮ commands a smaller percentage of the total market than it once did, this doesn’t tell the whole story.
This article will explore several other ways to evaluate the adoption of various stablecoins apart from total marketcap/circulating supply and discuss why marketcap is a limited tool for assessing success.
Total Trading Volume
For stablecoins, marketcap simply measures how many coins have been issued. If those coins are fully reserved like USD₮, it shows how much total collateral has been deposited with the issuer.
There are many ways a stablecoin issuer can amass collateral that does not translate into proportionally increasing usage of that stablecoin. To get a sense of how much actual adoption and utilization a stablecoin has, one can examine trading volume against marketcap.
In the snapshot of the last 8 days of trading volume for USD₮, it is apparent that USD₮ trades approximately its entire marketcap of $66B of coins each day. USD₮’s robust trading volume shows that not only is USD₮ highly liquid, it is also highly utilized.
Let's compare USD₮s liquidity to Apple stock (APPL), one of the world's most liquid and widely traded securities. At the time of publishing, APPL has a 65-day average trading volume of 91.73M. At an average share price of $150 a share, this represents $13.6B of trading volume per day. Valued at roughly $2.5 Trillion, Apple trades around .5% of its total marketcap per day.
For USD₮ to have a daily trading volume that is roughly equivalent to its entire market cap is a tremendous accomplishment and display of deep liquidity and utilization.
Let's compare USD₮’s daily trading volume to that of its largest competitor, USDC.
At a glance, two things are immediately apparent:
1) USDC’s daily trading volume is roughly 10x lower than USD₮’s on average
2) USDC’s daily trading volume as a percentage of its own total supply is roughly 12%
While USDC’s marketcap has grown, its daily trading volume has lagged its marketcap growth significantly. In comparison, USD₮ markets are significantly more liquid and widely traded.
Additionally, beyond total trading volume, USDC trades a much smaller percentage of its own total supply than USD₮ which is indicative of less demand for active usage of the asset.
Furthermore, looking back at these same metrics for USDC during January 2021, we can see that while the marketcap of USDC has grown close to 10x over the 1.5 years, its trading volume has only grown a fraction of that.
It is clear that growth in marketcap has far surpassed the growth of actual utilization for many of USD₮’s competitors.
Market Comparison
Breaking down daily trading activity even further, we can examine what actually makes up the composition of each stablecoin's volume.
Looking at USD₮’s trading volume for July 27th, 2022 it is clear that USD₮ is mostly traded against other digital assets (BTC, ETH). Trading USD₮ against other stablecoins only makes up a small percentage of USD₮’s total trading volume.
Comparing that against USDC, it is immediately apparent that USDC’s largest sources of trading volume actually come from trading it against other stablecoins. In fact, trading USDC against USD₮ is the largest and most liquid market for USDC! Furthermore, USDC conversions to fiat currencies are another major source of volume.
What could explain the prominence of stablecoin to stablecoin trading for USDC? One explanation is that users convert to USDC to convert capital into the fiat banking system rather than to use within the cryptocurrency ecosystem.
If this was the case, we would expect to see BUSD used mainly to trade against other cryptocurrencies (BTC, ETH) instead of against other stablecoins/fiat currencies.
This is precisely what we can observe. BUSD is mainly traded against BTC and ETH. Only 3.37% of its trading volume on the day sampled was against USDC and while close to 10% was against USD₮, that can be explained by USD₮’s broad acceptance in many cryptocurrency ecosystems.
On-Chain Comparisons
Finally, we can examine the differences between USD₮ and its competitors from an on-chain perspective.
USD₮ has 4,495,813 unique addresses holding and using USD₮ on Ethereum.
USD₮ has 15,039,779 unique addresses holding and using USD₮ on Tron.
USD₮ has 398,045 unique addresses holding and using USD₮ on Solana.
USDC has 1,482,232 unique addresses holding USDC on Ethereum.
USDC has 355,304 unique addresses holding USDC on Tron.
USDC has 1,463,179 unique addresses holding USDC on Solana.
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BUSD has 3,766,168 unique addresses holding BUSD on Binance Smart Chain.
BUSD has 120,777 unique addresses holding BUSD on Ethereum.
This doesn't capture every chain that either USD₮ or USDC is used on, but it lists the major ones with high usage.
Assuming each address is a unique user this demonstrates that USD₮ has one user for each $3,303 of marketcap, USDC has one user for each $16,426 of marketcap, and BUSD has one user for each $4,561 of marketcap.
How has the Tether Short Thesis Fared?
Tether wrote last month on the flaws in how various hedge funds have constructed their short thesis. Hedge funds saw USD₮ as a “risk-free” way to short the crypto markets.
In reality, many of them piled into USD₮ shorts during a period of major liquidations in crypto markets that saw USD₮’s exchange price (which is completely separate from the ability to redeem one USD₮ for one US dollar) briefly trade below a dollar.
As USD₮ is now trading above one dollar, they not only lost money as USD₮’s exchange price recovered but most of them have paid funding costs every day to maintain their short position.
As cryptocurrency markets have stabilized and the black-swan liquidations of major crypto firms have subsided, USD₮ has both traded above a dollar and USD₮’s marketcap has increased by over half a billion dollars.
This lends further credence to the notion that people use USD₮ to participate in the cryptocurrency ecosystem, and they use USDC to exit it.
Tether Maintains its Leading Role
The utility of stablecoins is growing, which is good for the industry and for adoption. While we saw USDC’s market cap increasing, their volume remains only 1/10 that of Tether. Additionally, at the time of publication USDC’s marketcap has been decreasing again while USD₮ has grown.
There is also a clear difference in the viability of our products. Tether is currently in a position of power stemming from its concrete relationship with regulators and law enforcement around the world, and supported by a risk management approach that has been battle tested especially in the last two months. Its secure and liquid portfolio which is now predominantly made up of US Treasuries has created the framework for a profitable business model that will ensure the longevity of the company. USDC on the other hand, seems to be built on a non-profitable business model which puts into question the sustainability of its product.
This is something that could potentially raise red flags with regulators down the road. Tether is on a mission to drive financial inclusion in a useful way and not on being a replacement for dollars used by Wall Street. It is dedicated to becoming a useful currency for not only the digital asset industry but emerging markets globally. The sheer scale of the integration of USD₮ into the financial plumbing of the global financial markets is an order of magnitude greater than its nearest competitor and speaks volumes about the confidence the industry and all of its users have in USD₮.
Update on Reserves
Tether continues to deliver on its commitment to reducing its commercial paper holdings.
Tether’s portfolio holds no Chinese commercial paper and as of today, its total commercial paper exposure has been reduced yet again to a mere ~3.7B (from 30B in July 2021) with plans to further decrease to ~200M by the end of August 2022 and to zero by end of October/early November 2022.
Finally…
Fortune magazine recently ran a story on USDC and Tether, and reached out to Tether for a comment on the article. Tether submitted fact-based comments that were left out in the final publication. Fortune seemed to ignore basic facts and questions that should have been asked of our competitors.
For example, how does that stablecoin aiming to maintain stability, safety and reliability for its community, incur an $800 million dollar loss?
Hopefully the questions raised in this blog will cause truth-seeking publications to explore these issues.
