Crypto investors avoid Tether for the USD coin during periods of market turmoil

The collapse of a $32 billion crypto exchange put the spotlight on stablecoins, the $145 billion lubricant that greases the entire digital asset industry. In uncertain times, stablecoins represent a safe harbor for investors to park their funds and weather the storm. However, stablecoins are not identical and their popularity may depend on the financial climate.

One asset that appears to be capitalizing on the current turmoil is USD Coin (USDC
), a dollar-based digital asset issued by Boston-based Circle Financial, which has $42 billion outstanding. The stablecoin has seen inflows of more than $2 billion since the FTX exchange began crashing around November 7, largely due to its reputation as a transparent and trustworthy asset.

“The FTX collapse raises the specter that if you really want the most reliable version of these innovations, you ultimately need to be your own player, agent, and custodian,” says Circle chief strategy officer Dante Disparte. “We have seen a flight to safety, a flight to quality, and USDC growth.”

If USDC is gaining market share, another asset must be losing it. Right now, that appears to be tether (USDT
), the largest stablecoin by market cap, at $67 billion. Over the past week, USDT has lost approximately $3 billion in capitalization. This drop coincided with the active briefly falling almost 1% from its peg on November 10. While the drop may not seem significant, decoupling can be chilling for investors, especially in the current climate. Despite the temporary loss of its peg, USDT’s first-mover advantage over USDC combined with its wide acceptance on exchanges globally fuels its popularity as a trading instrument.

However, investor uncertainty persists regarding the solvency of USDT. The company has not conducted a definitive audit of its reserves and is resisting attempts to open its books to outside observers. The company has issued periodic audits detailing its assets and liabilities, always with the aim of demonstrating solvency. This year it recruited top-five accounting firm BDO Italia to polish reliability and launched its Q3 certification last week. That report indicated that the company had at least $68 billion in assets against $67.8 billion in liabilities (representing all USDT in circulation). These assets include a mix of cash and cash equivalents mixed with smaller percentages of illiquid investments. By contrast, Circle only invests cash assets and US Treasuries. Additionally, it publishes the exact bonds held through the Cusip number and maturity date on a monthly basis.

Interestingly, the FTX crash is not the first time investors have dumped USDT for USDC. A similar trend occurred in early May when the terraUSD stablecoin and its sister token luna crashed, destroying $45 billion in value. On May 12, USDT briefly unpegged, falling to 95 cents, and short sellers were trying to take advantage of investor fears to push the asset lower still further. In the days that followed, USDC gained market share at the expense of USDT.

Despite these trends, it may be incorrect to say that USDC is on track to outperform USDT. In May, the latter handled $16 billion in redemptions, meaning the tokens were exchanged in national or fiat currencies, without issuance. It processed $3 billion smoothly this week.

Once the market stabilized during the USDT summer, it recouped most of its loss against USDC.

It is worth noting that USDT and USDC serve very different groups. USDT is seen primarily as a tool for traders, while USDC is more active in decentralized finance and is marketed more as a tool for traditional banks.

Disparte noted that 75% of all USDC is kept off exchanges. This statistic may help allay fears that a large chunk of tokens could be at risk of being seized by exchanges if those assets have been irresponsibly lent, but it also points to the fact that the USDC is still searching for its true value. product-market. in the world of banking and corporate payments. By contrast, USDT, which has $18 billion of its assets on exchanges, which is about a third of its market capitalization, is a linchpin of the trade.

These different value propositions could place upper limits on how much USDC could replace USDT absent a complete collapse of confidence in USDT.

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