Supply of USD-Pegged Currency Shrinks
Blockchain and cryptocurrency are now mainstays in financial markets and initial coin offerings (“ICO’s”) are giving companies and firms a new avenue to raise capital. Within the cryptocurrency market, “stablecoins” offer a unique form of cryptocurrency to investors. Stablecoins are cryptocurrencies pegged to real-world assets such as the dollar (“USD”) or gold. (Oscar Williams-Grut, Business Insider). Breaking from the volatility seen in other cryptocurrency markets, stablecoins are an attempt to combine the benefits of digital transfer offered by cryptocurrency with the stability of mainstream currency. (Oscar Williams-Grut, Business Insider).
Recently, the pricing of stablecoins has not reflected its stability, as some stablecoins are trading below their dollar-pegged values. (Josiah Wilmoth, CCN; Oscar Williams-Grut, Business Insider). Tether, one of the largest stablecoins in the market, achieved dollar parity again and is trading at an even 1:1 ratio. But whether or not the trading price will remain at or above $1.00 with the emergence of competitors in the market remains to be seen. (Josiah Wilmoth, CCN).
Tether has dominated the market and remains the most liquid stablecoin with more than $2.2 billion in daily turnover. (Josiah Wilmoth, CCN). But Tether, which is touted as being backed 1:1 by USD, spent almost half of October trading below $1.00. (Josiah Wilmoth, CCN). Tether touched the $1.00 mark again at the end of October, signaling the end of a discount period for stablecoin. (Josiah Wilmoth, CCN). The price dipped to $0.85 in mid-October, and the price moving back to $1.00 at the end of October caused the redemption of hundreds of millions of Tether tokens and depleted Tether’s market circulation supply and market cap. (Josiah Wilmoth, CCN). In October alone, Tether holders redeemed $890 million in tokens. (Josiah Wilmoth, CCN). The number of non-circulating tokens in the Tether Treasury became so large the firm had to destroy 500 million of them, leaving the rest in the treasury to account for new capital flows. (Josiah Wilmoth, Tether Destroys $500M, CCN).
Whether or not Tether will raise new capital remains to be seen as competition in the stablecoin market emerges. TrueUSD, USD Coin, Paxos Standard, and Gemini Dollar have all emerged as dollar-pegged stablecoins—adding competition to the market. (Josiah Wilmoth, CCN). While Tether remains the largest and most liquid, investors are hesitant to pay $1.00 for cryptocurrency tokens that are worth less than that. Until the market for Tether tokens stabilizes and they can demonstrate the ability to consistently sustain its 1:1 USD peg, raising new capital may be challenging. Cryptocurrency markets around the world will continue to watch Tether and other stablescoins as their token price flutters around the $1.00 mark.