Crypto Investors Shun Tether For USD Coin During Periods Of Market Turmoil

The collapse of a $32 billion crypto exchange placed a spotlight on stablecoins, the $145 billion lubricant greasing the entire digital-asset industry. During times of uncertainty, stablecoins represent a safe harbor for investors to park their funds and ride out the storm. Stablecoins are not identical, however, and their popularity can depend on the financial climate.

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

“The collapse of FTX raises the specter that if you really want the most fundamentally trustworthy version of these innovations, you ultimately have to be your own actor, agent and custodian,” says Circle Chief Strategy Officer Dante Disparte. “We have seen a flight to safety, flight to quality and a growth of USDC.”

If USDC is gaining market share, another asset must be losing it. Right now that appears to be tether (USDT
USDT
), the largest stablecoin by market capitalization, at $67 billion. Over the last week, USDT lost approximately $3 billion in capitalization. This drop coincided with the asset briefly falling almost 1% from its peg on November 10. While the drop may not seem significant, de-pegs 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 across exchanges globally buoys its popularity as a trading instrument.

However, investor uncertainty surrounding USDT’s solvency remains. The company has not produced a definitive audit of its reserves, and it resists efforts to open its books to outside observers. The company has released periodic audits detailing its assets and liabilities, always purporting to demonstrate solvency. This year it enlisted top-five accounting firm BDO Italia to burnish trustworthiness and released its Q3 attestation last week. That report indicated that the company had at least $68 billion in assets against $67.8 billion of liabilities (representing all USDT in circulation). These assets include a mix of cash and cash equivalents combined with smaller percentages of illiquid investments. By contrast, Circle only invests assets in cash and U.S. Treasuries. Additionally, it publishes the exact bonds held on a monthly basis down to the Cusip number and maturity date.


Interestingly, the FTX collapse is not the first time that investors cycled out of USDT for USDC. A similar trend occurred in early May when the stablecoin terraUSD and its sister token luna collapsed, destroying $45 billion in value. On May 12 USDT briefly de-pegged, falling to 95 cents, and short sellers were trying to play on investor fears to push the asset down further. In the ensuing days USDC gained market share at USDT’s expense.

Despite these trends it may be inaccurate to say that USDC is on course to overtake USDT. Back in May the latter handled $16 billion in redemptions, meaning tokens were exchanged into national, or fiat, currencies, without issue. It processed $3 billion without issue this week.

Once the market stabilized over the summer USDT, recouped most of its loss versus on USDC.

It is worth pointing out that USDT and USDC serve vastly different constituencies. USDT is seen primarily as a tool for traders, while USDC is more active in decentralized finance and marketed more as a tool for traditional banks.

Disparate pointed out that 75 percent of all USDC is held off of exchanges. This statistic may help calm fears that a large portion of of the tokens could be at risk of forfeiture by exchanges if those assets have been lent out irresponsibly, but it also points to the fact that USDC is still searching for its true product-market fit in the world of bank and corporate payments. By contrast, USDT, which has $18 billion of its assets on exchanges, good for about a third of its market capitalization, is a linchpin of trading.

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