The total stablecoin market cap has been trending downward. This follows several problems the industry faced this year. However, certain coins have seen more downward slides than others.
After the collapse of Terra’s dollar-pegged stablecoin, UST, in May, the stablecoin market cap dropped from around $180 billion.
It is currently hovering around $144.70 billion. While investors developed negative sentiment towards the entire stablecoin market, Tether and USD Coin took the most hit.
But what caused this dramatic downturn?
Tether’s Controversy
As of mid-June, Tether had dipped below $70 billion from above $83 billion, following the UST collapse, the bear market, and USDT’s other minimal problems.
Tether de-pegged from its dollar backing for a few hours during this time.
This de-pegging could be attributed to stablecoin withdrawal being frequent at the time.
There have been initial concerns about USDT’s actual backing. According to Tether's website, all tokens are fully backed by the company's reserves. These include traditional money and cash equivalents.
Tether also backed USDT with illiquid assets and receivables from loans to other parties. However, the company has been trying to fix this by significantly reducing their backings from non-liquid to liquid assets. As of writing, most of Tether’s backing is in cash form.
Since the idea was that the US dollar would back USDT on a 1:1 basis, the claims about its backing raised questions. Although Tether has, over time, become more transparent, UST’s collapse escalated the existing concerns. Some investors who feared a repeat of the earlier stablecoin collapse took to other options.
But these issues only resulted in minimal market cap drops individually. However, paired with the bear market that affected the entire crypto industry this year, the industry witnessed a market-wide selloff among investors.
USDC, on the other hand, saw growth during Tether’s controversy. But, the stablecoin’s crisis has made investors return to Tether, and others.
USDC's Woes
The first cause of USDC's problems is Binance's USDC suspension.
Earlier in September, Binance, the largest cryptocurrency exchange by volume, announced that it would swap the USDC balances of its users for Binance USD (BUSD).
Binance said the conversion will "improve liquidity and capital efficiency for users." However, the conversion was not meant to affect USDT.
USDC's market cap dropped by $9.5 billion following the announcement.
Also, Terra’s collapse stirred negative sentiment towards the entire stablecoin market. Data from Glassnode showed a decline in the USDC supply held by the top 1% of addresses. The supply decreased from its year-to-date high of 93.84% in February to 88.36% in September.
Another factor that accelerated the USDC decline was the Tornado Cash sanction. Due to concerns about money laundering, the U.S. Treasury sanctioned the cryptocurrency mixing service.
Tether refrained from blacklisting Tornado Cash addresses in response to the sanction. But USDC developer, Circle, froze all Tornado Cash-linked wallets. Additionally, the company stopped addresses connected to the mixing platform from using USDC.
Circle’s move showed it was risky to hold USDC. That could have also accelerated the dumping of USDC by whales.
USDC’s losses appear to be the gain of other stablecoin top players like Tether and Binance USD. Although Tether’s market cap is still below $70 billion, it has picked up a few billion since its July low of $65B.
Binance, which also saw a downward trend following UST’s crisis, is also benefiting from USDC’s woes. This is due to its forced conversion of USDC to BUSD in the hyper-competitive stablecoin market.
Conclusion
Crypto users utilize stablecoins for payments and as a store of value. As a result, they should maintain their 1:1 peg to their underlying asset. If they fail at these, they defeat the purpose of their use. Again, a downward trend is inevitable if investors have reasons to lose confidence in the industry.
From the above, the total stablecoins market cap downward trend is not unfounded. It is a no-brainer that the UST collapse instigated the fall. But Tether and USDC also made their beds.
