Tether CTO Responds as USDT Trades Below $1,00
TL; DR
On 15 June Tether USD depegged to trade at $0.9558, sending panic in the market.
The Tether CTO assured its investors that USDT had enough reserves and liquidity at that time.
Stablecoin depegging occurs when the value of the coin falls or rises from its established position.
Introduction
Although the depegging of Stablecoins rarely occurs they may have devastating effect on the crypto market as that may lead to panic selling. The greatest fear that the various market participants may have is the possibility of price manipulation by certain individuals or groups. For instance, there are times when whales can manipulate the prices of certain cryptocurrencies.
In this article, we discuss the recent depegging of Tether USDT.
Why USDT Trades Below $1,00?
Tether USDT, the biggest Stablecoin by market capitalization, traded below $1.00 on 15 June as a result of an imbalance in Curve’s liquidity pool. Therefore, the market got in a panic as that reminded crypto investors of the turbulent events that include the implosion of LUNA and UST plus the collapse of FTX in 2022.
The USDT, pegged at 1.1 against the United States dollar, traded as low as $0.9958, about 0.4% drop in its price within a short time. Nevertheless, over a long period now, the Tether USDT has been under scrutiny as a section of the market believes that it does not have enough reserves.
Nonetheless, from time-to-time, Tether has maintained its position that it has enough reserves. In the past, it provided audit and assurance reports to back its claim that it has enough reserves for USDT. In fact, it maintains that its reserves are in the form of cash and cash equivalents, with most of them “invested in U.S. Treasury Bills.” However, Bitcoin only constitutes 1.8% of the reserves.
The SEC’s current crackdown on altcoins has resulted in traders and other investors closing some trades. Therefore, Tether USDT and other stablecoins are playing a critical role in facilitating these transactions. In a bid to maintain their investment value some investors are converting their altcoins to Stablecoins, especially USDT.
Imbalance in the Curve’s 3pools
The imbalance in the DeFi liquidity pools on Curve Finance caused the depegging of Tether USDT. Curve Finance’s 3pool consists of three Stablecoins namely Tether USDT, Maker’s decentralized DAI and Circle’s USDC. All these three Stablecoins are pegged against the US dollar at 1.1 ratio.
Read also: Depegging, Bank Runs and Unstablecoins
Curve Finance - Fxprofitsignals
Curve Finance also offers arbitrage opportunities for the three Stablecoins if any of them gains or loses value. This is because Curve Finance is a decentralized exchange where investors can swap like-assets.
Basically, the real cause of the recent USDT depeg is the action of some large wallet investors who dropped Tether USDT in favour of the alternative Stablecoins, DAI and USDC. As a result, the Curve 3pool ended up with more than 50% USDT which signalled a shift in the market sentiment of the Curve Finance liquidity pool users and USDT holders.
In fact, at a certain point, there was $300 million of USDT and about $55 million each of USDC and DAI. Also, the composition of the pool where USDT constituted 73% lastly occurred in 2022 when FTX filed for bankruptcy.
Tom Wan, a research analyst at 21Shares informed Decrypt what was taking place. He said, “By looking on-chain, we can see the selloff is mainly speculative and triggered by arbitrage and short selling of Tether on decentralized exchanges and lending marketplaces.”
Further, he opined, “There is no apparent root cause at the moment. USDT’s liquidity in Curve 3Pool seems to have stabilized at around 70% since Tether’s CTO mentioned that they are ready to redeem any amount.”
Tether CTO defends the stablecoin’s solvencyTether CTO defends the stablecoin’s solvency
Paolo Ardoino, Tether’s Chief Technology Officer, assured the USDT holders that the Stablecoin has enough liquidity and that they can convert it to US dollar at any time. Despite the increased level of selling pressure Ardoino said that the Stablecoin has enough reserves.
Through Twitter Ardoino (@@paoloardoino) said, “Markets are edgy these days, so it’s easy for attackers to capitalize on this general sentiment. But at Tether we’re ready as always. Let them come. We’re ready to redeem any amount.”
On another note, some crypto community members believe that this USDT selling pressure is just temporary. For instance, Scott Melker, a crypto investor commented, “A Stablecoin depeg is not determined by its price on an exchange, but rather by whether you can redeem 1.1 from the source.”
What does depegging mean?
Since we have discussed the recent USDT price fall to $0.9958, let’s delve deeper on what Stablecoin depegging means, its causes and implications.
Stablecoins are cryptocurrencies that are designed to maintain price stability over an extended period of time. Usually, they are pegged against major fiat currencies like the US dollar. However, some DeFi protocols peg their Stablecoins against assets like gold or cryptocurrencies such as Bitcoin and ETH.
The price stability of Stablecoins makes them very attractive to traders and investors. Notably, the main purpose of Stablecoins is to act as a medium of exchange. People mainly use them to maintain the value of their investments or for cross border remittances. Nevertheless, Stablecoins may lose their pegs as a result of different factors which may include price manipulation by greedy investors.
Causes of depegging and the associated examples
There are several causes of decrease in Stablecoins market value such as lack of market liquidity and flaws in their designs.
Market manipulation: Large holders of a specific Stablecoin can manipulate its price by selling a significant amount at once. It becomes worse if many investors sell off the coin such as Tether USDT within a short period. That massive sell off of a Stablecoin may lead to its depegging. In fact, price manipulation refers to any activity which distorts the price of an asset.
Lack of market liquidity: The stability of most Stablecoins depends on their liquidity. In simple terms, liquidity means how easily a cryptocurrency can be converted to fiat currency. If a Stablecoin does not have many buyers and sellers it can easily depeg.
On 11 March 2023 the USDC which is backed by US dollars and treasuries lost its peg as its value plunged to $0.88. This followed the collapse of Silicon Valley Bank (SVB) which was the custodian of some of its reserves. By that time, it was not clear as to how much of the reserves Circle, the issuer of USDC, would recover.
The news of SVB collapse created panic in the crypto market leading to much sell off. Since this occurred over the weekend it was difficult for Circle to handle the high sell off which resulted in USDC’s loss of peg to trade at $0.88.
Flaws in design: If the design of a Stablecoin has inherent flaws it may deviate from its peg. For example, a Stablecoin which is overcollateralized may have some inefficiencies which lead to depegging. Some design flaws for algorithmic Stablecoins can lead them to lose their pegs as well.
At times, a Stablecoin may fail to take into account some external factors that affect its value. In May 2022, Terra USD (UST) was affected due to a bank run. Its design led it to deviate from its peg against the US dollar as it tumbled to a few cents. As a result, the market lost over $60 billion from that loss of peg.
These are not the only coins that lost peg in the history of Stablecoins. Early this year, apart from the USDC, DAI also depegged to as low as $0.897
How to buy USDT at Gate.io
The recent fall in Tether price was only temporary as it has already regained its value. At the time of writing, the USDT price is at $1,00. Therefore, you can buy it at Gate.io. To purchase USDT at Gate,io create and verify your account. Once you do that you go to the Buy Crypto section where you choose how to make your payment. You can pay using credit cards, P2P trading and bank transfer.
Conclusion
On 15 June this year, Tether USDT lost its value to as low as $0.9958. However, it has already regained its peg as it is trading at $1,00. There are also alternative Stablecoins like USDC and UST that deviated from their pegs in the past. Sadly, the UST completely collapsed in May 2022. Market manipulation, lack of liquidity and flaws in design can cause the loss of value of Stablecoins.
