Stablecoins have become the focus of attention recently. On the one hand, during the sharp drop in currency prices on March 12, stablecoins generally had an excessive premium, especially USDT off-market as high as 8-10%. In 18 days in March, it issued 19 times, with an additional issuance of 1.3 billion U.S. dollars and an increase of 20% of the market value. The total market value has reached 6.2 billion U.S. dollars, ranking fourth, second only to Bitcoin, Ethereum and Ripple. The daily transaction scale has surpassed Bitcoin in an all-round way, and is close to the sum of the daily transactions of the top three currencies.
It has to be said that stablecoins have profoundly changed the landscape of digital currencies.
Aiming at the status quo of stablecoins and their impact on the industry in the future, Uncle Kai has been interviewed by the media many times recently and sorted them into the following 9 issues about stablecoins.
1. Why does the stablecoin USDT have a high premium to the RMB?
In the over-the-counter market, there is a big premium for buying USDT with RMB. Especially in the extreme market on March 12, there was even a super high premium of more than 15% for buying one USDT at RMB 8.35. There are three main reasons for this premium :
1) Liquidity needs:When the epidemic caused panic and a liquidity crisis, currency holders scrambled to sell their currencies and exchange them for stable and liquid USDT, so a large demand for USDT broke out.
2) Derivatives margin requirements:When the market fluctuates greatly, many derivatives contracts touch the liquidation line, requiring holders to increase the USDT margin, so the demand for USDT surges.
3) Hedging function:Many off-market users, frightened by the turmoil in the world, prefer to exchange their legal currency for USDT stable currency, which is stable and can be circulated quickly around the world, mainly for hedging and rapid circulation.
The above three points can explain the premium of USDT to all fiat currencies.However, the high premium of the RMB reflects the particularly strong demand for USDT by Chinese domestic users:This is mainly due to domestic foreign exchange and capital controls, and the renminbi cannot be freely converted. The second reason is that the activity of RMB trading in China has increased greatly: the financial market plummeted this time, and domestic A-shares and RMB assets were relatively less affected. Therefore, the demand for buying bottoms from RMB into the currency circle increased greatly.
However, even after the market crash has passed, the RMB-denominated USDT still maintains a relative premium. In fact, this principle is the same as the over-the-counter RMB’s premium to the US dollar. This is due to the long-term market structure (such as foreign exchange control) rather than short-term market fluctuations.
2. Is it possible for the brick-and-mortar arbitrage to bring the USDT RMB premium back to the normal level?
In the case of free exchange and low transaction costs, brick-and-mortar arbitrage can greatly reduce or even smooth out the premium. However, at present, the domestic regulation of digital currency transactions and large-amount RMB transfers is becoming more and more strict. Large OTC merchants often use hundreds of bank cards in turn, and they cannot withstand the loss of frequent account freezing. Difficulties in payment channels have caused a substantial increase in the cost of moving bricks and arbitrage, thus forming a dynamic balance of USDT with a high premium.Moving bricks and arbitrage cannot smooth out the premium caused by this long-term market structure.
3. Does the high premium affect the deposit? Will the high premium continue?
Yes, high premiums curb deposit demand. OTC itself is a very market-oriented and decentralized transaction structure, and the price will be adjusted according to demand, that is, the high premium on OTC will inhibit the demand for deposits. From this point of view, there is a certain market basis for the stablecoin issuer to issue additional stablecoins, and the additional issuance itself is also conducive to the smooth operation of the market.
It is difficult to judge whether the high premium will continue, because the high premium is influenced by long-term market structure factors and short-term market fluctuation factors. At least in the short term, long-term and short-term factors have not seen a change trend, and the high premium will remain for a period of time .
4. What impact will the continuous issuance of USDT have?
The speed of USDT issuance is astonishing. In 18 days in March, USDT was issued 19 times, with an additional issuance of 1.3 billion US dollars. The market value has reached 6.2 billion US dollars, accounting for 20% of the total issuance. It currently ranks fourth in terms of total market value, and its daily trading volume exceeds that of Bitcoin. The daily trading volume is close to the sum of the top three currencies.
Objectively speaking, where there is demand, there is supply, and there is no problem with additional USDT issuance. The crux of the matter is: Does the additional issuance of USDT meet the real demand? In other words, is there any water in the USDT additional issuance? This is the core issue.
Since Tether, the issuing company of USDT, is quite mysterious and unsupervised, the 1:1 USD margin does not know which bank in a small European country exists, and does not publish financial statements. Even if it has been published, there is no credible audit. How much water there is we don't know. We can only hope with the greatest goodwill that Tether will not cheat, be greedy, manipulate currency prices, misappropriate deposits, or fail to invest. All in all, we can only expect them to be as perfect as saints.
Of course, other stablecoins have also been issued in large numbers. According to data from the third-party organization CoinMetrics, the issuance of USDT increased by 51.5% in March, that of USDC increased by 55.4%, that of PAX increased by 26.5%, and that of HUSD. Up 74.7%. The issuance of the top four stablecoins by market capitalization all saw a sharp increase in March.
Under the large increase of all stablecoins (weighted average 18% of the total market capitalization), the direct effect is to push up the prices of all currencies based on stablecoins. Therefore, assuming other conditions remain unchanged, the main driving force for the rise in currency prices currently comes from the issuance of stablecoins.
You can do a simple arithmetic problem. If the overall stablecoin is falsely issued by 30%, that is to say, the 10 billion stablecoin actually only has 7 billion US dollars in reserves, then although the transaction price of Bitcoin today is 7000 USDT, it is not worth 7000 USDT in theory. US dollars, but 4900 US dollars. The price difference in the middle is supported by the credit of Tether, but unfortunately many people cannot see the truth behind the price.
5. The issuing company of USDT has been facing a crisis of trust, but the market share of USDT has not been affected too much. Why?
This has both historical and practical reasons:
Historically, USDT was the first stablecoin to appear. Before September 2018, without any other stablecoins, USDT alone occupied 95% of the stablecoin market share. Later, due to regulatory pressure, formal banks’ refusal to provide services, and some judicial disputes, coupled with the rise of other stablecoins, by the beginning of 2019, USDT’s share had dropped to 70%, and it was still absolutely dominant, but its relative share dropped a lot. Since 2019, USDT has blossomed in many places, actively regaining lost territory, and has continued to issue additional shares in multiple public chains BTC, ETC, EOS, TRC, (OMNI-USDT, ERC20-USDT, TRC20-USDT and EOS-USDT), regaining More than 80% of the stablecoin market share.
In the face of USDT, a stablecoin that has a first-mover advantage, occupies an absolute dominant position, and has formed user habits, even if many exchanges have their own stablecoins, they have to "conform to user habits" to use USDT on a large scale. For example, why the UK drives on the left while other countries drive on the right? This is the force of habit and it is very difficult to shake.
In addition to the reasons of historical habits, in reality: the absolute amount of USDT is 80%, crushing 20% of the other 39 stablecoins. Quick transfer. These realistic factors have become the main reasons for creating the stablecoin overlord USDT.
The last very important practical reason is that USDT can still be exchanged relatively stably at least for now. After a long time, this makes worried people feel paralyzed and fluke, thinking that they will not be the last one to take over.
6. With the increase of legal currency trading pairs, will USDT lose the market?
At present, there is no trend that fiat currency trading pairs can replace USDT.Exchange legal currency for digital currency (such as Bitcoin), skip USDT, and theoretically replace stable currency, but in reality, as long as you encounter legal currency, you need to deal with banks, and you need to deal with compliance and regulatory issues, so the procedures are complicated and costly. Therefore, the trading volume of fiat currency trading pairs is unlikely to replace USDT at present, especially in the environment where regulators around the world are still cautious about digital currencies.In other words, USDT's non-compliance is not supervised, which has contributed to its dominance.
7. Is the additional issuance of stablecoins related to the halving market?
Uncle Kai personally thinks that even if there is a halving market, it is seriously overestimated. However, from another perspective, from the perspective of the stablecoin issuer, it will definitely advocate the halving market.
Because only when the market rises, there will be a demand for stable coins, and it will be logical to issue more stable coins. Just like the issuance of fiat currency will cause inflation, a large number of additional stablecoins will naturally increase the price of bitcoin's stablecoins, creating the illusion of halving the market.
The current epidemic has caused Bitcoin to plummet to the bottom. Many people expect a rebound in the market. Coupled with the planned halving of the market, this is a once-in-a-lifetime opportunity for stablecoins to be issued. This also explains why all stablecoins, including USDT, are on a large scale. additional issue. It's a pity that the stable currency USDT is not transparent, we can't verify how many overissues, we can only "good faith" think that 1:1 USD issuance. With a high probability, this premise is not true, so the bitcoin price we see is not real, but an inflated stablecoin price.
8. Under what circumstances will USDT explode?
The thunder of USDT is the devil in the hearts of all people in the currency circle. Everyone hopes that this devil can be put in a vase and never be released, otherwise the digital currency industry will be shaken.
There are three possibilities that USDT will explode
1) Dig your own grave and detonate slowly:From quantitative change to qualitative change, if USDT is issued at the current crazy speed, it will soon wear out its only remaining credit, and users will instinctively hold less USDT and exchange it for US dollars, or other stable currencies, or hold Bitcoin. And so on, constantly weakening its position, until a certain day reaches a critical point, USDT cannot be redeemed for US dollars at a rate of 1:1, the holders run on it, the value is instantly depreciated, and finally the tragedy ends.
2) Replaced by a strong competitor:The market urgently needs a stable currency with strong credit endorsement, transparent, open, regulated and easy to use. For example, the US dollar version of Libra, which is currently brewing, is a potential future overlord of stable currency that meets everyone's needs. The emergence of this stable currency will soon replace USDT. The process is relatively slow, but it will inevitably explode in the end.
3) The supervision takes drastic measures and directly detonates:USDT is notorious in the eyes of supervision, and the U.S. government is unwilling to hand over the power of the "Federal Reserve of the digital currency industry" to a mysterious company outside the legal system. Any law enforcement actions can lead to the destruction of USDT.
In the most extreme case, the three situations occur at the same time. For example, after the large-scale spam of USDT, the U.S. regulators carry out targeted law enforcement actions against USDT in order to support the USD version of Libra. The possibility of such an extreme situation is very low, but after experiencing so many black swans in 2020, who can guarantee that this is absolutely impossible?
9. What is the overall impact of stablecoins on digital currencies?
The impact of stablecoins on the digital currency industry is mixed.
It is undeniable that the issuer of the stable currency assumes the responsibility of the central bank of the digital currency industry: unifying the valuation and measurement standards of digital currency, greatly improving the convenience of transactions, reducing transaction costs, and achieving a prosperous currency trading market and derivatives market. Let the digital currency liquidity have a buffer reservoir, and it is possible to manage the liquidity reservoir. At the same time, stablecoins have gradually replaced some of the functions of Bitcoin, becoming a treasure trove of safe-haven funds and the best tool for transferring liquid assets.
However, the stable currency represented by USDT is not supervised, not open and transparent, and has grown into a giant invisible overlord in the currency circle, with unrestrained additional issuance, and uncontrolled influence will eventually be used to manipulate currency prices.
Reality 1: The entire digital currency industry has been firmly tied to the USDT chariot.
Reality 2: No one in the world can resist the temptation of "a string of numbers on the keyboard can be directly turned into bank deposits".
The combination of these two facts is both embarrassing and creepy.
