The Biggest Winner From The Crypto Crash Takes A Hard Hit After BTC Price Jumps

The price of bitcoin has jumped above $7,000, recovering more than 90% of its value since falling to $3,850 in mid-March.

As the price of top cryptocurrencies is back to surging the activity on the stablecoins is decreasing. As per the data provided by crypto analysis company IntoTheBlock,

“The number of large transactions (>$100k) for Tether dropped from 1.65k txs on April 2, to only 36 txs yesterday.”

Source: TradeBlock – Tether large transactions

For the past few weeks, while cryptocurrency prices have been crashing, fiat pegged Tether (USDT) risen to the number one spot since the coronavirus pandemic hit global markets. Up until the beginning of this month, Tether’s market capitalization increased by 38%, about $2 billion while at the same time the world’s leading cryptocurrency shrunk 37%.

Unencumbered dollars outside of the financial system

As we reported, the lack of liquidity in the global markets forced investors to sell everything they could get their hands on and jump into cash. In the crypto space, the flight to safety for many has been in these stablecoins, where they parked their money and waited on the sidelines to jump back.

The popular stablecoin Tether (USDT) is backed by USD and offers a seamless way to do transactions with little price volatility. Nic Carter, co-founder of crypto data site Coin Metrics told Bloomberg,

“The world has been piling into dollars, and it just so happens that stablecoins are among some of the most unencumbered dollars you can obtain, outside of the financial system.”

Each USDT is roughly equivalent to $1, however, there has been much controversy around the stablecoin having the appropriate reserve to back its supply. Last year, it became known that Tether is only 74% backed by fiat reserves. Later on, the Hong Kong-based company behind Tether changed its reserves structure stating, it may also,

“include other assets and receivables from loans made by Tether to third parties.”

Over the past years, Tether has also started issuing Tether on a number of different blockchains viz. Ethereum, Tron, EOS, Algorand, and Liquid. Carter said,

“Anecdotally, some non-U.S. traders have told me that they actually prefer the more lightly surveilled Tether because they feel that it’s less likely that their coins get arbitrarily frozen for violating the terms of service.”

More Tether means increased volatility

For quite some time now, Tether and its sister company, crypto exchange Bitfinex have been in legal cross-hairs. Last year, the New York Attorney General accused the companies of hiding a loss of about $800 million. They are also facing lawsuits for manipulating the price of Bitcoin during the 2017 bull run.

Currently, Tether is asking its users to adhere to KYC requirements following the international and government mandates. Paolo Ardoino, CTO at Tether and Bitfinex said,

“We can’t predict if the trajectory will remain the same, but the current interest gives us confidence in further steady growth of Tether’s monetary base.”

But Tether wasn’t the only one that benefited from the recent deep rout. Other stablecoins like USD Coin (USDC) also grew 60% in the past month. However, as more investors get into fiat-backed coins, this could increase the volatility of the crypto market, said Sid Shekhar, co-founder of TokenAnalyst.

“The more Tether there is in existence (and specifically the more sitting on exchanges), the more there is opportunity for sharp swings in price as traders can immediately buy in (or sell out) as opposed to the slower process of converting sending and fiat into crypto,” said Shekhar. “This naturally lends itself to increased volatility.”

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