Tether (USDT) has long been accused of manipulating the price of bitcoin, especially during the bull rally of 2017. Tether and its sister company crypto exchange Bitfinex are actually fighting a suit alleging such claims.
Now, as per the latest column, there is “no systematic evidence that stable coin issuance affects cryptocurrency prices.”
The writers of the article, Richard K Lyons, Chief Innovation & Entrepreneurship Officer at UC Berkeley and Ganesh Viswanath-Natraj, Assistant Professor of Finance at Warwick Business School, points out how the evidence states stablecoins “consistently perform a safe-haven role in the digital economy.”
As per the significant premiums recorded during the COVID-19 panic in March, it was seen that stablecoin issuance “endogenously responds to deviations of the secondary market rate from the pegged rate.”
Over the last two years, stablecoins have risen dramatically, the total trading volume of BTC/USDT actually exceeded the volume of BTC/USD in 2019.
In 2020 especially, the growth has been off the chart, with the total market cap of stablecoins surpassing $9 billion. A vast majority, about $7.5 billion of this is from the popular stablecoin Tether (USDT).
“That stable coin use should be growing so rapidly is consistent with their ‘raison d’etre’ – to solve the store-of-value problem by pegging their value to the US dollar,” reads the article.
To talk about that creation of Tether, the authors explain that every Tether is issued “in principle” 100% backed by a dollar deposit. It is created when an investor deposits dollars into Tether's account, creating an equivalent supply of USDT introduced in circulation.
Before 2018, nearly all the Tether was immediately distributed to Bitfinex and other exchanges. But after that, Tether Treasury started retaining a fraction of total Tether in circulation, having the capacity to sell Tether for dollars if the stablecoin’s price is above parity in the secondary market.
The authors found “no significant effect” of Tether flow to the secondary market on major non-stable crypto prices. Although results do not preclude the possibility that price manipulation occurred there has been no systematic effect either.
The paper further argues that stablecoins are used as a vehicle currency and dependent on other factors such as an incentive to arbitrage deviations of Tether’s market price from the peg. The analysis found “strong evidence that one cent increase in the dollar price of Tether results in $0.3 billion to the market.
Another support factoring to Tether flows is the role of the stablecoin as a vehicle currency is that “in periods of risk, some investors will choose to exchange into a better store of value.”
Lyons and Natraj point out that portfolio rebalancing toward Tether has minimal intermediate costs. It has been seen during the period of collapse in the bitcoin market in Jan-Feb 2018 and recently in 2020 during the COVID-19 panic that there have been premiums in Tether and other stablecoins and “a significant rebalancing of portfolios away from Bitcoin and towards Tether.”