Bitget Annual Briefing 2022-23: The Rational Path Ahead (Part 2)

A guide on how to embrace the year of 2023

Fiat-Backed Stables Are Still Tremendously Ahead

With USDT and USDC having secured their places in the Top 10 cryptocurrencies by market capitalisation since 2021 (see Bitget Annual Briefing 2022-23: The Rational Path Ahead (Part 1)), USD-pegged stablecoins are for sure dominating the stablecoin market. The aggregated market capitalisation of 10 biggest stablecoins - Tether (USDT), USD Coin (USDC), Binance USD (BUSD), Dai (DAI), Frax (FRAX), TrueUSD (TUSD), Pax Dollar (USDP), TerraUST (USTC), Decentralised USD (USDD) and Gemini Dollar (GUSD) - reached its two-year high at US$182,528,500,000 in May 2022, briefly before the collapse of Terra (now TerraClassic).

The event also caught USDT off guard as it had to face massive pressure from withdrawals (approximately US$7.6 billion from May 07 to May 16, 2022). There were times when USDT dropped below US$0.95 and required two months to regain its peg. A similar situation happened when FTX got blown up; USDT fell to US$0.981525 on November 10, 2022.

The depegging of Tether was most likely proportional to its adoption level. From 2021 to February 2023, the average ratio between Tether and USD Coin is 2.19. Loosely translated, the demand for Tether was twice as much as the demand for USD Coin, therefore at times of black swan events triggering investors to exit the market, the impact on Tether would be more severe.

If we are to remove these outliers, Tether appears to be actually stable compared to other fiat-backed stables. The realised annualised daily volatility of Tether, which tries to predict its futures volatility using high, low, open and close prices of the day before, is the lowest out of the 10. The aforementioned Tether depegging periods may also be influenced by the FUD (fear, uncertainty, and doubt) around Tether reserve. The story started in October 2021 when Tether had to pay a US$41 million fine to the U.S. Commodity Futures Trading Commission (CFTC) because USDT was not fully backed by the US-Dollar as it claims. The Q1 2022 audit report of USDT shows 24.4% of Tether reserve was made up of commercial papers, i.e. unsecured promissory note by companies, of grade A3 to A1+ on Standard Poor's credit rating scale, which was considered high risk for a stable.

Tether’s depegging after the crash of TerraUSD Classic (back then referred to as TerraUSD or UST) acted as the final straw. Tether had to offload their commercial paper holdings as well as increasing their rating score. As of Q2 2022, only 12.7% of Tether total reserve were held in commercial papers, and their scores ranged from A1+ to A2. By the end of Q3 2022, the stablecoin issuer completely eliminated commercial papers from its reserve, according to an official announcement here.

Fiat-backed stablecoins in general are less volatile than crypto - backed and algorithmic stablecoins, except for the case of Gemini Dollar: there are several periods when GUSD volatility is on par or even higher than Frax, a half - (crypto) collateralised, half-algorithmic stablecoin.

As the most - trusted representative of crypto - backed stables, Dai exhibits a low volatility of 0.05% on average, with the only irregularity observed in 2021 when it shortly hit US$3.668398. Dai currently accepts a basket consisting of seven cryptocurrencies and three fiat-backed stablecoins as collaterals and keeps a collateralisation ratio of above 150%, thereby achieving a solid peg to the US-Dollar.

In terms of velocity, Dai ranks first out of the top 3 stablecoins (Tether, USD Coin, and Dai). Velocity can be simply understood as the speed at which any cryptocurrency moves in the network. Dai usage in decentralised finance (DeFi) is versatile, thus the highest velocity. USD Coin velocity is higher than that of Tether in 2022, although it shows a significantly lower level from 2021.

The reason for Binance USD not being mentioned lies in the fact that it is ‘dying' after Paxos announced the termination of BUSD minting by order of the New York Department of Financial Services (NYDFS). Paxos has stopped minting new BUSD since February 21 and simultaneously burned a total of 5,643,228,886.24 from their Treasury from February 14 to March 01, 2023, equivalent to 35% of the circulating supply captured on February 14 by CoinGecko.

Euro And Gold - Backed Stablecoins Have Been Well-Received

One new Euro-backed stablecoin was introduced in July 2022. However, the demand for stables pegged to Euro and gold was higher in the first few months (January to April). Paxos Gold (PAXG) definitely took the lead, showing the highest volume in comparison to Tether Gold (XAUT) and Tether Euro (EURT).

A more regular pattern is also spotted for Paxos Gold volume to market cap ratio. Similar to velocity, the volume to market cap ratio represents how quickly a cryptocurrency changes hands. thus can be considered a useful metric to measure its popularity. It spiked around the time of Terra (LUNA) and FTX. This could be an early sign of digital gold mass adoption - people tend to find a safe haven in turbulent times, and crypto market is no exception. Fiat-backed stablecoins are obviously attractive when the market is doomed by fear, but throwing in inflation and recent economic events, and digital gold becomes a good choice.

The new Euro Coin saw volume peak in November 2022 and the volume to market cap ratio in January 2023. Nevertheless, the market cap of top 10 stablecoins (excluding USTC), which are all USD-pegged stablecoins, was 530 times higher than the combined market cap of the Euro Coin and Tether Euro (the number was calculated on February 10, 2023). It is still a long way to go.

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