In October Tether had some rough weeks and the cryptocurrency market stopped breathing as the leading stable coin by market capitalization suddenly was no longer stable compared to the US dollar. The period of instability lasted for almost 20 days and it led towards a sharp decline in the market capitalization of Tether. Whereas at the beginning of October 2.8 billion USD were stored in Tether at the end of the October it was almost one billion USD less.
Many speculations existed in the cryptocurrency community that a decline of Tether would cause a huge drop in the prices of cryptocurrencies. Instead many people were exchanging their Tether into established cryptocurrencies such as Bitcoin and Ethereum. A subsequent sell off of these currency in favor of fiat currencies did not occur at a large scale.
The Tether crisis did not lead towards a major destabilization of the cryptocurrency prices. However, substantial amounts of Tether were moved to fiat exchange like Kraken, where Tether can be exchanged to USD. The highest disparity between Tether (USDT) and the US dollar was recorded on Kraken on October 15 with Tether showing a discount of 15% compared to the dollar. By the end of October Tether had recovered from its crisis and the coin almost reached price stability again compared to the US dollar.
Why does Tether matter at all?
Tether is used by market participants to leave long or short positions during periods of uncertainty or high price volatility. During the decline of cryptocurrency prices many investors parked their money in Tether which led to an increase in the market capitalization of the stable coin during 2018. This function is particularly important for exchanges that do not enable investors to deposit fiat currency. Among those exchanges are very large ones such as Binance. Binance does at the moment not allow investors to deposit USD or Euro, although there are plans of changing this ongoing.
Binance recognizes this vulnerability and currently has several attempts to launch other stable coins in order to decrease its dependence on Tether. So far none of the other tokens have yet came into a position to represent an alternative to Tether.
The risk that exchanges dependent on Tether face is that users may lose trust into them once the value of the supported stable coin declines. As a result users may remove large amounts of funds from these exchanges comparable to the scenario of a bank run, when a bank loses the trust of its customers. The first signs of such a scenario already became visible once the spread of Ethereum and Bitcoin prices of exchanges that depend on Tether increased compared to fiat exchanges. In other words Bitcoin and Ethereum kept in fiat exchanges became more valuable compared to the Bitcoin and Ethereum which was held on non-fiat exchanges.
An army of stable coins is on its way with the aim to replace Tether
While Tether has received substantial criticism for the in-transparency surrounding the cryptocurrency and suffered a market melt down in October other stable coins came into the spotlight.
Among them is MakerDAO which is offering a stable coin called Dai. MakerDAO has received a 15 million USD investment from the well known venture capital firm Andreessen Horowitz in September 2018. Since then the value of the governance token MKR has constantly increased and it is now ranked among the top 30 cryptocurrencies valued by market capitalization. The value of the DAI has been impressively stable compared to the USD in the course of 2018 while the market capitalization of the DAI increased from 3 million USD to almost 70 million USD in the course of the year.
In late October Coinbase has launched the first stable coin (USDC) on its business focused Coinbase Pro platform. The technology behind USDC was contributed by Coinbase itself and Circle, a blockchain technology company that has received large scale venture capital investments led by Goldman Sachs. Besides these two coins there is a high number of other projects working on the problem of creating a stable coin.
A new area is around the corner and it is likely that 2019 will bring a new generally accepted stable coin. A trusted stable coin will empower the next wave of crypto-adoption since the number of potential use cases of cryptocurrencies increases sharply. Risk free hedging will become possible on platforms such as Augur and people in countries that suffer from hyperinflation will have the ability to park their life savings in stable coins. Furthermore, users will be able to lend money in stable coins without depending on the price volatility of Ethereum or Bitcoin. Peer to peer lending can eventually take off and a new financial system based on cryptocurrencies becomes possible. Stablecoins are incredibly important for adoption of blockchain technology and credibility is the number one issue that the leading stable coin of the future needs to provide.