Why is the Supply of USDC and Tether Going Up in a Crypto Bear Market?

Indeed, with the supply of USDC and USDT already being plentiful prior to recent increases, you’d be forgiven for assuming that there were already enough stablecoins to go around, and that there’s little if any need for more in a declining market. However, representatives of both Tether and Circle (which oversees USDC) inform CryptoVantage that their respective stablecoins have, somewhat counterintuitively, witnessed an increase in demand during the current downturn.

There may be some truth to this: reports suggest that, at least in countries with weak currencies, there has been some increase in demand for stablecoins in the past couple of months. That said, with neither Tether nor Circle producing full audits (rather than more limited attestations), doubts remain as to whether any increase in genuine demand fully explains the recent increases in the supply of USDC and USDT.

The Supply of USDC and Tether Increases in a Bear Market

Tether’s controversial history is probably well-known by now: not only has it never undergone a full audit, but the New York Attorney General found in February 2021 that it had “made false statements about the backing of the ‘tether’ stablecoin.”

“Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie,” said Attorney General Letitia James.

Skeptics — most notably Nouriel Roubini — have long argued that USDT is basically a scam aimed at inflating the price of bitcoin (and other cryptocurrencies) so that pre-existing holders can sell their inflated holdings to the gullible for real fiat currency. Such arguments have been supported by academic research which has concluded that USDT has been used to inflate bitcoin’s price, although other research (funded by Ripple) has suggested its issuance has no real correlation with prices.

Skepticism has also turned recently to Circle’s USDC, which despite receiving monthly attestations from Grant Thornton doesn’t appear to have had a full audit. Circle’s CEO Jeremy Allaire did tell Congress in December that USDC is fully backed by cash and short-term US debts, but without a full and independent audit, the market is basically taking the company’s word for it.

As such, the increase in the supply of USDC has raised some eyebrows. 90 days ago, roughly 32.5 billion USDC was in circulation, while today its supply has risen to $46.16 billion. This is an increase of 42%, yet during the same 90-day window the price of bitcoin has fallen by about 33.8%, from $63,622 to $42,064 (as of writing). Likewise, the supply of USDT has risen by (a more modest) 11%.

Supply of USDC over the past 90 days. Source: CoinGecko

This is a curious detail: a little more than $20 billion (in stablecoins) has been pumped into the market in the past three months, yet this market has fallen. I mean, who wants USDC and USDT in a market where the value of BTC has dropped by a third?

The Truth According to Circle and Tether

One possible explanation is that the cryptocurrency market is currently in such bad shape that stablecoin issuers have to print billions in ersatz dollars in order to stop the price of bitcoin and other cryptocurrencies from falling even further. This is the kind of conclusion you’d probably adopt if you believe that stablecoins such as USDC and USDT really are used (mostly) to inflate cryptocurrency prices.

However, Circle and Tether themselves have separately informed this author that the supplies of USDC and USDT have increased due to an actual increase in demand for stablecoins. Here’s what a spokesperson for Circle told us:

“We have observed increased demand for USDC for many reasons, [most] importantly due to the dynamics of crypto capital markets […] When digital assets (ex: bitcoin, ethereum) trend down in valuation, more market actors are selling the volatile assets into stable assets like USDC. That typically increases the demand for USDC, and we observe increased minting activity.”

Put simply, holders of crypto have sought to escape downwards volatility by moving to pegged cryptocurrencies such as USDC. Why they opt for USDC rather than USD (or the fiat currency of some other advanced economy), however, is anyone’s guess. Yes, some exchanges don’t support fiat currencies, but holdings can often be moved to exchanges that do, while many millions of cryptocurrency holders reside in countries that don’t place restrictions on fiat-to-cryptocurrency trading.

Likewise, Circle’s representative didn’t address the question of whether the pre-existing supply of USDC (equal to $32 billion some 90 days ago) was already enough for people wanting to fly to safety. Still, it did mention other drivers of demand (including cross-border payments and growing multichain availability), while its story was backed up by Tether, whose spokesperson has informed CryptoVantage that increases in demand are coming from less developed nations.

“Tether demand on retail is growing as shown from Turkey and many countries in LATAM […] Authorized Tethers are created on a blockchain and represent inventory that is on a shelf awaiting purchase. People can exchange fiat for Tethers using exchanges that support this capability,” they said.

Tether’s point about Turkey and various Latin American countries is supported by reporting in these areas. Recently, the Wall Street Journal noted that people in Turkey have been increasingly turning to stablecoins, given that the value of the Turkish lira has plunged by as much as 48% against the US dollar in the past year alone. According to Chainalysis data cited by the financial paper, more than half of cryptocurrency trades involving the Turkish lira in December were for USDT. The lira also accounts for around 14% of the overall USDT market, according to CryptoCompare.

Tether also shared with us a link to an article reporting that bitcoin wallet Strike has recently launched in Argentina, bringing with it support for USDT. On the other hand, this doesn’t actually mean that lots of Argentinians are holding USDT, with CryptoCompare data not even registering a share in global Tether trades for the Argentinian peso (ARS). It’s a similar story with the fiat currencies of developing nations that report high numbers of cryptocurrency ownership, with the Nigerian naira having only a 0.01% share of global USDT trading, and with the Indonesian rupiah having a 1.13% share.

Source: CryptoCompare

In other words, are such percentages enough to account for the sudden increases in the supplies of USDT and USDC (the trading of which is dominated by USDT, BUSD, USD, WETH, EUR and GBP, according to CryptoCompare)? On their own they aren’t, and in conjunction with the generally opaque nature of both Tether and Circle, it becomes hard to conclude with any assurance that the supply of USDC and USDT has increased to feed an organic increase in demand.

Experts already critical of Circle and Tether aren’t buying the explanations proffered by both companies.

“Of course USDC is being used to push crypto markets — that’s what trading stablecoins are for,” says David Gerard, a cryptocurrency skeptic and author of Attack of the 50 Foot Blockchain and Libra Shrugged.

Gerard argues that surges in the supply of USDT have notoriously preceded pumps in the price of Bitcoin. He also contends that USDT’s backing is “very dubious,” mentioning that the CFTC had also found (much like the NYAG) that Tether’s reserves had repeatedly fallen short of the 1:1 backing the stablecoin issuer had previously claimed.

“USDC claims better bona fides — but the nature and quality of their backing is a mystery. Most importantly, they previously stated they were backed by actual dollars in a bank account, then it turned out they were backed by unknown “investments” of unknown quality. And USDC has still never had a proper audit,” Gerard adds.