As a digital currency pegged to fiat currency, the price fluctuations of stablecoins are naturally influenced by the international fiat exchange rate. Some unexpected events, such as insufficient fiat reserves for stablecoins or an imbalance in local market supply and demand, can lead to a certain degree of positive and negative premiums. If prices plummet significantly, it is called decoupling. Generally, a certain range of positive and negative premiums is permitted.
What is USDT (Tether), and what causes the price fluctuations of USDT?
For everyone entering the cryptocurrency space, whether trading coins or doing anything else, 99% of people will first encounter USDT. USDT (Tether) is familiar to those in the circle but quite unfamiliar to newcomers. Today, I will discuss USDT (Tether) with beginners who are new to or want to enter the crypto space.
Currently, there are various stablecoins in the market, such as USDC, DAI, TUSD, FDUSD, etc. USDT is one of the stablecoins issued by Tether Company based on blockchain technology. Its English name is Tether, token symbol is USDT, and its Chinese name is 泰达币. Its value is pegged to the US dollar at 1 USDT = 1 USD.
USDT is the most widely circulated stablecoin in the market.
Tether officially claims to guarantee with an equivalent amount of US dollars and provides a service where 1 USDT can be exchanged for 1 US dollar. The purpose of this is that before the advent of stablecoins, all currency pairs in early trading were influenced by bilateral exchange rates. For example, at that time, Ripple's price was pegged to Bitcoin, while Bitcoin had the highest trading volume and market capitalization. However, Bitcoin's price fluctuated greatly, making it unsuitable as a pegged currency. Thus, stablecoins emerged to solve the problem of bilateral exchange rates.
As long as you convert to a stablecoin, you will not be affected by market fluctuations, which is very clear in terms of capital risk aversion. It has gradually become a rigid demand in the market. When you use fiat currency to purchase official USDT, your fiat will automatically convert to US dollars and be deposited into the official account. The amount of US dollars stored in this account represents how much USDT is circulating in the market. Tether reserves at a 1:1 ratio; for every USDT issued, there will be an additional US dollar in the official account. This is the foundation of why USDT can maintain a stable price.
Conversely, when users exchange USDT back to USD, the official will simultaneously destroy the equivalent amount of USDT to ensure that the official account's reserves match the circulating volume. To improve transparency, you can check the latest official USD reserve amount on the Tether website, as the guarantee of USD means that most exchanges will support USDT as a pricing trading pair!
Because 1 USDT = 1 USD, the price of USDT is also affected by the USD exchange rate. Recently, the price of USDT dropped from over 7 to over 6 due to the Federal Reserve starting to loosen monetary policy and lower interest rates, increasing the amount of circulating USD, leading to dollar depreciation. Such fluctuations in USDT prices due to normal monetary cycles of interest rate hikes and cuts are considered normal.
The significant drop in USDT's price is certainly due to some unexpected events causing USDT to decouple from USD, leading to panic and resulting in a substantial price drop for USDT locally or globally!
Essentially, it is still the spread of panic sentiment, leading to an imbalance in the supply and demand relationship of USDT in the market.
Historically, the price of USDT has experienced several price drops, and Tether has faced several crises of trust, being accused of insufficient reserve funds, leading to a severe short-term decoupling of USDT's price, which then quickly recovered.
In 2020, a certain trading platform announced that some key personnel responsible for private keys were cooperating with public security investigations and were currently uncontactable, making it impossible to complete authorizations, leading to a suspension of withdrawals. This caused market panic, with major merchants and retail investors selling off USDT, resulting in a sharp drop in the over-the-counter price of USDT, with severe negative premiums on the exchange that lasted for several weeks before recovery.
Although there have been multiple crises of trust, as of October 2024, the market capitalization of USDT is $120 billion, ranking third in the cryptocurrency market, only behind Bitcoin and Ethereum, and it remains the largest stablecoin by market share.
The over-the-counter premium of USDT refers to the ratio of the over-the-counter market price to the US dollar. Excessive demand for digital assets often drives this indicator above 100% of this fair value, indicating that demand significantly exceeds supply, leading to prices being higher than the normal price range for a short or long period, which is called positive premium.
On the contrary, when the demand in the cryptocurrency market is sluggish and the supply is abundant, when the supply exceeds the demand, lower buy quotes at the market will cause prices to fall below 100% of this fair value, resulting in lower market quotes, which is called negative premium.
According to the patterns of the cryptocurrency market, USDT’s over-the-counter premium is generally positive during a bull market, as funds rush to enter, resulting in high demand. Conversely, in a bear market, the price of USDT is generally at a negative premium. However, this is not always the case; local market surges can also cause temporary positive and negative premiums for USDT.
For newcomers to understand this pattern and apply it in practice, knowing when to sell or buy your USDT can be based on this logic, which is also beneficial for saving your holding costs.