Tether's Market Cap Drops to Lowest Point Against USDC

The Tether's market cap relative to the USDC token dropped to its lowest figure in July 2022.

The recent growth of Circle's native stablecoin USD Coin (USDC) has been impressive compared to its $66-billion rival giant Tether (USDT).

As of the time of writing, the market cap ratio for USDT and USDC was at its lowest point since creation.

Since May, USDC's market capitalization has increased by 8.27%, reaching its highest level of $55.9 billion on July 2nd. In contrast, USDT has lost over 19% in its market valuation, currently standing at $66.14 billion.

USDT circulating market cap. Source: Messari
Messari's report shows that the current market cap of USDT is nearly $

USDC has the closest chance of overtaking TUSD as the leading stablecoin when considering that their market capitalization is closing in.

In August 2020, the USDT to USDC market cap ratio was above "9". In July, it dropped to 1.20, which is the lowest on record as shown in the chart below.

USDT to USDC market cap ratio. Source: TradingView
The market cap of the USDT to USDC pair. Source: TradingView

At the current rate — and with only $10 billion separating the two stablecoins — USDC could soon overtake USDT in market capitalization, if not sooner.

USDC has already overtaken USDT as the top ERC-20 token by transaction volume.

Despite the scepticism, Tether has been able to maintain its USDT token in circulation.

Since the collapse of Terra's $40 billion "algorithmic stablecoin" project in May, crypto investors have become wary, fearing that the same could happen to USDT. This is due to speculations that Tether's USDT tokens are not 100% backed by cash and other traditional assets as it claims.

As a result, short sellers have increased their bets on the possibility that USDT would soon fall below its $1-peg, with the Wall Street Journal reporting that these bearish positions could be worth "hundreds of millions" of dollars.

In the event that Tether were to be unable to redeem all its USDT for a dollar in a "bank run" scenario, an expectation is that people would start selling their stablecoin at a discount, breaking the peg.

During periods of extreme market volatility, USDT often goes below or above its $1 peg. This was especially true in the early days of the coin.

In October 2018, the token's value dropped to as low as $0.85 (on Kraken) following rumors that one of its sister companies (crypto exchange Bitfinex) was bankrupt.

USDT price chart since 2015. Source: CoinMarketCap
This chart shows the price of USDT since 2015. Source: CoinMarketCap

Every time after the collapse of Terra, USDT's value dropped to as low as $0.97. The stablecoin recovered its dollar peg every time, though.

Since its launch in 2018, USD Coin has only fallen below the usual $0.99-1 twice. During the "Covid crash" in March 2020, it dropped to $0.97 and went back up to $1 before falling again to $0.98 in the same month. 

USDC price chart since 2019. Source: CoinMarketCap
CoinMarketCap chart of USDC since 2019.

Investors have placed a lot of trust in USDC because Circle, which operates as a money service business, is registered with FinCEN and other 46 state regulators in the U.S. As a result, the firm reports its reserves to the authorities in line with money transmission laws.

Circle's financials are also examined by Grant Thornton, a leading global accounting firm.

Following the resignation of Argentina’s economy minister, cryptocurrency investors have seen a spike in demand for USD-backed stablecoins and this has led to increased prices.

Paolo Ardoino, the chief technical officer at Tether, announced in June that they would have their reserves audited by one of the top 12 accounting firms. For now, accounting firm MHA provides quarterly attestations of Tether's reserves.

Until that happens, USDC is on track to overtake USDT for a potential flippening event, particularly as stablecoin demand stays high amid global economic turmoil.