Launched in 2014 and originally built on top of the Bitcoin blockchain, each unit of Tether (in theory) represents a dollar held in a bank. The stablecoin has had a rocky history with allegations of “printing” unbacked tokens, fraud, and criminal conspiracy. Despite that, Tether has grown into the most long-standing and widely used stablecoin in circulation, 10x larger than its next biggest competitor (USDC).

Historically, major changes in Tether’s market cap (and other global stablecoins) have been a leading indicator for Bitcoin’s price and we are seeing massive growth in stablecoin issuance over the past month.

Since March 1st, the total supply of Tether has shot up by 43% to almost $7 billion worth in circulation, representing the largest jump in Tether supply across a 6 week period since its inception. Other stablecoins have also seen massive increases, with Paxos Standard (PAX) supply up 28% and Binance USD (BUSD) supply up a whopping 173% in the same time frame.

What Is Driving This Demand For Stablecoins?

March 12th saw a liquidity crisis in crypto with derivatives markets. Prices dropped by more than 50% in a matter of hours while exchanges struggled to hold up to the global volatility and volume. The global unwinding of leverage that ensued drove a lot of liquidity out of the market.

One key factor that could explain the sudden explosion in Tether supply is the role of crypto exchange Bitfinex, which is closely connected to the issuers of Tether (Bitfinex and Tether share the same CEO and CFO). Bitfinex is currently the most liquid exchange for BTC. As the market seized up, traders rushed to Bitfinex for the deeper order book and tight spreads. The most active pair on Bitfinex — BTC/USDT.

Bitfinex is also the biggest onramp for USDT. As traders flocked to Bitfinex during the liquidity crisis, Tether issuance also skyrocketed. But contrary to what some crypto analysts argue, an increase in USDT supply does not necessarily mean that people are rushing to sell BTC for USDT. When traders sell Bitcoin, the USDT they acquire was already in existence. New Tether was not created for this transaction. USDT issuance tends to indicate new buying power entering the market. Conversely, large BTC inflows to exchanges tend to indicate selling pressure, but that impact tends to be felt immediately. Given the delay between deposit and issuance in USDT, fresh capital inflows of USD into Tether cannot be instantly put to work.

Bullish for BTC?

Historically, an increase in Tether’s supply has been a leading indicator of Bitcoin’s price going up, while a decrease in Tether supply usually preceded a drop in price.

In November 2018, Bitcoin’s price dropped from $6300 all the way down to $3400, 6 weeks after Tether saw its supply drop by 44%. In more recent times, a 30% increase in the supply of Tether kicked off a 6 week Bitcoin rally in May of 2019, taking a price that was stalling at $5700 and pushing it up to $11350.

While the relationship between Tether’s supply and Bitcoin’s price has been studied ad nauseam in the past, we have yet to witness an explosion in stablecoin supply similar in scale to the one happening right now.

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