Babbitt column | Cai Kailong: The ultimate 9 questions of stablecoin

Recently, stablecoins have become the focus of attention, on the one hand, because during the collapse of the currency price on March 12th, stablecoins generally exceeded the premium, especially the 8-10% premium of USDT off-exchange, and on the other hand, the rapid increase of USDT: There were 19 additional issuances within 18 days in March, an additional US $ 1.3 billion, and an additional 20% market value. The total market value has reached US $ 6.2 billion, ranking fourth, second only to Bitcoin, Ethereum and Ripple. The daily transaction scale has fully surpassed Bitcoin, and is close to the sum of daily transactions of the top three currencies.

It has to be said that stablecoins have profoundly changed the pattern of digital currencies.

In response to the current status of stablecoins and the future impact on the industry, Uncle Kai has repeatedly interviewed by the media and compiled the following 9 stablecoin issues.

1. Why is the high price of the stablecoin USDT against the RMB?

There is no small premium for OTC to buy USDT with RMB in the OTC market, especially in the extreme market on March 12, there is even an offer of 8.35 yuan to buy a USDT with a premium of more than 15%. There are three main reasons for this premium. :

1) Liquidity demand: When the epidemic triggered panic and a liquidity crisis, currency holders scrambled to sell the currency in their hands and exchanged it for stable and liquid USDT, so a large demand for USDT broke out.

2) Demand Margin Demand: When the market fluctuates greatly, many derivatives contracts touch the liquidation line, and the holder needs to increase the USDT margin, so the demand for USDT surges.

3) Hedging function: Many off-site users are frightened by the turbulent situation in the world, preferring the fiat currency in their hands, and replacing it with a stable and fast circulating USDT stable currency in the world, mainly used for hedging and rapid circulation.

The above three points can explain the premium of USDT to all fiat currencies. However, the high renminbi premium reflects the strong demand for USDT from domestic users in China: This is mainly due to domestic foreign exchange and capital controls, and the renminbi cannot be freely converted. The second reason is that the activity of Chinese currency traders has increased greatly: the financial market has plummeted, and domestic A shares and RMB assets have been relatively less affected. Therefore, the demand for transferring from RMB to the currency circle has greatly increased.

However, even if the slump has passed, the RMB-denominated USDT still maintains a relative premium. In fact, this reason is the same as the OTC RMB against the US dollar. This is the reason for long-term market structure (such as foreign exchange control) rather than short-term market volatility.

2. Is it possible to move the brick arbitrage to return the USDT RMB premium to a normal level?

In the case of free exchange and low transaction costs, brick arbitrage can significantly reduce or even smooth the premium. However, at present, domestic regulations on digital currency transactions and large-value RMB transfers are becoming stricter. OTC large merchants often take hundreds of bank cards in turns, and they can't withstand the losses that are often frozen by accounts. Difficulties in collection channels have led to a substantial increase in the cost of brick arbitrage, thus forming a dynamically balanced high USDT RMB premium. Moving bricks and arbitrage cannot smooth the premium caused by this long-term market structure.

3. Does high premium affect deposits? Will the high premium continue?

Yes, high premiums suppress the demand for deposits. OTC itself is a very market-oriented and decentralized transaction structure, the price will be adjusted according to demand, that is, the high premium on OTC will inhibit the demand for deposits. From this point of view, the issuance of stablecoins by stablecoin issuers has a certain market basis, and the additional issuance itself is also conducive to the smooth operation of the market.

It is difficult to judge whether the high premium will continue to be maintained, because the high premium is affected by long-term market structural factors and short-term market volatility factors. At least in the short-term, the long-term short-term factors do not see the trend of change, and the high premium will remain for a period of time. .

4. What impact will the continued issuance of USDT have?

The rate of USDT issuance is staggering. It was issued 19 times in 18 days in March, with an additional issue of 1.3 billion US dollars. The market value has reached 6.2 billion US dollars, and 20% of the total issuance. Currently, it ranks fourth in terms of total market value, and its daily trading volume exceeds Bitcoin. The daily trading volume is close to the sum of the top three currencies.

Objectively speaking, there is supply when there is demand, and there is no problem with the additional issuance of USDT. The key question is : Does the additional USDT amount meet the real demand? In other words, is there any moisture in the additional issuance of USDT? This is the core issue.

Because Tether, the issuing company of USDT, is quite mysterious and unregulated, the 1: 1 USD deposit does not know which bank in a small European country exists, nor does it publish financial statements. Even if it has been published, there is no trustworthy audit, so its additional issuance We don't know how much water there is. We can only hope that Tether will not falsify, greedy, manipulate the price of the currency, embezzle the deposit, and do not fail to invest with the greatest goodwill. All in all, we can only expect them to be as perfect as saints.

Of course, other stablecoins have also been issued in large numbers. According to data from third-party institutions CoinMetrics, the issuance of USDT rose by 51.5% in March, the issuance of USDC rose by 55.4%, the issuance of PAX rose by 26.5%, and the issuance of HUSD Rose 74.7%. The top four stable coins by market capitalization all saw a sharp increase in circulation in March.

With the substantial issuance of all stable coins (weighted average issuance of 18% of the total market value), the direct effect is to push up the price of all currencies with stable currencies as the standard. Therefore, assuming other conditions remain unchanged, the main driving force for the rise in currency prices currently comes from the issuance of stablecoins.

You can do a simple arithmetic problem. If the stablecoin is issued 30% in total, that is to say, 10 billion stablecoins actually only have 7 billion U.S. dollars in reserves. Today, although the transaction price of Bitcoin is 7000USDT, it is not worth 7000 USD, but USD 4,900. The difference between these prices is supported by Tether's credit, but unfortunately many people cannot see the truth behind the price.

5. The issuing company of USDT has always faced a crisis of trust, but the market share of USDT has not been affected too much. Why?

This has two historical and practical reasons:

Historically, USDT was the first stablecoin to appear. Before September 2018, in the absence of any other stablecoins, the USDT family alone accounted for 95% of the stablecoin market share. Later, due to regulatory pressures, regular banks' refusal to provide services, and some judicial disputes, plus the rise of other stablecoins, by the beginning of 2019, the USDT share fell to 70%, which was still absolutely dominant, but the relative share fell a lot. Since 2019, USDT has blossomed a lot, actively regaining lost territory, and has continued to issue more shares in multiple public chains BTC, ETC, EOS, TRC, (OMNI-USDT, ERC20-USDT, TRC20-USDT and EOS-USDT) More than 80% of the stablecoin market share.

In the face of USDT's first-mover advantage, an absolutely dominant stable currency that has formed user habits, even if many transactions have all their own stable coins, they will have to use USDT on a large scale "in line with user habits." For example, why is the UK driving to the left and other countries driving to the right? This is the power of habit, which is very difficult to shake.

In addition to historical habits, in reality: the absolute amount of USDT is 80%, crushing 20% ​​of the other 39 stablecoins, and USDT actively develops multiple public chains and multi-point blossoms, plus USDT is not regulated, but helps fund Quick transfer. These realistic factors have become the main reasons for creating stable currency overlord USDT.

The last important practical reason is that at least USDT is still relatively stable at present. Over time, this makes the worried people feel paralyzed and lucky, thinking that they will not be the last person to take the luck.

6. With the increase of fiat currency trading pairs, will USDT lose the market?

There is currently no trend for fiat currency trading pairs to replace USDT. Converting fiat currency to digital currency (such as bitcoin), skipping USDT, can theoretically replace stable currency, but in reality, whenever you encounter fiat currency, you need to deal with banks, and you need to involve compliance and regulatory issues, so the procedures are complicated and costly The transaction volume of the fiat currency trading pair is currently unlikely to replace the USDT, especially in the general environment where countries around the world are cautious about digital currencies. In other words, the non-compliance of USDT is not regulated, but it has contributed to its dominance.

7. Is the issuance of stablecoins related to halving the market?

Uncle Kai believes that even if there is a halving market, it is seriously overestimated. However, from another perspective, standing on the issue side of stablecoin, it will definitely promote the halving of the market.

Because only the rising market will have the demand for stable coins, and it is reasonable to issue more stable coins. Just as the issuance of fiat currency will cause inflation, the issuance of large amounts of stable currency will naturally increase the price of the ship and raise the price of bitcoin's stable currency, resulting in the illusion of halving the market price.

The current epidemic has caused Bitcoin to plummet to the bottom. Many people expect a rebound, coupled with the planned halving of the market, this is a good opportunity for stablecoins to be issued once in a lifetime. This also explains why all stablecoins, including USDT, are on a large scale. Additional issue. It is a pity that the stablecoin USDT is opaque and we cannot check how much over-issued it is. We can only "good faith" think that it is issued at 1: 1 USD. There is a high probability that this premise does not hold, so the bitcoin price we see is not real, but an imaginary high stablecoin price.

8. Under what circumstances will USDT thunder?

The thunder of USDT is the devil in the hearts of all people in the currency circle. Everyone hopes that this devil can be put in a bottle and will never be released, otherwise the digital currency industry will be shaken.

There are three possibilities that USDT will burst

1) Self-excavating the grave, slowly detonating: from quantitative change to qualitative change, if USDT is issued at the current crazy speed, it will soon wear out its remaining credit, and users will instinctively hold USDT less and exchange it for US dollars. Or other stable coins, or holding bitcoin, etc., continue to weaken their status until a certain day reaches a critical point, USDT can not pay 1: 1 against the US dollar, the holders run, devaluation instantly, and finally the tragedy ends.

2) Replaced by strong competitors: the market urgently needs stable credits with strong credit endorsements, transparency and openness, supervision and ease of use. For example, the US dollar version of Libra, which is currently in the pipeline, is a potential stablecoin future that meets your needs overlord. The emergence of this stable currency will soon replace USDT. The process is relatively slow, but it will inevitably explode.

3) Supervisory measures take drastic measures to detonate directly: USDT is notorious for regulatory purposes, and the US government will never give up the power of the "Federal Reserve in the digital currency industry" to a company outside the mysterious and unpredictable legal system. Any law enforcement action can lead to the destruction of USDT.

The most extreme situation is that three kinds of situations happen at the same time. For example, after the massive USDT spamming, the US regulation carried out targeted enforcement actions against USDT in order to support the USD version of Libra. The possibility of this extreme situation is very low, but who has experienced so many black swans that haven't met in a hundred years in 2020, who can guarantee that this is absolutely impossible?

9. What is the overall impact of stablecoins on digital currencies?

The impact of stablecoins on the digital currency industry has been mixed.

It is undeniable that the issuers of stablecoins assume the responsibilities of the central bank of the digital currency industry: unifying the measurement standards of digital currency pricing, greatly improving the convenience of transactions, reducing transaction costs, and achieving a prosperous currency trading market and derivatives market. Let digital currency liquidity have buffer reservoirs, and the possibility of managing liquidity reservoirs. At the same time, stablecoin has gradually replaced some of Bitcoin's functions, becoming a treasure place for safe-haven funds, and the best tool for transferring liquid assets.

However, the stablecoin represented by USDT is not regulated, open and transparent, has become an invisible hegemon of the behemoth of the currency circle, uncontrolled increase in issuance, and uncontrolled influence will eventually be used to manipulate the price of the currency.

Reality 1: The entire digital currency industry has been firmly tied to the USDT tank.

Reality 2: No one in the world can resist the temptation that “a string of numbers on the keyboard can directly become a bank deposit”.

The connection of these two facts is both astonishing and creepy.