Tether (USDT) had a market capitalization of more than $12 billion as of Aug. 14, according to cryptocurrency market analysis firm Coinmetrics. Meanwhile, some argue that the rapid rise in the valuation of the dominant stablecoin has positive benefits for Bitcoin (BTC) in the long run. But some investors are also concerned that it makes the cryptocurrency market vulnerable.

For several years, Tether has been the most widely used stablecoin and has seen exponential growth.In January 2017, the total supply of Tether hovered around $10 million. In four years, that number has increased 1,200 times.

The supply of Tether has increased since 2017. Source: coinMetricsCoinMetrics.

Bitcoin’s firepower or vulnerability?

Tether is used as an alternative to fiat currency on major exchanges, including Binance and Bitfinex. As a result, cryptocurrency investors often rely on Tether to store capital on the side.

Researchers at Coinmetrics explained.

“Moving to a stable currency allows investors to effectively park their money on the sidelines without having to fully cash into fiat currency and incur fees. This quick fix is likely to be a key reason for the increased demand for stablecoins after March 12.”

Since Tether is often used to hedge major cryptocurrencies, it can be assumed that its supply represents capital waiting on the sidelines. When Tether’s supply expands, it could indicate that investors are actively hedging their bets, leaving a rich supply of capital ready to enter the crypto market.

BTC/USD price vs. Tether market capitalization

BTC/USD price vs. Tether market capitalization. Source: btc/usd price vs. tether market cap. skew

Digital asset manager Charles Edwards pointed to the increase in Tether supply as a catalyst for Bitcoin. He said that the 26% increase in Tether was one of the eight fundamental factors that drove BTC up. He said

“How can you be short Bitcoin here? – Portnoy in Bitcoin – Fed investigating crypto dollar w MIT – Gold S/R flip – +26% Tether – 45% supply hasn’t moved in >2 years – energy value increases > price – mining profitable & price close to cost of production – accumulation price structure.”

While some analysts see the expanding supply of Tether as an optimistic trend, others have expressed concerns about the stablecoin.Coinmetrics addressed several issues that Tether has faced in recent years, including a lawsuit from the New York Attorney General’s office.

Well-known trader Peter Brandt has previously criticized Tether, saying it is “just another fiat currency”. He said: “The problem is that Tether is the interesting currency.

“The problem is that tether is an interesting currency – an illusory derivative peddled by crypto exchanges. As @Silver_Watchdog’s chart shows, the total market cap of tether exceeds the total market cap of cryptocurrencies. It’s a fictional currency backed by air.”

Still, the researchers emphasize that Tether remains dominant and continues to expand into other blockchains. The researchers noted.

“However, despite Tether’s problems and the introduction of new stablecoins, USDT still dominates and continues to grow. Initially launched using the Omni protocol on the Bitcoin blockchain, Tether began to expand to other networks by early 2018.”

A confluence of various positive macro factors, including institutional adoption, the weakening of the U.S. dollar through an ever-expanding money supply, and rising Tether supply, has improved sentiment around Bitcoin, with some analysts predicting that BTC will reach new highs by 2021.

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2020-08-14