Key Takeaways
- Following Terra’s UST collapse, Tether’s USDT market cap has dropped by over $9 billion.
- The recent redemptions of USDT for dollars have led some to once again question the collateral backing the top stablecoin.
- While Tether appears to hold sufficient collateral to process redemptions now, a broader market shock could impact the firm’s holdings.
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Fears over USDT’s stability have resulted in more than $9 billion worth of redemptions over the past week. We explore whether investors should be worried about a potential collapse.
USDT Redemptions at Record Highs
The circulating supply of USDT is falling fast.
Over the past week, the stablecoin’s market cap has dropped by over $9 billion as holders rush to redeem their tokens for U.S. dollars.
Last week, USDT briefly lost its peg as the market experienced a severe sell-off due to the collapse of Terra’s UST stablecoin, trading as low as $0.95. Arbitrageurs bought up USDT when it was trading below peg to redeem tokens with Tether one-to-one with U.S. dollars, harvesting the price difference while helping shore USDT back up to its peg. However, although USDT’s peg now rests firmly at a dollar again, redemptions have continued.
USDT is a collateral-backed stablecoin, meaning that for each USDT in circulation, Tether owns cash, cash equivalents, or commercial paper to back it on a one-to-one basis with the U.S. dollar. Tether asserts that USDT holders can redeem their tokens for…
