Correlating Tether issuance with crypto market cap growth over time

Cryptocurrencies have seen immense growth over the past decade, with the total market capitalization increasing from virtually nothing to over $2 trillion at its peak in late 2021. One interesting aspect around this growth is the potential correlation with Tether, a stablecoin pegged to the US dollar.

A brief history of Tether

Tether (USDT) was launched in 2014 as a stablecoin designed to maintain a 1:1 peg with the US dollar. Unlike volatile cryptocurrencies like Bitcoin and Ethereum, Tether aims to provide price stability by backing each USDT token with $1 held in reserves.

Tether saw minimal adoption at first, but its market cap has since grown exponentially to over $65 billion as of September 2022. It has become a widely used stablecoin, especially on major crypto exchanges.

Some key events along the way:

  • Early 2017 - Tether market cap surpasses $10 million
  • Late 2017 - Tether issuance accelerates, market cap grows 10x in 2 months during crypto bull market
  • 2018-2019 - Questions arise around Tether's reserves and whether each USDT is fully backed. NYAG investigation launched.
  • 2021 - Tether market cap grows 6x to over $60 billion. It records over $500 billion in quarterly trading volume on exchanges.

Analyzing the relationship between Tether issuance and total crypto market cap

As Tether's market cap has grown, some have questioned whether its printing of new USDT has directly led to inflating the overall cryptocurrency market capitalization. Are the two metrics correlated?

Looking at historical data, we do see some correlation between major Tether printing phases and uptrends in the total crypto market cap. For example:

  • October 2017 - Tether issues 450 million new USDT tokens over 4 days. The total crypto market cap doubles in size over the next 2 months.
  • April 2019 - Tether prints 300 million USDT in two batches. The crypto market cap grows by 35% over next 2 weeks.
  • May 2021 - Tether issues over 1 billion USDT inMay. The crypto market cap adds over $500 billion that same month during a bull run.

However, correlation does not necessarily mean causation. It's unclear if Tether issuance is directly driving market growth, or if issuance is simply ramping up to meet growing demand for a stable medium of exchange as the broader industry expands.

Blockchain analysis firm Chainalysis found Tether flows strongly correlate with crypto market prices, but concludes the data doesn't demonstrate Tether is itself moving crypto prices.

Has Tether impacted trust in crypto?

"Crypto's reputation has been tarnished over the years by fears around Tether. But despite the controversies, it remains a foundational part of the ecosystem."

Tether has been controversial almost from the start, with long-standing doubts about its reserves and whether all USDT is fully backed 1:1 with dollars.

These fears peaked in 2019 when the New York Attorney General investigated and found Tether had loaned reserves to a related company. Tether paid an $18.5 million fine and agreed to submit reports on its reserves.

Critics argued the lack of transparency and potential reserve issues mean Tether could threaten broader market stability if its peg were ever broken. Defenders say Tether provides essential liquidity, and its growth reflects true market demand.

While concerns linger, USDT remains widely used on exchanges by crypto traders. And Tether has persisted even through slumps like the 2022 "crypto winter." The risks may still not be fully resolved, but Tether appears to be here to stay as a key crypto building block.

Can regulations increase confidence in stablecoins like Tether?

Stablecoins are attracting increasing regulatory attention, especially after certain algorithms failed to maintain pegs in 2022. While oversight adds burdens, it may also bring standards that boost trust.

Regulators globally are focused on:

  • Reserve transparency - Requiring audits of reserves to ensure 1:1 backing.
  • Reducing volatility risks - Demanding adequate reserves be held in safe assets.
  • Consumer protections - Implementing KYC procedures to reduce illicit use.

The U.S. government's proposed stablecoin bill would designate certain stablecoins as "qualified" based on meeting standards. Tether is already moving to increase transparency with quarterly assurance opinions on reserves.

More clarity around reserves and stronger compliance may help stablecoins win broader trust from institutions and consumers. But regulations will also constrain stablecoins' flexibility. There are trade-offs ahead as oversight evolves.

Conclusion

Tether's growth has been a double-edged sword for crypto. Its printing likely helped inflate several bull markets. But doubts about Tether's reserves have also tarnished trust in crypto markets overall.

While correlation with Tether issuance exists, it does not necessarily demonstrate causation. As regulations advance, increased transparency may either validate Tether's role, or impose necessary restraints. Either way, Tether now sits firmly at the center of the crypto ecosystem.

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